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Markets Live: ASX bounces back

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by October 31, 2016 General
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Shares have broken a three-day losing streak after climbing global bond prices sparked buying in heavily sold-off yield plays, while ANZ’s announcement of the sale of much of its Asian businesses headlined a busy day of corporate news.

The ASX 200 was wobbly early thanks to a poor Wall St lead but ultimately rallied as investors rediscovered some of their lost love for high dividend-paying names, with the benchmark measure climbing 34 points or 0.6 per cent to 5318.

Utilities were the best performing corner of the market, gaining 1.7 per cent, while energy lagged as the oil price came under pressure in Asian trade.

Investors reacted favourably to ANZ‘s announcement, bidding the stock 0.8 per cent higher, with Westpac and CBA pacing those gains, while NAB added 0.3 per cent. Macquarie, on the other hand, dropped 2.4 per cent.

Qantas shares swung wildly following its quarterly trading update: from more than 9 per cent lower in early trade to finish 4.1 per cent ahead.

AMP dropped a further 2.4 per cent as analysts downgraded the stock following Friday’s terrible trading update. Woolies dropped 2.4 per cent amid reports from their court battle with the ACCC over the supermarket owner’s treatment of suppliers. Wesfarmers jumped 1.7 per cent.

Boral shares fell 0.8 per cent Boral will sell its 40 per cent stake in the Boral CSR Bricks joint-venture to CSR.

The day’s best performer was lithium miner Orocobre, which jumped an impressive 20 per cent following a quarterly production update.

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NAB chief markets economist Ivan Colhoun has just been to Japan visiting institutional clients keen on investing in Australia. Here are his main takeaways:

  1. most Japanese investors retain a favourable view on the outlook for the Australian economy;
  2. there remains considerable interest in Australian bonds and other interest-bearing instruments – including in the newly-issued 30-year bond – given Australia’s relatively high (and positive) yield;
  3. Japanese investors also appear mostly favourably disposed towards the $A on account of both their optimistic view on the Australian economy and the belief that the RBA will not cut rates again anytime soon;
  4. the global bear steepening trend for the yield curve is expected to continue;
  5. Australian house prices and the sustainability of Chinese growth were the key questions asked. There was little awareness of the apartment settlement and oversupply risks that we are closely focused on at the present time.

Japanese investors are keeping faith in the Aussie dollar and the local economy, NAB says. Japanese investors are keeping faith in the Aussie dollar and the local economy, NAB says. 

US news

While most of market speculation around the US election outcome has centred on the way shares and US Treasuries would trade in the immediate aftermath of any non-consensus result, in a nod to the lessons imparted by the Brexit vote, investors have not given as much air time to the longer view.

Any kind of surprise outcome in the late stages of the United States presidential race could also prolong an already drawn out capital spending recession in the United States.

“If you don’t really understand who’s going to win the election, and what their policies are going to be thereafter, there’s a good argument to saying that uncertainty could lead to further weakness in investment, and further consequences for US households,” said Elliot Clarke, senior economist at Westpac.

“We had the GDP numbers out on Friday and business investment was pretty weak, that’s been a continuing theme.”

Chad Padowitz, chief investment officer at Wingate Asset Management, sees the impact of a remarkable election campaign reflected in the performance of the health care sector. Year-to-date, health care distributors, health care services and biotech are among the worst performing S&P 500 sub-indices down 28.3 per cent, 17.2 per cent and 16.4 per cent.

“The health care sector, that’s the most politically-charged sector,” he said. “There could be an element of you don’t want to put your head out right at this moment, and post the election it’s a bit more smoother sailing. We’re actually expecting it to do quite well over the next couple of months.” Mr Padowitz said, noting that he favours drugmaker Sanofi.

That’s also why he thinks a Democratic sweep of the White House, House of Representatives and Senate would be perceived to be bad for health investors.

“The health care sector globally is a bit concerned about increased regulatory scrutiny, something of that vein will probably be more aligned to a Democratic sweep.”

US investment spending. US investment spending. Photo: Westpac

asian markets

The fall in oil prices as well as the rekindled jitters around the US presidential election are the main reasons for falling sharemarkets around the region (the local ASX is the big exception today).

Japan’s Nikkei has lost 0.25 per cent, the Shanghai Composite is down 0.4 per cent, the Korea Kospi has fallen 0.6 per cent, while the Hang Seng is edging 0.1 per cent higher and the ASX is now rallying 0.8 per cent.

