IG Markets Australian Market Wrap

Down under in Australia, the ASX 200 rallied from its lows in light trade, closing down 0.6% at 4830.30. Considering the weak US leads, the Australian market held up extremely well, albeit in very light trade. The materials sector detracted the most points while the financials rallied off their lows ahead of Australian bank reporting later this week.

In economic news, Australia's Q3 PPI rose 0.1% on quarter versus forecasts of 0.3% rise while on year it rose only 0.2% vs an expected rise of 0.6%. This adds some confidence that 3Q CPI on Wednesday will come in below the forecast growth of 0.7%. Wednesday's figure will have more of an impact on RBA's policy-making board which meets tomorrow week.

The Australian market is still very much at the mercy of US trade. There will be plenty of opportunities for investors to buy or bail this week with 149 more S&P 500 companies due to report, including four Dow components. Also, investors will need to digest reports on October consumer confidence, August home prices, September new home sales and durable goods orders, as well as the government's first estimate on third-quarter gross domestic product.

Locally, we also have the beginning of the bank reporting season with National Australia Bank first on the block on Wednesday. With Australia's big four banks all surging in recent months, it would appear they are priced to perfection, factoring in better-than-expected results. It will be very interesting indeed to see if they can maintain the gains post result.

One of the driving forces behind the rally in equities this year, the US$, has continued to weaken this morning. Despite lower liquidity levels during the Asian session, we've seen an interesting move in the Euro. It's speculated that a paper published by the People's bank of China indicates the Euro and Yen should be given greater weightings in China's foreign exchange reserves. Whilst this is unsubstantiated, it saw a knee jerk reaction with traders continuing to sell the US$. Given traders nervousness over a future replacement of the world's reserve currency, it will be interesting to see the reaction to the article when the big players open in London and Europe.

Turning our attention to the markets and it was the industrials (-1.1%), materials (-1%), energy (-0.9%) and consumer discretionary (-0.6%) sectors which detracted the most points today.

Among industrial stocks, Asciano, Downer EDI and Macquarie Airports were the biggest drags, all down between 2.6% and 3%, with Asciano underperforming the most.

In the materials space Alumina (-3.2%), Newcrest Mining (-1.2%), Fortescue Metals Group (-1.5%) and BHP Billiton (-1.2%) all declined following a very mixed set of leads from Friday's overnight trade.

In the energy space and following a weaker night for Crude Oil on Friday, the likes of Woodside Petroleum, Paladin Energy and Santos all detracted significantly, down between 1% and 1.8%, with Woodside Petroleum the biggest faller.

JPMorgan lowered its target price for Woodside Petroleum to $43 from $43.50 after Apache decided to divert its gas to Chevron's Wheatstone project. It said "the loss of access to Apache's gas puts pressure on Woodside to make discoveries to underpin Pluto 2. We think a sizable gas discovery is required early in Woodside's exploration program in order to meet the aggressive targeted final investment decision date of end CY10. We see risk in these growth options, and we believe capex for Woodside's growth has been underestimated, leading the stock to be overvalued". It rates Woodside an 'underweight'. Also, Royal Bank of Scotland downgraded Woodside Petroleum to a 'sell' from 'hold'. Royal Bank of Scotland said "it continues to believe in the viability of Woodside delivering LNG from Pluto 2 by 2014, but that the decision of Apache and KUFPEC to direct their gas to Wheatstone is still a negative. Woodside Petroleum is trading well above our net present value and in our view the Chevron deal is likely to dampen sentiment on Pluto's expansion plans".

Elsewhere, the financials sector weighed on the market ahead of the bank reporting season starting Wednesday. Axa Asia Pacific and AMP were the biggest fallers, down 2.4% and 2.2% while the big four banks were mostly lower with only Westpac Banking Corporation finishing in positive territory, up 0.5%. Commonwealth Bank of Australia, National Australia Bank and ANZ were down between 0.2% and 0.5%.

Credit Suisse upgraded Macquarie Group (-0.1%) to 'outperform' from 'neutral' ahead of its first half results on Friday. It cited recent share price weakness, an expectation the group will generate more than 20% returns on equity and the expectation that Macquarie's shares will continue to benefit from a sustained earnings upgrade cycle. Credit Suisse sees upside for Macquarie driven by improving activity trends, the groups monetizing its balance sheet strength into earnings over time and business platform expansion. Its price target is $67.