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By Ben Potter, IG Markets

The Australian market closed significantly higher today, in line with strong overseas leads and end-of-quarter window dressing and asset allocation changes.
 
The physical S&P/ASX 200 index was up 0.7% at 3672. We hit a 10 week high of 3706 but investors closed out of long positions ahead of the weekend, pushing stocks lower.  
 
We were hoping for a close above 3722, a key positive to take into weekend and the first quarterly gain since the fourth quarter 2007. This would have helped erase the pain stock holders have felt over last 18 months!
 
In the short to medium term, there is no reason why the momentum in this rally can’t drive prices toward the 3800 level.
 
The industrials (2.6%), consumer discretionary (1.6%), materials (1.3%) and consumer staples (0.9%) drove most of the gains.
 
Macquarie Infrastructure Group (4.9%), Macquarie Airports (4.5%) and Qantas (3.6%) added the majority of points to the industrials sector. Qantas was this morning upgraded to ‘buy’ from ‘hold’ by Citigroup, but tis target was lowered to $2.10 from $2.50 after an assessment of the current market value of its fleet. They expect Qantas’s greater reliance on the domestic market and increasing use of its dual-brand strategy to help soften the impact on the airline’s profitability.
 
Tabcorp (5.1%), Fairfax Media (3%), News Corporation (1.9%) and Crown (1.6%) were the major gainers in the consumer discretionary sector.
 
In the materials space, Fortescue Metals Group (5.3%), Amcor (4.5%), Rio Tinto (4%), and Newcrest Mining (2.7%) were the major advancers. BHP Billiton was up 0.7% too. On the London Metals Exchange, base metals were bullish with Copper rising 3%, Zinc 4%, Aluminium 1.8% and Nickel 1% as short’s continued to cover their positions and improving global sentiment lifted equity indices. In London, Rio Tinto rose 7.4% while BHP Billiton was up 3.6%.
 
Rio Tinto reacted strongly after the group chief financial officer said it has further options should the proposed deal with Chinalco fails. The market likes the idea of a back up plan, the debt levels that RIO have stacked up from the Alcan purchase has become a company threatening issue, so if the Chinalco deal does not materialise then the equity markets (the preferred source of erasing debt) would certainly be a short term fix for the miner.
 
In other news and weighing on the stock today was a downgrade from Merrill Lynch Bank of America. BHP Billiton was lowered to ‘neutral’ from ‘buy’ as they no longer find valuation compelling enough to maintain a ‘buy’ rating.
 
On the downside, the financials and energy sectors were the major detractors. The big four banks were mixed with Commonwealth and National Australia Bank rising 0.7% and 0.5% while Westpac and ANZ lost 2.4% and 1.5%, respectively.
 
These moves were inline with overseas leads as US banks finally succumbed to a good bout of profit taking following their two-week surge. It was actually quite a refreshing change to not see the US market being driven by financial stocks. For a recovery in the markets to really take hold, we need to see volatility decline, which won’t happen with Citigroup rallying or declining 25% each day!
 
However, the Australian banks are looking rosy at the moment. They are well capitalised, liquid stocks that should in the present situation be attracting more overseas investment. If overseas investors do gain the confidence to allocate toward financial stocks again, then our domestic banks stand to do very well from it.