Ben Potter, IG Markets
The Australia market finished lower today as concerns over Chinese demand for raw materials and base metals triggered further profit taking in the materials sector.
There’s a lot of cash being raised for the Rio Tinto’s rights issue. We’re seeing selling across the resources spectrum. Overnight leads don’t support this, with the CRB Commodities index only losing 0.2%.
The market’s down for the third straight session as investors see further weakness to come. In the US, traders are betting heavily on an increase in the volatility index, or fear index, which is bearish for equities. Overnight, the number of August 50 call option contracts bought increased by 29000% to 55160 contracts traded, up from the 5 day average of 187.
However, the declines seen so far continue to be on light volumes. “Until we see selling on heavy volumes, the pullback is likely to be fairly benign, especially compared to last years rout”.
The selling is miniscule compared to the amount of cash on the sidelines awaiting this pullback. With more than $20b in cash, $2b in super contributions each month and $4.7b in dividends due early July, it’s hard to see this pullback going much further than -10%.
There simply isn’t the widespread, wholesale portfolio liquidations and hedge fund selling we saw last year.
The physical S&P/ASX 200 index was down 1.5% at 3904.1 after trading as high as 3962 this morning.
The property trust (-3%), industrials (-2.4%), consumer discretionary (-2%), materials (-1.5%) and financials (-1.5%) sectors were the biggest drags.
Among property stocks, Macquarie Office Trust (-11.1%), Goodman Group (-8.4%), Stockland (-6.2%) and Macquarie Countrywide (-6.4%) were the biggest detractors.
In the industrials sector, Asciano (-31.7%), Downer EDI (-6%), United Group (-5.9%) and Leighton Holdings (-3.7%) were the major losers. Asciano is trading ex-rights today.
Elsewhere, CSR (6%) finished higher after indicating that due diligence was being conducted on the creation of two separately listed companies, one for sugar and renewable energy and the other for its building products, property and aluminium businesses. The demerger would create a “focused, market leading sugar and renewable energy business with attractive growth options in sugar, renewable electricity and liquid fuel”.
News Corporation (-4.5%), Fairfax Media (-2.8%), Tattersalls (-2.7%) and Harvey Norman (-3%) dragged the consumer discretionary sector lower.
In the materials space, Alumina (-4.3%), BHP Billiton (-2.2%), Newcrest Mining (-1.7%) and Bluescope Steel (-1.6%) were the heavyweight losers. Offshore leads for the sector were weak on reports of slowing Chinese demand for everything from base metals to raw materials and steel. In London, major research house Barclays Capital said it continues to expect weaker commodity prices over the northern hemisphere summer as China’s strategic stockpiling of commodities slows”. On the London Metals Exchange (LME), Copper was down 0.1%, Zinc 1.2% and Aluminium 0.3% while Nickel managed to gain, rising 2%.
Rio Tinto (0.1%) traded ex-rights this morning. In London overnight, the firm said that its outlook for key commodities remains uncertain, expecting global economic activity to remain weak, possibly through to the end of 2010. They also reaffirmed their guidance for iron ore production of 200 million tonnes in 2009.
In news regarding the iron ore JV with BHP Billiton, Rio Tinto said there is a risk they could be forced to sell some assets to win approval from regulators.
Among financials, Macquarie Group (-4.4%), Westfield Group (-2.8%), ANZ (-2.1%), QBE Insurance Group (-2.1%) and Westpac Banking Corporation (-1.3%) led the sector lower ahead of President Obama’s comments on changes to financial regulations in the US tonight. The KBW banking index was down 2.5% too.
On the upside, the health care (0.2%) sectors helped to pare further losses.
In the currency market, the AUD/USD is 0.7% stronger at 0.7986 while the USD/JPY is 0.4% higher at 96.75.
