Market rallies as investors target oversold blue chips

Despite a relief rally on Friday, local shares fell over the past week as speculation increased that the US Federal Reserve might start to cut stimulus next week.

On Friday the benchmark S&P/ASX200 index rallied 35.9 points, or 0.7 per cent, to 5098.4, while the broader All Ordinaries index gained 32.3 points, or 0.6 per cent, to 5101.5, as investors decided that after a six-day losing streak, the longest since July last year, blue chip shares had been oversold.

Over the week the ASX200 lost 1.7 per cent to chalk up its fourth straight week of losses.

"Friday's price action was a relief rally, was a result of the market having been oversold over the last week," Citi head of sales trading Daniel Young said. "Next week bank dividends will be paid so hopefully we will see that money put to work."

Crown Resorts dropped 4.3 per cent on Friday following the news of a Victorian government plan to extract more tax from the casino operator. Crown ended the week down 3.4 per cent at $15.90.

Macquarie Group head of investments private portfolio management Paul Trainor believes the effects of tapering are now mostly priced in to the market.

"More positively, the start of tapering means the US economy is clearly improving and moving into a self-sustaining recovery period," he said.

Reserve Bank governor Glenn Stevens has been vocal about his hopes a strengthening US economy will lead to a lower exchange rate, which will help Australian equities, and take pressure of the central bank to cut interest rates again or intervene in the currency market.

At Friday's local close the dollar was buying US89.28¢, down from US90.56¢ at the previous week's close.

Mr Trainor said he was moving overweight in companies with global earnings. "The macroeconomic backdrop looks more conducive offshore, particularly in the US where employment conditions are improving and the outlook for manufacturing has lifted," Mr Trainor said. "Plus, a weaker Australian dollar relative to the US dollar and also likely the euro, is expected to lift translated earnings in 2014."

Mixed signals on the health of the domestic economy and some disappointing company announcements added to the pressure on shares over the week.

Financial services was the worst-performing sector for the week, down 2.3 per cent as the big four banks declined and the nation's largest insurer got battered after emerging from a trading halt on Monday to issue its 10th consecutive profit warning, flagging it an expected $250 million net loss for the year. QBE was the worst-performing stock of the week, dumping 34 per cent to $10.60.

Commonwealth Bank lost 1.3 per cent to $74.20, while ANZ fell 2.4 per cent at $30.25, and National Australia Bank fell 0.3 per cent to $33.35.

On Friday, Westpac chairman Lindsay Maxsted forecast an increase in demand for loans over the next year. Over the week, Westpac dropped 1.6 per cent to $31.

Domestic economic indicators over the week were mixed.

On Wednesday, the Westpac-Melbourne Institute index showed consumer confidence fell 4.8 per cent in December off a near three-year high in November. An announcement from Holden later that day that it will stop manufacturing cars and vehicle parts in Australia from 2017, delivered another hit to consumer confidence.

The government's decision to deny Holden's demands for an additional $80 million support a year for seven years has been interpreted as a sign it may be difficult for Qantas to secure government support. The embattled airline fell 2.8 per cent over the week to $1.

On Tuesday a NAB survey of business confidence in November dipped slightly, which was widely interpreted as a sign the new government's electoral honeymoon is over. Bureau of Statistics data, released on Thursday, showed the number of new jobs created in November was double that expected.

Resources stocks were mostly lower as demand from China continues to grow at a slowing pace.

BHP Billiton dropped 2.5 per cent to $35.85 despite plans to cut costs in its iron ore division and a revamped petroleum strategy being mostly well received. Rio Tinto, which outlined its own plans to reduce iron ore production costs last month, lost 2 per cent to $65.09.