Investors were rattled by news that the FBI is planning to review more emails related to Democratic presidential candidate Hillary Clinton’s private server, just a week before the election. Federal investigators have secured a warrant to examine the newly discovered emails, sources told Reuters.

Hillary Clinton had opened a recent lead over her unpredictable Republican rival Donald Trump in national polls, but it had been narrowing even before the email controversy resurfaced.

The Mexican peso, which strengthens along with the chances for a Clinton win, fell, while the US dollar remained weak against other major currencies.

“There seems little doubt that a Trump victory would trigger selling in stock markets from current levels,” said CMC chief market analyst Ric Spooner. “This has traders nervous as they start the week assimilating fresh news on Hillary Clinton’s email problems.”

The website fivethirtyeight.com still sees a 78.8 per cent chance of Clinton winning the election. The website fivethirtyeight.com still sees a 78.8 per cent chance of Clinton winning the election. 

Oil is trading at 1 2015 high after another overnight rally.

Oil prices are extending declines after non-OPECproducers made no specific commitment to join OPEC in limiting oil output levels to prop up prices, suggesting they wanted the oil producing group to solve its differences first.

Officials and experts from OPEC countries and non-OPEC nations including Azerbaijan, Brazil, Kazakhstan, Mexico, Oman and Russia met for consultations in Vienna on Saturday and only agreed to meet again in November before a scheduled regular OPEC meeting on November 30.

Brent crude for December delivery was down 29 cents, or 0.6 per cent, at $US49.42 a barrel after settling down 76 cents on Friday, while NYMEX crude was down 0.5 per cent at $US48.47 a barrel.

“There was a lot of talk and nobody managed to agree on anything. That has been pushing the market down,” said Jeffrey Halley, senior market analyst at OANDA brokerage in Singapore.

The potential tightening of the US presidential race after news of a renewed FBI probe of Democratic candidate Hilary Clinton was also affecting sentiment and putting investors off riskier assets, Halley said.

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And here’s Business Day columnist Elizabeth Knight writes on how cheap airfares have hit Qantas profits:

Record low airfares due to industry overcapacity are behind Qantas Airways’ announcement that some of the gloss has come off its profit since June, and the December half will be lower than last year’s bumper result.

The news has certainly prompted some experts to question why Qantas continues to add seats on its international routes, which could place even more downward pressure on prices. Qantas says that even at these lower prices, the company is still making a good return.

International capacity grew a hefty 5.8 per cent but revenue fell an even larger 6.9 per cent.

Make no mistake for Qantas, which expects to mint between $800 million and $850 million pre-tax in the first half of the 2017 financial year, this is not a disaster and it’s a vast improvement on where the company was a couple of years back. But it won’t match the record $921 million it made in the first half last year.

This is despite the fact that Qantas will receive an additional $200 million in tailwinds from the low oil price.

The lower oil price has been a large factor in the overall revival of Qantas’ profit over the past two years but it also has a negative consequence in that it enables international competitors to increase capacity – thus putting pressure on airfares and, in turn, revenue.

Monday’s performance update from Qantas will send some aviation analysts to their desks to pare back full-year estimates, which, even before the announcement, had the 2017 profit slipping from the 2016 year result.

But for others like JPMorgan, the update from Qantas represents a sigh of relief. It was expecting the first half of 2017 profit to come in a touch under $800 million, due to the effects of competition on the international business.

Read more.

Qantas chief executive Alan Joyce. More capacity and lower airfares has hit the airline's profit. Qantas chief executive Alan Joyce. More capacity and lower airfares has hit the airline’s profit. Photo: Louise Kennerley

Woolworths’ attempts to extract payments from suppliers to fill a $50 million hole in its profits were “slapdash, haphazard, unbusiness-like and unreasonable,” a Sydney court heard on Monday.

Counsel for the ACCC, Norman O’Bryan SC, told the Federal Court that, under a scheme dubbed Mind the Gap, Woolworths came up with spreadsheets and scripts to be used by category managers and buyers to demand retrospective payments from “underperforming” suppliers in an attempt to fill a shortfall in its December-half profits in 2014-2015.

However, some buyers and category managers misinterpreted or did not understand the data and scripts and demanded payments that were unreasonable and unjustified, giving suppliers just three or four days to pay.

If suppliers resisted, their case would be “escalated” up Woolworths’ chain of command.

