IG Markets Australian Market Wrap

Last's week's momentum in cyclical stocks has carried over and drove gains today. News that copper tested 9-month highs in Asian trade really buoyed the market, especially Fortescue Metals Group.

There were also good gains among retail stocks too amid expectations of strong sales results from Harvey Norman tomorrow and Woolworths on Wednesday.

The re-allocation of cash back into equities is well underway. Too many funds are overweight cash and underweight equities. Fund managers are now 'panic buying', afraid they'll miss out on further gains. It's simply a demand / supply game now, and there's not enough supply.

The S&P/ASX 200 index was up 1.2% at 4050.3, off highs of 4066.9 earlier in the session.

Just like last week, it was the cyclical sectors fronting the gains. The materials (2.2%), energy (1.9%), consumer discretionary (1.2%), consumer staples (1.2%) and financials (0.5%) added the most points.

In the materials space, Fortescue Metals Group (9.2%), Alumina (5.3%), BHP Billiton (2.3%), BlueScope Steel (2.1%) and Rio Tinto (1.8%) were the major gainers. The leads for the sector were predominantly bullish with BHP Billiton and Rio Tinto rising 0.5% and 3.5% in London trade. On the London Metals Exchange, base metals all finished firmer with Copper gaining 0.8%, Zinc 4.5%, Aluminium 0.8% and Nickel 0.2%.

In other mining news, Goldman Sachs JBWere has this morning reinstated Kagara as a 'hold' with a 12-month target of $0.90. The catalyst was the refinancing of its balance sheet to the tune of $226 million, which has removed all balance sheet pressure. This was the key risk Goldman's saw in Kagara. Goldman Sachs JBWere said they "expect Kagara to post a $34 million loss in FY10 based on metal price forecasts but says at current spot metal prices and AUD/USD level, this increases to a $17.5 million profit, which clearly highlights earnings leverage". It finished the session 7.8% higher.

In the energy sector, Paladin Energy (4%), Oil Search (3.5%), WorleyParsons (3.1%), Santos (2.6%) and Origin Energy (1.7%) were the major contributors. Oil prices firmed on Friday night and are currently trading at $64.30 per barrel.

West Australian News (4%), Aristocrat Leisure (4.1%), David Jones (3.2%) and Fairfax Media (1.6%) were all higher today. The media stocks performed well after Citigroup this morning released a note on the sector. They said "while upcoming results will be a train wreck and worst on record, earnings season could prove a great buying opportunity. While we stress that trough cycle earnings remain FY10, we have increased comfort that advertising revenues have stabilised and that the worst of the declines are broadly behind us".

Among consumer staple stocks, Wesfarmers, Woolworths and Coca-Cola Amatil added most of the points, up 1.9%, 1.5% and 0.7%, respectively. Credit Suisse this morning raised their earnings forecasts, valuation and price target for Woolworths ahead of group FY sales figures on Wednesday. They have raised their target to $31 from $28.50. Credit Suisse said "Woolworths performance is excellent. Cash is accumulating at a rapid rate and the company has $1 billion in Australian franking credits, meaning that a substantial return of capital in the next 12 months has a material probability of occurring".

Bendigo Bank and QBE Insurance Group fronted gains in the financials space, rising 2.9% and 2.1% respectively. Commonwealth Bank of Australia, ANZ and National Australia Bank all rose between 0.4% and 1% while on the downside, Westpac Banking Corporation lost 0.1%.