ASX CLOSE: Rising commodity prices pushes ASX higher

Tuesday 5th January 2010

In Asia, equity markets are all higher this Tuesday as the strongest US manufacturing data in three years and higher commodities prices spur buying interest. Hong Kong's Hang Seng is the best performer, higher by 1.9% while the Shanghai Composite is up 1.2% and the Nikkei 0.3%. The Kospi is weaker by 0.3%.

In Australia, the ASX 200 index finished the session 1% higher at 4924.3, the highest level since September 2008 after it broke through resistance at 4895.3 this morning.

A return of the risk trade and rising commodity prices boosted confidence and in turn drove the ASX 200 higher, especially the materials and energy sectors.

Although volumes were light, this is still a very positive sign as recent momentum has been underpinned by a concerted pickup in manufacturing data across the globe.

The positive economic data of the last few days combined with rising commodity prices shows that the global economy is on track for a self-sustaining recovery.

The risk trade was well and truly back on overnight following a two-week break as forex traders exited the US dollar, instead turning their attention toward higher yielding currencies and commodities.

Friday's non-farm payrolls employment data will be crucial in ascertaining whether or not the recent US dollar rally was a bounce in a long-term bear market or the beginning of a reversal. Wednesday's ADP private sector job numbers are always a good indication for non-farm payrolls, so these will be eagerly watched.

On the Australian market, the property trusts sector led the gainers, rising 3.3% after it lagged the market towards the end of last year and as investors view dividend yields as attractive versus cash. Mirvac, Goodman Group and Stockland Group were the leaders, rising 6.1%, 5.7% and 5.1% respectively.

Industrials Macquarie Infrastructure Group and Macquarie Airports enjoyed strong gains, rising 3.4% and 3% respectively while United Group and CSR also added significant points.

In the energy sector, stocks were boosted by further gains in the oil price which were spurred by impressive economic data and a cold snap in the US. Crude Oil traded above the $81 per barrel level for the first time in 2 months. Paladin Energy was the best performer, rallying 4.5% while Origin Energy, Santos and Woodside Petroleum were all up between 0.9% and 2.8%.

In a broker report from Citigroup, it upped WorleyParsons' (-0.8%) target price to $25.50 from $23.60 but reiterated its ‘sell' recommendation. Citigroup believes recent WorleyParson deals, including yesterday's agreement to buy Brazil's CNEC Engenharia, fit with the group's strategy to increase its non-oil/gas business. The question is however, if and when, WorleyParsons may move from small bolt-on acquisitions to large transformational deals. Despite some broker speculation, we think it is unlikely that WorleyParsons will bid for one of the large public rivals, given its preference for private market deals and the fact that most public rivals have greater exposure to fixed-price contracts.

The materials sector (1.1%) added the bulk of the points today with Bluescope Steel the best performer, rising 4.2%. Fortescue Metals Group had a good session, rising 2.5% while Newcrest Mining, Rio Tinto and Lihir Gold and BHP Billiton were all up between 0.5% and 2%.

In a note from Barclays Capital, it believes gold's price prospects have improved after the unwinding of net speculative long positions from recent extremes. Gold's daily momentum is rolling higher from oversold conditions and prices have repeatedly held trend line support. The odds favour continued gains in the sessions ahead, with key resistance at $1,042.

Also helping the miners was a report from Standard Chartered. They said London Metals Exchange copper is likely to target $7760 per ton, the June 2008 high, after ending at 17-month highs overnight. Should it break through this resistance level, the 2008 high of $8940 would be in play. Returning risk appetite, USD weakness and strikes in Chile have been the major supporting factors.

Elsewhere, the financials sector also chipped in with gains of 1.3% as Bendigo Bank and Westfield Group rose 2.8% and 2% respectively. The big four banks all finished in the black, up between 0.5% and 1.5%, with Commonwealth Bank of Australia the top performer.

In an interesting strategy note from Citigroup, they expect the S&P/ASX 200 to reach 5500 by end-2010, implying a price return of around 13% from current levels. Although this seems relatively pedestrian compared to the market's 56% rally since the lows of last March, it still presents a very solid return by historical comparisons. Citigroup believes that confirmation of the recoveries in domestic and international economies will drive the market higher in the first 6 months, with genuine earnings growth likely to emerge as the incremental driver of stock prices in the second half.

We would not be surprised to see the market P/E approach 17.5 over the next 6 months. Although this may look 'expensive' relative to its long-run average of about 15, we see this as a normal experience given we are dealing with trough cycle earnings. Citigroup also expects increased M&A activity in the Australian market in 2010, while capital structures are likely to be normalised.

Its top ten picks are ANZ Bank, BHP, Commonwealth Bank, Downer EDI, Dexus, Fairfax, Qantas, QBE, Sonic Health Care and Santos.

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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