In one example, a Woolworths buyer asked Manassen Foods for $28,548, citing a decline in its trade spend and a fall in the gross margin Woolworths made from sales of Manassen’s products – two of the four “lenses” Woolworths applied to identify suppliers who would be approached for Mind the Gap payments.

Mr O’Bryan said the buyer cut and pasted information from Woolworths’ spreadsheets and scripts, mixed up basis points and percentage points, and came up with an inaccurate figure.

“She doesn’t understand what the spreadsheet was telling her about the appropriateness of the ask,” Mr O’Bryan told Justice David Yates.

“It’s a complete misreading and misunderstanding of Woolworths’ own internal documentation,’ he said.

“It indicates that Woolworths was approaching this in a slapdash, haphazard, unbusiness-like and unreasonable manner,’ he said.

“Woolworths told staff this was all statistical and fact-based … (that they) are entitled to ask for this money because it’s fact based and valid.”

“We submit there was no proper basis of any sort because Woolworths made up these measures for itself. Woolworths never even bothered to instruct the people who were the frontline troops to understand the very material which they were going to make these asks of.”

“Because every dollar they could extract from suppliers dropped straight to the bottom line to produce (its December-half) result.”

“That’s one of the major reasons why this exercise is unconscionable,’ Mr ‘O’Bryan said.

Woolies shares are 2 per cent lower at $23.75.

A Sydney court has been told a scheme to fill a hole in Woolworths' 2014-2015 profits by asking suppliers for cash was ... A Sydney court has been told a scheme to fill a hole in Woolworths’ 2014-2015 profits by asking suppliers for cash was “haphazard and unreasonable.” Photo: Patrick Scala

Woodside Petroleum has played down the impact of a $US5 billion cost blowout at Chevron’s Wheatstone LNG project in Western Australia but analysts warn that with the collapse in gas export prices the extra spend will put further pressure on returns.

The 17 per cent budget overrun, disclosed by Chevron chief financial officer Pat Yarrington to investors in the US on Friday, takes the total cost of the project under construction near Ashburton North to $US34 billion.

But Woodside said it already updated its expectations of the project costs when it bought its 13 per cent stake in Wheatstone last year, and noted the cost increase would lift its capex guidance from February by less than 8 per cent.

Several analysts said the cost increase came as no surprise, given some well-known problems that have in particular dogged one key supplier to Wheatstone and the broader trend of serious cost blowouts affecting the latest batch of Australian LNG projects, including Chevron’s larger Gorgon venture.

“I have been assuming cost escalation of over 15 per cent at Wheatstone  for some time now, and already had a higher cost based assumed within our models,” said Saul Kavonic at energy consultancy Wood Mackenzie.

“The recent wave of Australian LNG projects have disappointed in project execution in the face of stretched supply chains and project management resources, and Wheatstone has been no different.” 

Mr Kavonic said that with the collapse in LNG prices due to the crude oil price drop, WoodMac modelling showed that many of the recent LNG projects, including Wheatstone, would achieve rates of return of less than 9 per cent.

Woodside has previous stated it seeks returns of at least 12 per cent from new projects.

Wheatstone should still have very low cash costs when it is running so even in the currently depressed LNG markets it will be cash flow positive, Mr Kavonic said.

Woodside noted that it had updated the expected costs of the project when it bought its 13 per cent stake from Apache in 2015.

The increase is “within the range of outcomes expected at the time of the acquisition” and can be funded by cash and undrawn debt, the Perth-based player said in a statement.

Woodside shares are 0.3 per cent softer at $28.24.

Chevron has confirmed fears of a cost blowout at the Wheatstone LNG project in Western Australia. Chevron has confirmed fears of a cost blowout at the Wheatstone LNG project in Western Australia. 

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Unwinding its Asian strategy is proving costly for ANZ, writes The AFR’s Chanticleer columnist Tony Boyd:

The gradual dismantling of Mike Smith’s super regional Asian banking strategy at ANZ is almost complete with new CEO Shayne Elliott‘s decision to sell the retail and wealth business in five Asian countries.

ANZ is one of several Australian banks to have proven that it is not possible for Australian bankers to create and successfully run a regional banking strategy outside of Australia.

ANZ failed to do it in Asia and NAB failed to do it in the United Kingdom.

The only example that Chanticleer can think of where a bank has built a successful regional strategy outside of its home market is Spanish bank Santander in the UK.

The buyer of ANZ’s retail and wealth management business in Asia is Singaporean bank DBS. It has a track record of buying and integrating wealth businesses in Asia.

