ASX CLOSE: Markets firmer; consumer staples sector standout performer

Monday 1st March 2010

Across Asia, regional markets are all higher in early afternoon trade after copper jumped the most in 11 months on concerns the Chilean earthquake may disrupt supplies. The Hang Seng is the best performer, up 1.8% while the Shanghai Composite, Nikkei and Kospi are stronger by 1.9%, 0.5% and 0.4% respectively.

Locally, the ASX 200 finished 1.1% firmer at session highs of 4686.5. The magnitude and breadth of today's gains was somewhat surprising given the uninspiring US leads and growing rhetoric about the stagnating US recovery.

We were expecting a more cautious day's trade, especially given the uncertainty over tomorrow's RBA interest rate decision and a jam packed week of local economic data, which includes retail sales, construction spending and GDP. If this wasn't enough, Friday night will see the latest read on the US employment situation with the release of the February Non-farm payrolls.

Whilst gains were broad based, it's worth noting the defensive bias, with consumer staples, utilities and healthcare adding significant points.

In economic news, the Australian TD-Securities-Melbourne Institute monthly inflation gauge rose by 0.1% in February from January. In the year to February, the inflation gauge rose by 1.9%. In a report from TD Securities, it said while runaway inflation pressures do not appear entrenched, pressure is building. It adds that the RBA still looks somewhat optimistic in expecting a gentle deceleration to the mid-point of the 2 to 3% target with minimal interest rate adjustment. As the unemployment rate continues to shrink and spare capacity is all but absorbed, TD Securities believe the RBA Board can tomorrow comfortably recommend another 25 basis point rate rise to 4.0 per cent.

As tomorrow's interest rate decision from the RBA approaches, the market is becoming increasingly hawkish and expecting a rate rise. As recently as last Monday, expectations were at about 20%, but have since climbed to above 50% in the past week. In a comment from ANZ, it said the market is shifting to expecting a rise as there's been a bit of press over the weekend supporting one. But it's still finely balanced and not a sure thing. Elsewhere, in a strategy note from National Australia Bank, it believes tomorrow's RBA decision will be seen as a litmus test on whether sovereign debt risks to the global economy are viewed as material. It continued saying, a hike would suggest the RBA believes these risks aren't likely to de-rail strong growth among Australia's trading partners. On the flip side, no rate rise would suggest the RBA is starting to worry more about downside risks to its forecasts for global growth.

Turning our attention to the market, it was the consumer staples sector that was the standout performer, rising 3%. Wesfarmers and Woolworths were up 4.7%and 2.6% respectively as they enjoyed strong follow-through buying after both delivered better-than-expected results last week.

In a note from Merrill Lynch, it upgraded Woolworths to ‘neutral' from ‘underperform'. This was following the pullback in capital expenditure and reinstatement of a capital management program, after the retailer announced it would give up to $400 million back to investors. Merrill said it had been a concern for some time that Woolworths' capex was not meeting an adequate return, so it was pleased that the company has pulled back on capex and will return capital to shareholders. The broker expressed concerns that the cost of doing business is increasing, and that there's more competition in the Australian food and liquor industry. However, in general, it was very pleased by Woolworths' actions in the first half of 2010 in cutting capex and working gross margins higher.

Elsewhere, the industrials sector rose 1.4%, led by rebounds in Toll Holding and Downer EDI. They finished 6.6% and 4.2% higher after significant selloffs large week.

Financials were strong too, with sector gaining 1% following decent leads from the US. Insurance Australia Group was the standout, up 3.5% while the big four banks were all up between 0.7% and 1.9%, with ANZ the best.

WorleyParsons (1.2%) and Santos (1.1%) led gains in the energy space while the materials sector added 0.7%. Alumina, Lihir Gold and Newcrest Mining were all up between 2.6% and 4.3% while Rio Tinto and Fortescue Metals Group were stronger by 1.1% and 1.3%.

Following the massive earthquake in Chile, copper rose sharply on concerns that damage to infrastructure including electricity, roads and ports will dramatically slow copper exports. At this early stage, damage to mines seems to be limited, with no damage to operations in the north of the country, including BHP Billiton Escondida copper mine. After initially shutting its El Teniente and Andina mines, Codelco has said this morning that both have been reopened. In a note from a UBS analyst, it said power and fuel disruptions could take a week or so to address. Copper is likely to go for a run today, but the reality is, there's a huge quantity of the commodity stockpiled on the London Metals Exchange.

Prices are in AUD unless otherwise stated.
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