ASX Close: Dismal day on market with commodities weighing market down

Wednesday 27th January 2010

Commodity stocks continue to weigh Asian markets down after China yesterday stepped up measures to curb economic growth. The ASX 200 Index was the worst performing market in the region, finishing 1.6% lower at 4644.6 due to its large weighting to commodities.

Materials stocks continued to come under pressure during the day, grappling with the potential ramifications of China's orchestrated moves to slow their economy. This was the eighth straight fall for materials names, and confidence is really beginning to suffer.

The fundamentals behind last year's extraordinary gains for resource stocks remain intact. What seems to have changed is market sentiment.

The financial sector struggled once again following some of the reforms proposed by the Obama Administration last week. With global financials now only just recovering from the global financial crisis, these proposed changes could really crimp earnings and threaten their recovery.

The developments out of China and the US have clearly damaged the appetite for risk. And all this comes despite a very positive US earnings season, which has failed to register with investors who have been preoccupied by the above headlines.

In economic news, fourth quarter Australian CPI was slightly above analysts' expectations, coming in at +0.5% on-quarter and +2.1% year-on-year; slightly above 0.4% on-quarter and +2.0% on-year that analysts expected. In a note from Nomura Securities, they said the stronger result increases speculation of a 25bp rate hike by the RBA next week. However, the broker is uncertain whether AUD gains will continue. They said they're concerned about Chinese banking issues, as the Aussie dollar is very vulnerable to the China issue and investors' risk aversion.

Also, Westpac-Melbourne Institute's November leading index rose at the highest annualised growth rate in two years, up 7.6%, giving the RBA one more reason to raise rates at next week's meeting. Westpac chief economist Bill Evans said "the evidence from the Leading Index- the Westpac Melbourne Institute Index of Consumer Sentiment- the labour market and recent trends in retail sales indicate that the Bank will be keen to move monetary settings back to a level where interest rates are no longer stimulatory for the economy."

It was another dismal day for stocks on the ASX with all sectors finishing in the red. The material and energy sectors did most of the damage.

The materials sector fell 2.9% as concerns over China reared their ugly head again. Fortescue Metals Group was the worst performer, down 5.2% while Rio Tinto, Alumina, Bluescope Steel, Lihir Gold, Newcrest Mining, Orica and BHP Billiton were all down between 2% and 4.7%.

In a note from a trader in Sydney, they indicated the mood in the base metals market was generally bearish on the back of a stronger USD and further news of monetary policy tightening in China. Market participants also continue to worry about the US's plans to rein in banks' trading activities.

On the coal front, a report from Citigroup saw target prices for Australian coal stocks boosted on upside to prices. However, Riversdale Mining was downgraded to ‘hold' from ‘buy' following recent share price movements. The broker said the recent rally in coal prices, driven by strong Asian demand coupled with supply side restrictions, shows there's upside to their short and long-term coal forecasts. Whitehaven is Citi's pick of the sector for solid production growth, sensible acquisitions and clean share register. The broker rates it a ‘buy' with its target price lifted to $6.00 from $4.50. Centennial target was upped to $4.25 from $3.60 and its ‘hold' rating maintained. Macarthur Coal was also kept at ‘hold', with its target upped to $11.75 from $10.00.

In the energy (-2.2%) sector, Paladin Energy and WorleyParsons were the biggest decliners, falling 4.4% and 3.8%. Oil Search, Santos and Woodside Petroleum were all down between 1.9% and 2.5%.

Paladin released its Q2 production report which showed disappointing ramp up at its Kayelekera mine in Malawi. These continuing problems mean the uranium producer is unlikely to meet its full year production guidance.

Woolworths (-2.5%) dragged the consumer staples sector south. It lost 1.7% after their 2Q sales rose 4.1%, marking a slowdown from a year ago when spending was boosted by the government stimulus package. The result was below analysts' expectations of 5.9% rise. With prior period stimulus spending targeted at pensioners and low income earners, BIG W's sales fell 0.3% in the latest period, while domestic food and liquor were more resilient, rising 5.9%. The supermarket giant stuck to its guidance given last year that it expects net profit to grow 8%-11% in FY10, sales to grow in upper single digits (excluding petrol sales) and EBIT to continue to grow faster than sales.

Elsewhere, the industrials sector lost 1.4% as Asciano and CSR were down 2.8% and 2.4%. In an announcement today, CSR said it plans to proceed with the demerger proposal rather than tango with Bright Food Group over the Chinese company's expression of interest about buying CSR for up to $1.5 billion. After talks last week, during which Bright Food presumably could have firmed up its offer or intentions, CSR said it will only progress any transaction alternative to demerger "if such transactions have a sufficiently high degree of certainty as to value, timing and likelihood of completion." In a statement from CSR, they said "if Bright Food wants to engage, it has to satisfy CSR that its proposal is "clearly superior to the demerger in terms of shareholder value,".

The financial sector added injury to insult, finishing the session 1% lower as the big four banks all finished in the red, down between 0.9% and 2.4%, with Westpac the worst performer.

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