It says it will earn $S200 million within three years from the business it is acquiring from ANZ.

The other lesson from the ANZ’s failure to build a super regional Asian strategy is that investors should perhaps be wary of companies that pin their strategy on the brilliance of one individual.

Smith convinced the board and some sections of the market that he could build a super regional Asian strategy. He hired people to help execute that strategy but when he left there was no commitment to it.

While Smith was running ANZ, the bank did everything in its power to show that the strategy was working including changing segment reporting and shifting the earnings and revenue from disparate businesses under the Asian umbrella.

The simplification being pursued by Elliott has been welcomed by the market.

The stock was sold off after Smith left. But in hindsight it was over sold.

ANZ remains the bank with the most potential for recovery in its share price because the shrinkage of the business will lift return on equity and boost capital.

Elliott still has to sell a range of joint ventures in Asia.

Elliott is responding to changed market conditions in a methodical way. But the complicated and long winded sales process for the retail and wealth business in Asia shows that simplifying a complex strategy is time consuming and costly.

Read more ($).

ANZ chief executive Shayne Elliott slowly unwinding his predecessor's strategy. ANZ chief executive Shayne Elliott slowly unwinding his predecessor’s strategy. Photo: Vince Caligiuri

money printing

Private sector credit growth remains tepid, rising just 0.4 per cent in September for an annual rate of 5.4 per cent, coming in below the 10-year average of 6.3 per cent again.

St George senior economist Jo Horton points to soggy business credit as a key reason behind the recent softening in credit growth.

Business credit grew by just 0.2 per cent in September, after rising by 0.1 per cent in August. For the year to September, business credit rose by 4.7 per cent, the slowest pace of growth since June 2015.

While housing credit expanded at a steady 0.5 per cent monthly rate, of note is the pickup in investor credit, up 0.6 per cent over the month, where growth has been accelerating over the past six months.

“This is the strongest growth for the segment since August 2015, and provides further evidence (along with the recent pickup in house prices and auction results) that sentiment in the housing market remains positive,” ANZ economist Daniel Gradwell said.

The annual pace of housing credit growth eased a little further in September to 6.4 per cent, led by slower lending to owner occupiers, but the annual pace of lending to investors edged higher, to 4.8 per cent, for the first time in over a year.

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It’s too early to ditch yield stocks, Deutsche Bank strategists say.

The market in recent months has “dealt harshly” with yield names as global bond rates have moved higher, but the sell-off “appears overdone”, the DB team write. But being underweight the them “is likely to hurt”, they say, adding that they still like names such as:

  • Stockland for its housing exposure and 5.5% yield;
  • Telstra, where there is value at an est. FY17 P/E of “only” 14.5 and with a 6% yield;
  • Sydney Airport, with its tourism theme and 5% yield; and
  • APA, which has “good organic growth” and a 5.5% yield.

So why the upbeat view on a recently spurned theme? The broker has a number of supporting arguments.

First off, bond yields have mostly risen due to higher inflation, largely due to higher oil prices. A supply response could bring that story to an end, and exhibit ‘a’ is a rising rig count in the US.

Also, while a Fed hike in December is looking likely, bond markets tend to price that in early and then actually rally – that is, yields fall – after a hike. There is plenty of money coming out of Japan and Europe that will pour into US bond markets, putting a cap on yields.

And anyway, Australian rates matter more for Aussie stocks, and there is a divergence here between the RBA and the Fed, with the former still more likely to cut than hike in the foreseeable future. The Deutsche strategists reckon that at 40 per cent the market is underpricing the risk of a cut in 2017. DB’s economics team are pencilling in a May cut, but their plucky strategists “see a risk it happens earlier, with November even possible”.

Finally, there is the 15 per cent underperformance of yield names as a group in recent months, and the resultant growing yields attached to them.

The poor performance of late followed the thematic “overshooting on the way up, so the recent correction brings them ‘in-line’,” the DB team write.

“Similarly, the excess dividend yield on these stocks has risen in recent months. They offer a yield of almost 6 per cent, compared to the market at 4.5 per cent. This excess yield is not too far below the six-year average.

“So where to now? We don’t see bond yields rising much, removing a catalyst for more underperformance. Yield stocks could even trade a little rich again, given their ongoing scarcity value in offering a decent real yield.”

