ASX CLOSE: Market higher on stronger than expected employment numbers

Thursday 14th January 2010

Equity markets have rebounded across Asia today after US markets saw broad based gains and Australian employment rose three times more than economists forecast. Japan's Nikkei 225 is leading the region, up 1.4% while the Kospi and Hang Seng are higher by 1.1% and 0.7%.

The ASX 200 closed 0.6% higher at 4898 after hitting a high this morning of 4920.5 after the stronger-than-expected employment numbers were released. Gains were pretty broad based but, once again it was the materials and financial sectors putting the most points into the index.

In particular, Perilya (7.2%) and Kagara Zinc (4.4%) were among the best performers in the ASX 200 after zinc had a strong session overnight.

After a couple days of weakness we've seen a good rebound in global markets. Participants seem to have gotten over the news from China and are beginning to realise that in the long run, it's a positive.

The stronger-than-expected unemployment numbers gave the ASX and the AUD a good boost. The market was cooling on the prospects for a February rate rise but this has put the ball firmly back in play. Everybody knows our economy is the strongest in the Western world but even the most bullish of forecasts didn't see 35,000 jobs being created.

These numbers should boost investor's appetite for risk, especially as European trade comes online. We would expect to see the AUD trade convincingly above 93 cents tonight.

In economic news, Australian employment jumped sharply in December with a further 35,200 jobs created versus an expected rise of 10,000. The unemployment rate fell to 5.5% from 5.6% in November. The market had been expecting a rise to 5.8%. The results indicate a very high chance the RBA will raise interest rates further at its February policy meeting. When viewed with other recent strong data, the RBA may also look at a March hike too.

Turning our attention to the market and gains were fairly broad based today. The materials sector led the way, rising 1.2% as Fortescue Metals Group, Rio Tinto and BHP Billiton all rose between 1.5% and 3.3%, with Fortescue Metals Group the leader.

Late this afternoon, Rio Tinto released its fourth quarter production numbers. At first glance it looked better-than-expected, although not enough to ignite further gains once the stock reopened.

In a broker note from Credit Suisse, Newcrest Mining (-1%) was downgraded to ‘neutral' from ‘outperform' and Lihir Gold (flat) to ‘underperform' from ‘neutral' after revising its gold supply-demand balance to a more bearish stance. They now expect a 420 ton surplus in gold markets in 2010, up from 110 tons. The broker highlighted that its gold price assumption of US$1,025/oz is well below current spot prices of $1,137/oz. Looking forward to 2010, Credit Suisse cut its gold price forecast to US$1,010 from US$1,090. Newcrest Mining is its preferred gold exposure as it sees upside risk on new earnings projections from copper prices. The broker increased Newcrest's target price to $42 a share from $35.

Elsewhere, in a report from Goldman Sachs JBWere, they said the bulk commodity markets appear "genuinely tight at present" with spot prices for iron ore, coking coal and thermal coal tracking well above current contract prices. They see upside risk to its current forecasts. The broker's preferred commodities for 1H 2010 are coking coal, iron ore, platinum, thermal coal and copper. The outlook for Platinum looks strong on the basis of supply constraints, coupled with last week's trading start of platinum and palladium exchange traded products in the US. However, the broker is less comfortable with base metals, where prices are running ahead of fundamentals, even copper.

The financials sector had a strong session, adding 0.8% as Macquarie Group rose 3.7%. The big four banks all closed in the black, up between 0.5% and 1.4% and shrugging off a bearish note from Fitch Ratings.

They believe Australian bank revenue growth in FY10 could be restrained as households continue to reduce debt (a process which could hit smaller lenders particularly hard). It also adds that restricted access to wholesale funding markets and rising deposit costs could mostly hurt smaller banks, while rising unemployment could impact asset quality for all banks. Economic slowdown is still filtering through the SME and consumer sectors, which in turn is likely to lead to higher impaired assets in 1H.

On the downside, the energy (-0.3%) and consumer discretionary (-0.3%) sectors detracted. The retailers were mixed despite the prospects of another interest rate rise next month.

In stock specific news, following WorleyParsons' profit downgrade yesterday, a raft of brokers cut their price targets. WorleyParsons revised its profit forecast to $280 - $320 million, down from its October forecast of $320 - $350 million, citing uncertainty over how governments may combat climate change. Credit Suisse, which cut its rating on the stock to ‘underperform' from ‘neutral' and said the downgrade is a reflection of global capital expenditure markets rather than a Worley's specific issue. Credit Suisse reduced its rating given Worley trades at a 14% PE premium to its peer and cut its price target to $26.70 from $29.60. Goldman Sachs JBWere cuts its price target by 11% to $30.08. Deutsche Bank lowered its price target to $27.10 from $30.65 and said the group faces "significant headwinds" in fiscal 2010 from project delays. UBS bucked the trend with an upgrade to ‘neutral' from ‘sell', citing the declines in the share price. UBS cuts its price target to $26.00 from $29.00.

Prices are in AUD unless otherwise stated.
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