ASX CLOSE: Market oscillates in and out of positive territory

Wednesday 6th January 2010

In Asia, all equity markets are modestly higher this afternoon after positive leads from the US overnight in the commodities space and buying interest among Japanese automotives after signs of improvement in demand from North America. The Hang Seng and Kospi are the best performers, currently up 0.8% and 0.6% respectively while the Nikkei and Shanghai Composite are firmer by 0.6% and 0.1%.

The Australian market oscillated in and out of positive territory all session, much like we saw in US trade. The ASX 200 closed 1.6 points higher at 4925.9.

Gains in materials, industrials and energy stocks were offset by weakness among financials. This was a little surprising given the financials sector was the best performer in the US overnight.

Having said that, the market has had a good run, so it's a positive that we're not seeing too much profit taking and that we were able to hold onto recent gains.

The outlook for 2010 is certainly improving. It's not surprising that confidence among market participants is returning given the strength of Australia's economy and our leverage to rising commodity prices.

However, it will be very interesting to see what happens when more volume returns to the markets in the coming weeks. It's very easy for a few large buy orders to distort prices during times of decreased liquidity.

In economic news, the total number of Australian houses and apartments approved for construction rose a seasonally adjusted 5.9% in November from October, according to the Australia Bureau of Statistics. Forecasts had been for a rise of approximately 3%.

On the upside, the materials sector was the standout performer, rising 1.1%.

Materials stocks are generating a lot of interest at the moment with the outlook improving for base metals prices, especially for copper and iron ore. The consensus among analysts is for gains of about 20% in this year's round of iron ore price negotiations.

These fundamentals are really starting to show through in price action with a lot of small and mid-sized miners breaking out of trading ranges on impressive volumes for this time of year.

Iron ore miner Fortescue Metals Group was the top gainer in the sector and in the ASX 200 index, gaining a huge 13% as it broke out of a 4-month long consolidation zone on very strong volumes. Elsewhere, the big miners were supportive too with Rio Tinto, Lihir Gold and BHP Billiton all finishing the session up between 1.3% and 2.9%.

Some of the smaller miners to post gains were Riversdale Mining (6%) and Mount Gibson Iron Ore (5.5%).

In company specific news, BHP Billiton, one of four company's that own the Antamine mine in Peru this morning received approval to proceed with a $1.3 billion expansion of the base metals mine which is located high in the Andes Mountains. The project will increase processing capacity by 38% and increase reserves processed by 77%. Also, it will increase the life of the mine by six years to 2029.

The industrials sector also added points with Macquarie Infrastructure Group the top gainer, up 3.2%. Asciano and Macquarie Airports were also well bid, rising 2.1% and 2%.

After initially trading higher, Qantas finished the session lower, down 0.3% after this morning announcing an alliance with Malaysian discount carrier AirAsia aimed at cutting costs, pooling their expertise and reducing air fares. The alliance will see them work together on a proposed specification and joint procurement for the next generation of narrow-body aircraft as well as cooperate on passenger and ground handling in airports they both serve, pooling their inventories of aircraft components and spare parts and joint procurement of engineering and maintenance supplies and services.

In an extremely competitive environment where airlines have been under constant pressures from a number of different forces, we believe this world first alliance is very positive indeed. The Asia-Pacific region is one of the biggest growth markets in aviation so any ways to further reduce costs and offer more competitive fares will benefit both shareholders and customers. This arrangement shows that both management teams are thinking outside of the box and looking at innovative ways they can move forward to ensure they both remain leaders within the region.

The energy sector continued to benefit from the cold snap in the US with Crude Oil prices trading above US$82 per barrel overnight. Woodside Petroleum and Santos added 0.9% and 0.8% respectively.

In terms of decliners, the financials sector detracted the bulk of the points, finishing lower by 0.4%. Suncorp-Metway was the worst performer, down 2.2% while National Australia Bank, ANZ and Westpac Banking Corporation were all down between 0.5% and 2%. Commonwealth Bank of Australia managed a gain of 0.5%.

Axa was again in focus, rising 1.2% to the highest level in two years and above National Australia Bank's proposed $6.43 per share cash bid. In a report from Austock they said the market is factoring in the possibility, albeit small of another bid that will trump National Australia Bank's bid. They are of the view that there probably won't be another bid, but you can't discount AMP coming up and taking another crack at it. AMP's rejected cash-and-share bid is now worth $6.54/share given AMP's recent share price rise. However, the broker is advising clients who hold AXA shares to sell them because the bidding process could be protracted. They believe the shares would struggle to trade much above $5.00 if it weren't a takeover target.

Retail stocks were weak today amid concerns that the recent Christmas sales may come in below expectations. Harvey Norman declined the most, losing 3.8% while Billabong International, JB HiFi and David Jones were all down between 2.5% and 2.8%.

In a report from Royal Bank of Scotland, they said this morning's cautious outlook statement from Specialty Fashion didn't help. They said there's anecdotal evidence that the Christmas period wasn't as strong as retailers had hoped for. It will probably be a little while before we get confirmation of this but we think there is a good chance the numbers probably did disappoint.

Prices are in AUD unless otherwise stated.
IG Markets Ltd, Australian Financial Service Licence No. 220440. ABN 84 099 019 851.
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