Australian Stock Market Report – Afternoon 1/18/2013

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Afternoon Market Report (17:00 AEDT)

One of the main points to emerge this week has been the almost surprisingly constructive tone of the market. In recent days the index has been moving higher whilst volumes have been increasing, indicating a higher level of investor participation. At face value it appears as though investors are prepared to accept the higher prices on offer. One of the questions to keep front of mind in coming weeks will be whether or not this price acceptance remains in place in the event of any weakness.

At the close the ASX200 index was up 14.5 points, or 0.31 per cent at 4,771.2, while the All Ordinaries index gained 15 points, or 0.31 per cent, at 4,794.7.

Friday presented the first opportunity for the local market to respond to the Rio write-down which was announced before the European session opened on Thursday. The initial price action in UK trade saw the stock lose more than 5% in short order. By the end of London trade the stock had consolidated to round out the session with a loss of 1.7%.

By contrast the local session saw a vastly different response from investors. With some time to consider the ramifications of the write-down and senior resignations, the price action was supportive from the outset, and by the close of trade the stock was ahead by 2.7%. The view being formed was along the lines of a leaner meaner approach being taken by the miner. The view was supported by market approval given to the elevation of Sam Walsh to CEO. Mr Walsh is a RIO veteran who has overseen the success of the local iron ore division in recent years. Clearly the markets are hoping that the Mr Walsh´s winning ways in the business that generates the lions share if the miner's income, 70%, will translate to a revival of fortunes for Rio.

In general terms, the resource sector has been an underperformer this week having lost ground over the course of the last 3 sessions, although Friday saw some buying return. BHP rose 0.4% or 16 cents to end at $36.50, Fortescue closed at $4.52 for a gain of 14 cents or 3.2%. One of the features of the corporate calendar next week will be the quarterly production report due from BHP.

Another factor which had a bearing on the resource sector, in addition to the broader market, was the Chinese GDP report. Figures showed that the Chinese economy expanded in line with expectations, growing at 7.9 per cent in annualised terms in the December quarter. Consensus was for an expansion of 7.7 per cent compared to 7.4 per cent in the previous quarter. Solid quarterly growth was seen in the December quarter with the economy growing by 2 per cent which was slightly lower than the consensus estimate of 2.2 per cent.

Other releases included retail sales which were up 15.2 per cent on a year ago in December, the fastest pace of growth in 10 months against expectations 14.9 per cent. Industrial production was up 10.3 per cent - the fastest pace of growth in nine months against consensus forecasts of 10.1 per cent and fixed asset investment over 2012 was up by 20.6 per cent compared to estimates of 20.7 per cent.

The main take out from today's data is that the Chinese economy continues to recover from an engineered slowdown. The slowdown is complete and the recovery is now gathering momentum. Economic growth picked up after bottoming out at a three-year low in the prior quarter, while retail sales and industrial production growth rates were holding at the fastest pace in 10 and nine months respectively. The positive data from one of the world's important economy's will help local stocks sustain the post-Christmas gains.

One of the features of the week has been the indicative bid of $1.10ps for Billabong by a consortium of Altamont Capital Partners and VF Corporation. The bid matches the indicative bid from the Paul Naude led consortium last month over the course of the week the stocks has continued to improve although investors remain sceptical about the likelihood of success with the shares ending at $1.02. markets continue to see Billabong's balance sheet, its IT systems and core brand issues as impediments for any potential bidder.

Looking ahead to next week, local data will be limited. Consumer prices for the December quarter will be on tap.The annual underlying rate was probably near 2.4% which not cause any problems for the RBA. Elsewhere detailed employment data for December will describe estimates by age and region. The US offers a fuller menu of data including the Richmond Fed Index an Influential regional survey, Existing home sales, an index of national home prices, US home prices are rising faster than in Australia. Elsewhere, US Leading indicators and New Home Sales will be looked at closely..

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