ASX CLOSE: Market closes down on weak retail data

Thursday 4th February 2010

Across Asia, regional markets are all lower this Thursday after overnight falls in the US, weakness among commodities and worse-than-expected Australian retail sales data. The Hang Seng is the worst performer, down 1.6% while the Nikkei, Shanghai Composite and Kospi are down 0.8%, 0.6% and 0.1% respectively.

Locally, the ASX 200 was 0.6% softer at 4621.6, off morning highs of 4640. The bulk of the points came out of the materials, consumer discretionary and financial sectors following weak US leads. Also, this morning's lower-than-expected retail sales numbers put a dampener on retail stocks.

It really looks like the Australian consumer has tightened their belt following the three interest rate rises. While official rates have only risen by 75 basis points, we must remember that the average Australian mortgage has probably gone up by roughly 90 basis points -hence it's hardly surprising we've seen a drop in consumer spending.

Whilst the market is down today, it's a positive that the bears haven't been able to take complete control. It looks like the market wants to consolidate after the recent bounce and ahead of tomorrow night's US employment numbers.

Cyclical names led the two day advance, however, they're taking a breather today with defensive names coming to the fore. The next two sessions will help determine whether cyclicals resume their longer term uptrend or are still amidst a pullback.

In economic news, Australian retail sales weakened in December, confirming fears that consumer demand was softer through the crucial sale period and likely affirming the RBA's decision this week to keep rates on hold. Retail sales fell 0.7% compared with an expected rise of 0.1% over the month. Coupled with weak anecdotes from major retailers, the Christmas period looks poor. However, November sales were revised up to 1.5% from 0.4%, which has contributed to a solid 1.1% increase over 4Q. The RBA is now likely to wonder if the December weakness is the start of a trend or a minor blip. If so, it could cancel any March rate hike.

The poor retail sales weighed on consumer discretionary stocks, with the sector closing down 1.2%. Bellwether names David Jones, Myer, Harvey Norman and JB Hi-Fi all suffered significant losses, closing lower between 1.6% and 4.1%, having earlier in the week benefitted from the RBA's decision not to hike interest rates for a fourth consecutive month.

Myer's sales results also painted a disappointing picture for the holiday shopping season, given the group said December like-for-like sales were negative in what it called a "very challenging pre-Christmas environment". Total sales for the second quarter were flat and Myer said discounting was deeper than it had been in recent years. It's bleak news for the retail sector but shouldn't come as a surprise as anecdotal evidence had pointed to this sort of result. Still, investors may be disappointed, given a poll of four analysts by Dow Jones had expectations for second-quarter total sales growth of 3.2% and like-for-like sales growth of 2.5%. Myer's shares are trading 3.6% lower. On the upside though, management said first-half EBIT should rise by more than 10%, in excess of prior guidance for 5.6% growth. Management also said its store opening and refurbishment plans are on track.

The materials sector was the biggest percentage decliner, falling 1.5%. Major miners BHP and Rio Tinto gave back recent gains, closing lower by 1.2% and 2.6% while gold miners Lihir Gold and Newcrest Mining were weaker by 0.4% and 1.5%.

Significant points were also detracted by the financial sector which closed lower by 0.7%. It was red across the board with all four major banks ending the session lower between 0.1% and 1.6% while Macquarie Bank was a relative outperformer, up 0.4%.

On the upside, it was the defensive sectors and the energy space that outperformed. The energy sector rose 0.3% with Santos leading the way, up 4% after it said it was in advanced and comprehensive talks with big Asian LNG customers.

Also in focus today was Karoon Gas. Its shares were hammered early but recovered late to close down 11.3% after mixed drilling results from its key Poseidon-2 well. The well was intended to test the extent of the Plover geological formation. Gas flowed from the middle of three gas-bearing sand intervals, although the rate of 850 standard cubic feet per day wasn't particularly strong. Karoon believes higher flow rates are achievable but it will need to get better flow rates from the next well, Kronos-1, to support theories it's sitting on something big. Consequently, in a note from Macquarie Group, the stock was downgraded to ‘underperform', with Karoon's price target cut to $7.00. The broker said after two wells and two production tests, little is still known about Poseidon.

Prices are in AUD unless otherwise stated.
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