ASX CLOSE: Market gives muted reaction to rate rise

Tuesday 2nd March 2010

In Asia, regional markets are mixed after solid US leads and better-than-expected US consumer spending data. The Korean Kospi is the best performer, up 1.2% while the Nikkei is 0.4% firmer. The Hang Seng and Shanghai Composite are both weaker, down 0.8% and 0.3% respectively.

Locally, the ASX 200 closed 0.3% higher at 4701.9, having reached earlier highs of 4716. Despite stronger-than-expected retail sales data, the broader market drifted off morning highs as the rate decision approached.

As was widely tipped, the RBA chose to hike rates by 25 basis points to 4%, resulting in a relatively muted reaction from the market. Equities gave up 6 or 7 points while the Aussie dollar is virtually unchanged, having spiked to a high of 0.9033 immediately after the announcement.

As expected, the consumer discretionary sector came under pressure on concerns spending habits will be reigned in while financials, which stand to benefit moved higher late.

Whilst the timing of the hike was always subject to conjecture, the RBA explicitly said rates were going higher as the economic recovery continued.

Ultimately, the decision to hike should be seen as a vote of confidence in the underlying strength of the Australian economy. The board noted that growth is close to trend and inflation is tracking near target, so it makes complete sense to move rates up to more neutral levels.

In other economic news, Australian retail sales were strong in January, rising a seasonally-adjusted 1.2% over month versus an expected increase of only 0.5%. It signalled a healthy rebound from the soft December sales period. The result has strengthened the case for the RBA to raise interest rates at 2.30pm this afternoon as it previously highlighted its concerns about the strength of consumer demand in the wake of 3 rate hikes in late 2009. Meanwhile, building approvals were down 7.0% in January versus expectations for a 0.9% rise, which may reflect the removal of economic stimulus to the housing sector in 4Q.

Whilst the property trust sector was the biggest percentage gainer, up 1.1 % the materials sector added the most index points, up 0.5%.

Bluescope Steel was the standout, higher by 4.5% while the likes of Orica, Lihir Gold and Newcrest Mining all rose by between 1.2% and 1.9%. Diversified miners Rio Tinto and BHP Billiton were stronger by 0.9% and 0.3% respectively.

Overnight, at an industry conference Rio's CEO Tom Albanese delivered some relatively downbeat comments regarding the global economy. Albanese said he's "somewhat concerned" that the global economy could dip back into recession, dampening demand for commodities in the next 18-24 months. He believes near-term risks include sovereign risk issues in Greece and Spain, a likely slowdown in stimulus spending in China, and possible limits on stimulus spending in the US. The comments are likely to serve as a reminder that the demand outlook remains somewhat clouded in the near term. Still, longer term, Albanese was confident demand from the likes of China and India would underpin rising demand for the group's key commodities, including iron ore, coal and copper.

Also, in a commodities paper from Deutsche Bank, it believes copper prices are likely to be supported this week by supply disruptions following the powerful earthquake in Chile. Chile is the world's largest copper producer, accounting for 33% of global mine production. Deutsche said Anglo-American's Los Bronces and El Soldado mines halted operations. They are closest to the epicentre of the quake. Rio Tinto said its Escondido copper mine is not affected. Deutsche also thinks copper prices will be supported by a likely drop at Shanghai Futures Exchanges' warehouses. Also, in a report from Jefferies, it believes a rise in iron ore prices to 18-month highs last week (as Chinese purchasers returned to the market following their New Year holiday) looks positive for the dry bulk shipping sector. Jeffries notes that bulk shipping charter rates (especially capesize rates) are likely to improve in the coming weeks, with demand for ore "clearly strengthening", and inventories at Chinese ports below normal.

Financials rallied late following the rate rise with the sector finishing 0.5% stronger. AMP was the best performer, up 1.3% while three of the big four banks were all up between 0.8% and 1%. National Australia Bank was the odd one out, finishing unchanged for the session.

The energy sector also added significant points, closing % firmer. Heavyweights Oil Search, Santos and Woodside Petroleum were the big movers despite a weaker Crude Oil overnight.

Industrials were higher by 0.4% thanks to gains of 3.1% at Qantas and 1.9% for Asciano.

Virgin Blue added 1.6% after Australia's second major airline this morning appointed former Qantas executive general manager John Borghetti to replace founding CEO Brett Godfrey from May 8. After 36 years with Qantas, Borghetti left shortly after losing out to Jetstar's head Alan Joyce for the CEO role when Geoff Dixon departed in November 2008. As head of Qantas' mainline operations, Borghetti oversaw the introduction of premium economy class and the fit out of A380 aircraft. He was also responsible for both domestic and international operations. Borghetti's experience should be good for Virgin's struggling long-haul carrier, V Australia. It should also bode well for Virgin's efforts to poach more of the corporate travel market from Qantas, and probably a greater share of Australian government's business travel (which is currently under tender).

Prices are in AUD unless otherwise stated.
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