Eye on Reserve Bank as index falls slightly

Market dragged down by losses in mining and energy shares as worries grow.

By InvestSMART · 30 Mar 2012

By InvestSMART ·
30 Mar 2012

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Market dragged down by losses in mining and energy shares as worries grow.

THE sharemarket ended marginally lower yesterday, dragged down by losses in mining and energy shares as worries about growth in the US and China depressed commodity prices.

However, the market outperformed the Asian region for the second straight session, supported by a weaker Australian dollar, which has boosted the outlook for company earnings.

At the close, the S&P/ASX 200 Index was down 5.6 points at 4337.9.

''Our market has held up well considering the weakness which has plagued international markets,'' said CMC Markets trader Ben Taylor. ''While some traders believe we are merely playing catch-up from our recent underperformance, other investors believe the reason for resilience is a pending Reserve Bank rate cut next week.''

Japan's market slipped 0.7 per cent, Hong Kong was down 1.2 per cent and China was off 0.6 per cent. The local resilience and weaker sentiment in the Asian region gave speculators an excuse to increase bets that the RBA might cut its benchmark rates to 4 per cent next week.

The strength of the currency has made it hard for manufacturers to compete, denting the earnings of companies with operations in the US and elsewhere.

CMC Markets strategist Michael McCarthy said this week's performance signalled a substantial commitment to Australian equities by investors. ''The absolute standout is healthcare,'' he said. ''For the second day in a row it's been the top performing sector and it's been quietly buoyant for the last two weeks.''

He said there was an argument that a recent easing in the dollar was pushing up healthcare stocks with offshore exposures, such as CSL, but the strong performance in Sonic Health Care indicated that other factors were at play.

CSL gained $1.15, or 3.3 per cent, to $36.30 yesterday while Sonic rose 9? to $12.52.

Other defensive sectors, including IT, consumer staples, utilities, telcos and property trusts, were also in favour. Telstra firmed 2? to $3.30, Computershare climbed 17?, or 1.9 per cent, to $8.97 and Woolworths advanced 23? to $25.64.

Banks and financials, excluding property trusts, posted gains for the sixth day in a row, with the sector rising 7.5 per cent in the past 15 trading days. Three of the big-four banks advanced but Westpac dipped 6? to $21.88. Bank of Queensland plunged 41?, or 5.4 per cent, to $7.24 as investors digested the effect of its capital raising.

Materials and oil stocks underperformed, with BHP Billiton losing 36?, or 1 per cent, to $34.25, and Rio Tinto down 17? at $64.36.

With AGENCIES

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Frequently Asked Questions about this Article…

What happened to the S&P/ASX 200 today and why did the market finish marginally lower?

The S&P/ASX 200 finished marginally lower, down 5.6 points at 4,337.9. Losses in mining and energy shares—driven by worries about growth in the US and China that depressed commodity prices—dragged the market down, although local resilience and a weaker Australian dollar helped limit the fall.

Why are investors speculating about a Reserve Bank (RBA) rate cut and how could that affect the market?

Speculators increased bets that the RBA might cut its cash rate to 4% next week after a combination of local resilience and weaker Asian sentiment. Traders say the prospect of an RBA rate cut can support equity prices by improving the outlook for company earnings and encouraging risk-taking among investors.

How is the Australian dollar influencing company earnings and share prices right now?

A weaker Australian dollar has boosted the earnings outlook for companies with offshore revenues because their foreign income translates into more AUD. Conversely, a strong currency has made it harder for manufacturers to compete and has dented earnings for some companies with operations in the US and elsewhere.

Which sectors were the strongest performers and what defensive sectors were in favour?

Healthcare was the standout sector for the second day in a row and had been quietly buoyant over the past two weeks. Other defensive sectors that were in favour included IT, consumer staples, utilities, telcos and property trusts.

What moved healthcare stocks like CSL and Sonic Health Care today?

CSL rose by $1.15 to $36.30, and Sonic Health Care increased to $12.52. Analysts noted that an easing in the Australian dollar may have helped healthcare stocks with offshore exposure, but Sonic’s strong performance suggested other company-specific factors were also contributing.

How did bank and financial stocks perform, and what happened with Bank of Queensland and Westpac?

Banks and financials (excluding property trusts) posted gains for the sixth straight day, with the sector up about 7.5% over the past 15 trading days. Three of the big four banks advanced, though Westpac dipped to $21.88. Bank of Queensland plunged to $7.24 as investors digested the effects of its capital raising.

Why did materials and oil stocks underperform and what were the moves in BHP Billiton and Rio Tinto?

Materials and oil stocks underperformed amid weaker commodity prices tied to growth concerns in the US and China. BHP Billiton fell about 1% to $34.25, while Rio Tinto also declined to $64.36.

What should everyday investors watch for in this environment of currency moves, RBA speculation and sector rotation?

Keep an eye on RBA announcements and commentary since rate-cut speculation is influencing market sentiment. Monitor the Australian dollar because currency swings affect companies with offshore revenues and exporters. Watch sector trends—healthcare and defensive sectors were strong recently—and be alert for company-specific events such as capital raisings (for example, Bank of Queensland) that can drive sharp share moves.