australian stocks gain on rate cut expectations ignoring woolworths earnings report 1090212015

Australian stocks shrugged off a near 10 per cent decline in shares in supermarket giant Woolworths and went on to close Friday’s trading session with a gain of 0.3 per cent as financials, chiefly the big banks, took up the slack.

Barring a sharp drop in the opening hours of trade, which took the S&P/ASX 200 to its lowest point during the day of 5,874.80, the index remained in a strong upward trend for the rest of the session, closing just a whisker off the day’s high of 5,944.80. The S&P/ASX 200 has now recorded its sixth week of gains in a row and closed at its highest level since May 2008.

The local market was driven higher owing to a ‘feel-good’ effect from rising Asian stock markets and renewed expectations for a rate cut at Tuesday’s Reserve Bank of Australia meeting.

Indices and sectors

The benchmark S&P/ASX 200 rose 20.3 points, or 0.3 per cent, and closed at 5,928.8, while the broader All Ordinaries index was up 20.6 points, or 0.3 per cent, to 5,898.5.

The significant gaining sectors were information technology (+1.41 per cent), industrials (+1.14 per cent), healthcare (+1.13 per cent) and telecommunication (+0.92 per cent). Consumer staples (-5.73 per cent) was the sole losing sector.

Stocks

Woolworths Ltd (ASX:WOW), Australia’s largest grocery retailer, was the second largest loser on the S&P/ASX 200 on Friday, falling 9.54 per cent to AU$30.71 after it reported a 3.1 per cent drop in the profit in its first half to AU$1.28 billion and also downgraded its guidance for earnings for the full year. Earnings at Woolworths were adversely affected by continuing losses at the struggling Masters home improvement business. Wesfarmers Ltd (ASX:WES), the owner of supermarket chain Coles, followed suit with a fall of 3.50 per cent to AU$43.85.

Banks turned in a solid performance with the four major banks ending in the black. Commonwealth Bank of Australia (ASX:CBA) jumped 1.66 per cent to AU$91.92, Westpac Banking Corp (ASX:WBC) was up 0.85 per cent to AU$38.00, Australia and New Zealand Banking Group (ASX:ANZ) rose 0.51 per cent to AU$35.34 and National Australia Bank Ltd (ASX:NAB) was up 0.74 per cent to AU$37.90.

Energy stocks ended up somewhat mixed. Though Woodside Petroleum Ltd (ASX:WPL) gained 0.80 per cent to AU$35.18 and Origin Energy Ltd (ASX:ORG) was up 0.25 per cent to AU$12.21, Santos Ltd (ASX:STO) ended down by 0.13 per cent to AU$7.94 and Oil Search Ltd (ASX:OSH) fell 0.24 per cent to AU$8.16.

In mining, BHP Billiton Ltd (ASX:BHP) was up 0.27 per cent to AU$3.65, Rio Tinto Ltd (ASX:RIO) jumped 0.80 per cent to AU$35.18 and Fortescue Metals Group Ltd (ASX:FMG) closed 0.40 per cent higher at AU$2.49. Rio Tinto announced plans to merge its copper and gold businesses in a restructuring aimed at reducing costs.

However, shares in gold miner Evolution Mining Ltd (ASX:EVN), the biggest loser on the S&P/ASX 200, plunged sharply by 9.63 per cent on reports that Newcrest Mining Ltd (ASX:NCM) had cut its stake in the company from 32.3 per cent to 14.9 per cent. According to The West Australian, quoted Newcrest managing Director and Chief Executive Sandeep Biswas, Newcrest cashed in on Evolution’s recent strong trading performance “to realise value for its shareholders by selling part of its interest while retaining ongoing exposure to potential future upside.” Newcrest Mining, however, jumped 3.30 per cent to AU$14.39, and was the fifth largest gainer on the S&P/ASX 200.

Qantas Airways Ltd (ASX:QAN) built fresh upside momentum with a gain of 1.40 per cent to AU$2.89, though Virgin Australia Holdings Ltd (ASX:VAH) did better, rising 2.04 per cent to AU$0.50. Telstra Corporation Ltd (ASX:TLS) gained almost 1 per cent to AU$6.37.

Economic news, currency and insight

According to a report in The Australian, iron ore for spot delivery at Tianjin Port China last traded at US$63.00 per tonne, up 0.8 per cent from the previous closing of US$62.50 per tonne. The steel-making ingredient made a new 5 and a half year low of US$61.10 per tonne just 3 and a half weeks ago.

The People’s Bank of China (PBoC), in a surprise move Saturday, cut the benchmark one-year lending rate by 0.25 per cent to 5.35 per cent and reduced deposit rates by an equivalent percentage. This was the second rate cut by the Chinese central bank in the space of just three months, as it moved to address slowing economic growth. Four weeks ago the bank had lowered the reserve requirement ratio for banks.

“China’s real economic activity has slowed further in recent months, largely due to the ongoing property downturn,” wrote UBS economist Wang Tao last week in a report to clients, as quoted by the New York Times. “Weak domestic demand has aggravated excess capacity issues in many sectors, and together with a sharper decline in commodity and oil prices, have led to rapid disinflation, and for the industrial sector, deeper deflation. Against this backdrop, it would seem clear that monetary policy in China should be eased more aggressively.”

“In recent months the scale of consumer price increases has come down and the scale of producer price falls has widened and this has had the effect of pushing up the level of real interest rates,” the PBoC explained in its announcement, according to the Financial Times. "The focus of the interest rate cut is to keep real interest rate levels suitable for fundamental trends in economic growth, prices and employment," it said, according to Reuters. "This does not represent a change in the direction of monetary policy."

The Australian dollar has been trending higher after news of China’s rate cut. At 07:19 this morning (AEDT), the local currency was trading at 78.20 US cents, up from 78.03 US cents on Friday.

Meanwhile, in Australia, speculation has been mounting that the RBA may implement a second rate cut at its ensuing meeting on Tuesday following the release of disappointing data last week on wage growth and capital expenditure. "We expect that the RBA will cut again at its March meeting next week," Bank of America Merrill Lynch Australian economist Saul Eslake said in a note, as quoted by The Sydney Morning Herald. "However, we do not have a high degree of conviction around this call. This is because although we accept that the short-term economic outlook warrants further easing, the RBA has provided nor communicated forward guidance."

Analysts at Credit Suisse have revised their target rate on the S&P/ASX 200 to 6,400 owing to further rate cuts, cheaper Australian currency and rising earnings. "Our previous target of 6000 had been in place since mid–2014, and we believe that the more supportive monetary environment, together with modest earnings growth, justifies the increase as we roll forward our forecast," Credit Suisse Private Banking chief investment strategist David McDonald said in a research note, according to The Sydney Morning Herald. "The new target implies a high-single-digit price return over the next 12 months. Together with the dividend yield, this would provide a total return of around 12 to 13 per cent."

The local stock market is likely to open flat today considering that the March ASX SPI200 Index (AP) Futures was trading up by a mere 4 points to 5,918.0 at 07:59 this morning (AEDT).