ASX CLOSE: Market closes lower with subdued trading

Monday 15th February 2010

In Asia, equity markets have all started the week lower as debt worries in Greece and Dubai curbed investors' appetite for risk. The Nikkei 225, Kospi and Hang Seng are down 0.6%, 0.3% and 0.1% respectively.

Locally, the ASX 200 finished 0.4% lower at 4545.5, off the morning high of 4568.7. Defensive names dominated trade with gains seen across the healthcare, telecommunications and consumer staple sectors.

Overall, trading was subdued after a benign session on Wall St and ahead of tonight's Presidents Day holiday in the US. Also, traders appear to be waiting for further rhetoric regarding the European debt situation from tonight's EU meeting.

The global reaction to these developments will be key in determining risk appetite for the remainder of the week.

On a short term basis the market is delicately balanced. The local reporting season has been pretty solid to date and kicks into high gear in the coming fortnight.

The question that still remains is whether the continuance of strong company and economic news will be enough to buffet the market from the numerous global macro issues that are still casting a shadow over investor confidence?

The fact that the likes of BHP Billiton and Rio Tinto are unable to find any meaningful support following their better than expected results suggests these macro issues are still dominating investor psyche.

On the local market, cyclical sectors were the big detractors. The materials sector fell 0.9%, led by a 3.1% decline in Bluescope Steel after it released its first half results this morning. Australia's biggest steel producer slumped after it reported a $28 million 1H loss versus the $14 million expected. The company expects a small FY profit due to improving domestic and export demand conditions, improved steel prices and cost cuts. However, the market seems sceptical on the groups 2011 growth prospects. In a note from an institutional trader, they said market consensus for 2011 EPS is 27 cents, up from 9 cents in 2010. How will Bluescope grow EPS that much in 2011 when iron ore and coking coal contract price settlements are likely to rise by 50% or more? The trader also noted there was no pricing power in BlueScope's core business and that utilisation rates were low at 83% vs analyst forecasts of 95%.

Still among material names and Newcrest Mining, Rio Tinto, Alumina and Amcor were all down between 1.5% and 2.2%.

Interestingly, in a research note from Citigroup, they believe commodity markets are falling into the worry well, with market participants concerned about China's growth stumbling and excess inventory causing imports to collapse. Combined with concerns about OECD demand recovery, these issues are pointing to subdued markets in 1H 2010. However, Citi said we continue to look for a second half recovery, with the US dollar movement likely to play an increased role in commodity prices. The broker expects an increasingly close (inverse) relationship between the US dollar and commodity prices as investors and speculators previously bought commodities as a US dollar hedge. US dollar strength, if not driven by clear signs of US economic recovery was always going to be bad news for commodity markets. Citigroup believes this is an important contributor to the current price weakness.

The industrial sector came under pressure, down 0.8% and following leads from the US S&P industrials sector. James Hardie, Brambles and Asciano were the worst performers, all finishing lower by between 1.7% and 2.6%. However, Leighton Holdings managed to buck the trend, rising 0.7% despite a downgrade from UBS.

In a note from the Swiss broker, they cut Leighton's to ‘sell' from ‘neutral' after the group's earnings upgrade was soft and flat work-in-hand figures failed to inspire much confidence. UBS said it continues to see positive momentum as margins recover and clients proceed with work, particularly contract mining. However, as usual the valuation remains tight.

Financials were another source of weakness. The sector fell 0.5%, led by declines of 1.4% and 1.7% for Commonwealth Bank of Australia and Westfield Group. ANZ and National Australia Bank were both down 0.4% while Westpac Banking Corporation managed to buck the trend, adding 0.4%.

Bendigo & Adelaide Bank was the standout on the upside. It closed the session 3% higher after the group's first half result and dividend beat many market forecasts. Net profit more than doubled on year to $104.1 million, with cash profits climbing 24% on year to $139.7 million. In a note from Credit Suisse, the broker said going forward, the bank expects to deliver 'strong' 2H10 results, supported mainly by a stable net interest margin and sound credit conditions. Elsewhere, in a comment from Citigroup, they said the group's steady dividend, which defied market expectations for a lower payout, sends a positive message from the board.

Looking at the market from a broader perspective, brokers appear to be positive on the earnings season so far with Citigroup saying in a note that positive surprises are outnumbering disappointments by four to one, leading the broker to boost its expectations. They said over the course of the past week, EPS growth expectations for the market overall have firmed further to 8.4%, from 7.9% last week and 5.1% pre-reporting season. Citi went on to say that resources have been the driver of this, but industrials have also contributed. Elsewhere, in a separate report from Deutsche Bank, earnings for the December half were about 8% above analysts' expectations in aggregate for the companies that have reported and that full year 2010 earnings have been increased by 2%. DB believes management teams continue to be fairly cautious, but that they sound more confident than in recent times. The broker said its early days in reporting, but the tone so far is reasonably good, and the earnings are measuring up to expectations. If that continues to be the case as the year unfolds, and earnings growth continues to evolve as anticipated, the Australian market still has the capacity to rise solidly this year.

Prices are in AUD unless otherwise stated.
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