ASX CLOSE: Bargain hunters push market higher

Thursday 11th February 2010

In Asia, equity markets are all higher in early afternoon trade, led by gains among material and bank stocks after lower-than-expected Chinese inflation numbers and an increase in Australian jobs tempered concerns that tighter monetary policy will weigh on growth. The Kospi and Hang Seng are the best performers, up 1.8% and 1.3% while the Nikkei 225 and Shanghai Composite are stronger by 0.3% and 0.2% respectively.

Locally, the ASX 200 closed 0.9% stronger at 4554.3, outperforming US leads as banks, miners and energy names supported the market after yesterday's walloping. There were some very active sellers yesterday but today, they've been replaced by bargain hunters.

Opportunistic buying has been fuelled by a number of brokers suggesting certain cyclical sectors have been oversold in recent weeks. Energy is one such example.

The weaker Chinese inflation numbers eased some concerns over further Chinese tightening while the stronger-than-expected Australian job numbers have boosted confidence in our economic recovery.

Tonight's EU meeting is very important. There's plenty of anticipation and speculation as to what might come of the meeting. It has the potential to ease or negate concerns over the whole Greek debt situation. It could be a big market mover in both directions.

Any move higher in the euro would indicate an increase in risk appetite, which would be positive for equity markets, especially Australia.

In economic news, job creation surged beyond all expectations in January, with the economy adding 52,700 jobs compared to an expected rise of only 15,000. Full-time employment gained 15,900 jobs, while the unemployment rate fell to 5.3%, from 5.5% in December. It had been expected to rise to 5.6%. This stronger-than-expected result will pressure the RBA to resume interest rate hikes in March. In a note, ANZ said futures expectations are now predicting a rate hike for March as roughly a 50-50 proposition, up from a 25% earlier this morning. The broker believes the strength of employment growth shows this economy has a ton of momentum behind it.

The energy sector was the standout performer today, rising 2.5% after Royal Bank of Scotland said Australian energy plays were oversold. Woodside Petroleum, Paladin Energy and WorleyParsons added the most points, all up between 3% and 3.2%, with Woodside Petroleum the leader.

Material names also had a good day, with the sector gaining 1.5%. Rio Tinto, Alumina and Fortescue Metals Group were all up more than 2% while BHP Billiton rose 1.2%.

Following its strong result yesterday, a number of brokers have upped BHP Billiton's targets and ratings. In a note from JPMorgan, the miner's price target was raised to $42.62 from $40.15. The broker said the stronger-than-expected result was largely driven by reductions in costs and that most of this came from a decline in raw materials and consumables (specifically fuel and energy) as prices fell. JPMorgan expect a proportion of these 'cost reductions' to be reversed in following periods on the back of stronger commodity prices, including energy prices. Deutsche Bank reported it was a strong result despite being below its forecast of US$6.3 billion. The broker said it was an excellent result with iron ore, coking coal, energy coal and diamonds surprising all vs. consensus. Deutsche believes BHP is in an exciting phase with about US$50 billion of capex allocated to growth projects between FY10 and FY15.

Interestingly, in a report from Goldman Sachs JBWere, it believes comments on the spot iron ore price being 90% higher than the 12 month contract price indicate BHP Billiton is seeking a big increase in benchmark prices this year. Goldman Sachs was left in no doubt that BHP would be looking for a 90% iron ore price rise for a 12 month contract.

Financials were well supported with the sector finishing higher by 1.1%. The big four banks were all up between 0.6% and 2.7%, with ANZ the top performer. QBE Insurance Group also had a strong day, closing 2.4% firmer.

In a note from Citigroup, Commonwealth Bank of Australia's rating was downgraded to ‘hold' from ‘buy' after yesterday's first-half result. Citi said while the result was strong and demonstrated good momentum, much of this is now priced in. If CBA had not announced its January 15 earnings upgrade, the result would have been lauded as heralding the end of the economic downturn for the Australian banks.

On the downside, the telecommunications sector was the biggest detractor, finishing 4.5% weaker after Telstra (-5%) came out with a weaker-than-expected result.

There was very little to like about Telstra's first-half result. Not only did they miss expectations on net profit and dividend projections, the outlook was uninspiring too. The company flagged a low-single-digit drop in 2010's revenue; a more severe decline than anticipated in its fixed line business; a slowing Australian broadband market; and no near term resolution to its NBN discussions with the Government.

In another report from Credit Suisse, they noted Telstra's 1H numbers were disappointing. They went on to say that Telstra face the combined forces of rapidly declining PSTN revenue, price competition in mobile, loss of market share in broadband and mobile, and a switch to prepaid wireless broadband. Also, the fixed broadband market is maturing, and Sensis is under intense pressure.

Prices are in AUD unless otherwise stated.
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