Ben Potter, IG Markets

The Australian stock market closed the session firmer today, although it drifted from the day’s highs. On Wall St overnight, stock indices surged after the Obama administration announced details of its plans to buy billions in bad bank assets, and a better-than-expected existing home sales report raised hopes the economy is finally on the path to stabilisation and recovery.

The physical S&P/ASX 200 index was up 0.8% at 3580 after hitting a high of 3646 this morning.

It was another classic case of ‘buy the rumour’, ‘sell the fact’ as traders took profits after buying yesterday’s strength.

With a little more time to fully digest the Fed’s latest plan to deal with toxic assets, market opinion is pretty much divided on whether or not it will work.

With all this cash sitting on the sidelines, the real question is at what point do fund managers start reweighing portfolios toward equities from cash?

Until this cash starts returning to equity markets, it’s likely to remain a bear market rally.

Gains on the local market were driven by the energy (1.9%), materials (1.2%), financials (1%) and industrials (0.6%) sectors.

In the energy space, Woodside Petroleum (4.5%), WorleyParsons (3.7%) and Santos (1.1%) were the major advancers. Overnight, May crude oil futures rallied more than 3% to finish above $53 per barrel, pacing a strong rise in global equity markets. If the Government’s plan to revive the economy begins to work and gain traction, we’ll certainly see an increase in the global demand for energy. Currently, oil is trading at $53.55.

In the materials sector, the usual heavyweights in Rio Tinto (5.6%), Amcor (3.6%), Orica (2%) and BHP Billiton (1.4%) were the major contributors. In London, BHP Billiton was up 4.2% while Rio Tinto rose a whopping 13%. On the London Metals Exchange, Copper rose 2.7% and Zinc 2.5% while Aluminium and Nickel retreated, both down 1%.

Interestingly, Credit Suisse have cut BHP Billiton from ‘neutral’ to ‘underperform’ and lowered its price target to £13.00 from £13.50. They are forecasting a drop in global steel demand of approximately 15%, which will impact BHP Billiton through its iron ore and coking coal sales.     

QBE Insurance Group (2.2%) fronted the financials sector. Three of the big four banks were higher too, up between 0.2% and 1.6% on the back of strong financial leads from the US and London. Commonwealth was down 2%. In the US, the banking sector was the best performer with Citigroup (17%), Bank of America (18%) and Wells Fargo (11%) all gaining. The broad-based KBW banking index was 12% higher.

In a note to clients this morning, Macquarie Research believes that Royal Bank of Scotland’s Asian assets would be a good strategic fit for ANZ. “We view ANZ’s likely interest in the Royal Bank of Scotland’s Asian assets as positive for shareholders as the deal would represent a low-cost expansion of ANZ’s existing Asian business, with positive balance sheet implications”. Macquarie estimates the assets could fetch around $2.5 billion.

Leighton Holding (4.3%), Qantas (2%) and Transurban (0.9%) were responsible for most of the gains in the industrials space.

On the downside, the typically defensive health care (-1.6%), utilities (-0.8%) and telecommunications (-0.3%) sectors detracted.