Banks weigh on ASX on credit crunch fears

Three positive trading sessions in the back half of the week were not enough to wipe a poor start to the week for the Australian sharemarket, which closed the week lower.

The S&P/ASX 200 index advanced 9.2 points, or 0.2 per cent, on Friday to close at 6185.5 but recorded a fall of 22.1 points or 0.4 per cent for the week.

It was a tough week for the major banks this week, leading the market losses as the prospect of a credit crunch increased. Fitch Ratings said on Tuesday that the findings of the royal commission would put pressure on bank profits, even if it did not immediately affect their credit ratings.

Commonwealth Bank led the losses for the major four, falling 2 per cent this week to $70.00. NAB fell 2.2 per cent to $27.21, Westpac closed 1.6 per cent lower at $27.49 and ANZ ended the week at $27.72, down 1.6 per cent.

A2 Milk was also among the market's biggest weights this week as it fell 5.9 per cent to $9.64. Investors have been selling out of the stock after chief executive Jayne Hrdlicka and director Peter Hinton both trimmed their respective holdings in the company.

The major resource stocks were able to lift during the first week of the quarter, with the materials sector leading the market gains this week as the Bloomberg Commodity index lifted to a two-month high.

Alumina exposed stocks performed particularly well this week as a full shutdown of the Alunorte, the world's largest alumina refinery, sidelined 5 per cent of the world's supply. South32 rose 7.9 per cent to $4.23, Alumina Limited closed the week 10.1 per cent higher at $3.05 and Rio Tinto closed at $80.06, lifting 1.7 per cent during the past five sessions.

BHP Billiton led the market as the price of oil hit a four-year high during the middle of the week. It closed the week 2.5 per cent higher at $35.50, Origin Energy rose 4 per cent to $8.59 and Woodside Petroleum closed at $39.00, up 1.1 per cent.

Gold miners also closed the week higher as investors once again turned to the precious metal as a safe-haven investment. Saracen Mineral Holdings closed the week 6.7 per cent higher at $1.99, St Barbara rose 6 per cent to $3.70 and Newcrest Mining closed at $19.59, up 0.9 per cent for the week.

Stock watch

Bank of Queensland

Morgan Stanley lifted Bank of Queensland's target price slightly but remains 'underweight' on the stock, citing falling returns, under-pressure margins, diminishing capital options and the need to reinvest as key factors in its rating. Morgan Stanley said while better margins and loan volumes led to the broker upgrading its cash EPS by 2.5 per cent for FY19, the stock was too expensive as it traded at 12.5x PE. The broker highlighted management's ability to navigate margin challenges during the second half of 2018 with better deposit management leading to a 7.5 per cent growth in low cost transaction accounts. Morgan Stanley said it expected margins to decline by 5 basis points in the first half fo 2019 as tailwinds diminished. The broker lifted the company's price target from $9.30 to $9.50.

What moved the market

Retail sales

Retail sales rose by 0.3 per cent during August, following a flat result in July, with broad based strength across categories and states. The recent lift was above market consensus of a 0.2 per cent rise and takes the annual growth rate to 3.8 per cent. ANZ senior economist Jo Masters said that result was positive given the headwinds currently facing discretionary spending in Australia. "While this is consistent with ANZ-Roy Morgan consumer confidence, which continues to track above its long-run average, it is somewhat surprising in the face of falling house prices, rising petrol prices and ongoing retail price deflation," she said.

Oil

The price of oil dropped overnight as signs begin to emerge that the market may have risen too far. The price of Brent crude fell 2 per cent on Thursday while the price of West Texas Intermediate crude fell 2.7 per cent as market participants took profits on reports that Saudi Arabia and Russia would increase production after striking a private deal in September in lift output levels. The relative strength index for both Brent and US crude rose above 70 this week, a level that most regard as signalling the market has risen too far. Both crude levels dipped below 70 again following Thursday's fall price fall.

Aussie dollar

The Australian dollar hit a more-than two-year low on Friday morning against the US dollar, trading as low as US70.64¢. The Aussie dollar had been buying US72.33¢ on Tuesday but has since fallen by as much as 2.3 per cent on the back of US dollar strength. The US dollar is looking to Friday's payroll data, with leading indicators pointing to an above-average gain. The Aussie dollar dropped slightly in response to Friday's retail sales data despite the number coming in ahead of consensus forecasts. Investors in the Aussie may have been hoping for a more positive result to boost the dollar's prospects against the greenback.

Indian rupee

The Indian rupee has remained under serious pressure recently as the major importer of crude is hurt by rising oil prices. The rupee is continuing to hit record lows this week and there are no signs its fall will slow, even if India's central bank increased interest rates. Investor sentiment in the country has also been weighed by the global emerging markets sell-off, led by economic troubles in Turkey and Argentina. The Reserve Bank of India will have to tread carefully on monetary policy, with the country's inflation slipping below the 4 per cent target in August.

Let's block ads! (Why?)