ASX CLOSE: Market finishes lower, trades in tight range

Thursday 25th March 2010

In Asia, stock markets are mixed following the weaker overnight leads. The Kospi and Nikkei are both 0.2% firmer while the Shanghai Composite and Hang Seng are both lower by 1.2%.

Having traded in a tight range for most of the session, the ASX 200 closed 0.1% softer at 4885.40, with defensive sectors coming to the forefront as growth investors appeared to be spending the day on the sidelines. CSL & Cochlear were among the main gainers, both building on recent strength since their latest results.

Not surprisingly, riskier cyclicals such as consumer discretionary, industrials and material sectors saw some profit taking following heightened sovereign debt concerns out of Europe.

Once again, these sovereign debt concerns have reared their ugly head. Well, they never really went away, it's just that markets began to ignore them as they realised the worries weren't disappearing fast. We're probably just seeing a reminder that these problems are still real. We're not overly worried about them and feel the markets have largely discounted the issues. However, widespread contagion through the Eurozone could pose more of an issue.

That said, the local share market was only down 0.1%, showing remarkable resilience as it outperformed US leads. As we've mentioned recently, calls for a pullback remain, however one must remember that we are nearing the end of Q1 which typically sees significant window dressing from institutions and fund managers.

Additionally, this undercurrent of buying is not expected to wane in Q2 given the increasingly positive outlook for equities. Further confirmation of this will come in the form of US Q1 earnings which kick off in the coming weeks.

The industrials sector was the biggest percentage decliner today, down 0.9% following falls of 2.5% and 2% for Downer EDI and Brambles. James Hardie and Macquarie Airports were also weaker, down 2% and 1.6% respectively.

Consumer discretionary names came under pressure today, with the sector finishing 0.4% lower. Gaming stocks Crown and Aristocrat Leisure were the worst performers, down 2.6% and 2.2%, with the market seemingly unimpressed by Crown's announcement it was going to upgrade its VIP gaming facilities. Elsewhere, Fairfax Media lost 1.9% while retailers JB HiFi and Myers slid 1.6% and 1.2% respectively.

The financial sector finished in negative territory despite the best relative lead from US financials. It fell 0.2% thanks to weakness in Bendigo Bank (1.9%) and Insurance Australia Group (1.3%). The big four banks outperformed on a relative basis with Westpac Banking Corporation (0.1%) and National Australia Bank (0.5%) finishing in the black. Commonwealth was flat while ANZ lost 0.1%.

Axa Asia Pacific was even for the session after AMP said it's still considering its position in relation to its takeover bid for AXA Asia Pacific and is awaiting determination from the competition authority in relation to both its own and National Australia Bank's rival bid. In addition, France's AXA SA said yesterday it's optimistic it can reach a deal with NAB by the upcoming March 29 deadline set by its Australian subsidiary and the bank. The ACCC is the remaining variable, though, as the regulator could favour AMP's bid over NAB's.

The materials sector finished a modest 0.1% weaker following the negative overnight leads. Alumina, Lihir Gold and Newcrest Mining did the most damage, down between 4% and 1.6% while giants BHP Billiton and Rio Tinto were 0.1% lower and 1.8% firmer respectively.

In a commodities report from Morgan Stanley, it upgraded its iron ore forecast and now expects a price rise of 90% for 2010 vs a previous 60% hike. It left its expectations for spot iron ore average prices unchanged. The broker said this is significant as its new benchmark forecast over the next five years eventually catches up to the spot price. It implied the benchmark price system is likely to decay and become consigned to history at a faster rate than we previously estimated. Morgan Stanley believes Fortescue Metals has the greatest leverage to high iron ore prices, upping its target to $5.15/share from $3.95. The broker noted that it does not include the potential project at Solomon that it has as an option value of $1.94/share because it is uncertain as to the timing and scale of the project.

On the upside, it was the defensive sectors that led the way with the telecommunications and healthcare sectors rising 0.9% and 0.6%.

The energy sector also chipped in with gains of 0.4%, thanks largely to a 2.7% rise in Santos' shares. A Sydney Morning Herald report suggested Woodside Petroleum was going to make a $15 billion bid for Santos. Theoretically, a Woodside bid is possible, and would make it a coast-to-coast Australian energy champion. However, it's unlikely given Woodside has plenty of high-quality (and high-cost) LNG growth projects to build using conventional gas and has just raised $2.5 billion equity to do so. Sure, each project faces risks but building three already poses danger of bumping into a regional LNG supply glut and triggering cost pressures. A more likely Santos suitor would be a fellow coal seam gas-to-LNG proponent, like Shell or BG Group. Woodside boss Don Voelte is an outspoken critic of coal seam gas, and while its credibility is improving, it's yet to be proven as a large-scale export commodity. Late in the session, Santos did its best to quell rumours, saying it had not been approached by Woodside Petroleum.

Prices are in AUD unless otherwise stated.
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