Aussie yield stocks continue to offer an attractive yield. Aussie yield stocks continue to offer an attractive yield. Photo: Deutsche Bank

Indonesians’ growing appetite for red meat needed to make rendang curries and to flavour noodle soups is putting the world’s biggest seaborne cattle trade at risk.

For the first time, Indian frozen buffalo meat is legally available in the world’s fourth-most populous nation even as some Indonesian consumers voice concern over its quality. The sales, which started last month, are already causing anxiety on the sprawling Australian ranches that supply Indonesia with more than half a million live cattle a year.

The threat to Australia’s market share “is very real and we’d be foolish to think otherwise,” Tracey Hayes, chief executive of the Northern Territory Cattlemen’s Association, said from Darwin, where the bulk of Australia’s live cattle exports are shipped to Indonesia. Indian buffalo “is a much cheaper product,” she said.

Australia relies on Indonesia to buy more than half its live cattle exports — earning $549 million from the live trade last year. Australia has sought to repair its reputation as a reliable supplier after abruptly banning live shipments in 2011 due to allegations of cruelty in Indonesian abattoirs.

Indian buffalo meat sells for as little as the state-food agency set price of 65,000 rupiah ($6.50) a kilogram in so-called wet markets in Jakarta, compared with about 115,000 rupiah a kilogram for beef from Australia in more upscale farmers’ markets. It’s becoming increasingly popular in Asia, and India is now a major supplier to Vietnam and Malaysia — two countries that are also significant buyers of Australian live cattle.

The live cattle trade has at times been a flash point in Australia-Indonesia relations, which have also been strained by a spying scandal and the execution of convicted Australian drug smugglers. President Joko Widodo visits Australia in November, with a potential free-trade deal up for negotiation.

Read more.

Indian buffalo is squeezing Australian beef out of Indonesian markets. Indian buffalo is squeezing Australian beef out of Indonesian markets.  Photo: Glenn Campbell

ASX

Stocks are gaining some traction now, with the ASX rising back above 5300 points as investors cautiously dip their toes back into the market.

The gains come despite the rest of the region’s sharemarkets trading in the red and Wall Street futures also pointing lower, but then again the ASX was last week’s big underperformer.

“With Donald Trump’s chances of winning improving since Friday, we’re seeing a flight to safety this morning with defensive sectors such as industrials, utilities and gold outperforming,” said Atlantic Pacific Securities client adviser Gary Huxtable.

These were all sectors that were sold off heavily last week. Industrials and utilities are both up 1.2 per cent while heavily oversold health stocks have gained 0.9 per cent. Meanwhile, materials are continuing their rise, adding another 1 per cent.

Qantas has turned around and is now posting a 3.6 per cent gain after initially falling as much as 9 per cent on its profit warning.

Woolies continues to lag and at a loss of 2.7 per cent is the biggest drag on the benchmark index.

Macquarie and AMP are also headwinds, down 2.3 per cent and 2.5 per cent respectively.

Flying high: after falling as much as 9 per cent, Qantas shares are now rallying. Flying high: after falling as much as 9 per cent, Qantas shares are now rallying. 

shares down

Building materials supplier Boral will sell its 40 per cent stake in the Boral CSR Bricks joint-venture to CSR for $133.9 million.

Boral will make a profit of $20 million to $25 million on the sale, which will be reported as a significant item in fiscal 2017.

Chief executive Mike Kane says the joint-venture has performed well, but now is the time to realise value for the business and redirect capital to Boral’s core operations.

Investors weren’t impressed, sending Boral shares down 2.7 per cent to $6.18, while CSR are flat at $3.66.

dollar

The US election race is once again a dominating market factor after the FBI’s bombshell on Friday, when it revealed its probe of newly found emails related to Hillary Clinton’s use of a private server, rocking the Democratic candidate’s presidential campaign barely more than week before voting day.

The Mexican peso, which tends to weaken on evidence Republican presidential nominee Donald Trump’s support is increasing, is extending losses while futures on the S&P 500 index have edged lower.

The peso weakened for a fourth straight session, dropping 0.2 percent to 19.0154 per US dollar, close to its lowest level in two weeks.

“I think the US presidential election will be much closer than the polls think,” Perpetual head of investment strategy Matt Sherwood said. “If the polls tighten more, or the FBI investigation dominates the headlines, there could be a recalibration in market prices this week.”

An ABC/Washington Post tracking survey Sunday gave Clinton 46 per cent support from likely voters, to Trump’s 45 per cent, narrowing her lead to just one point from 12 a week ago.

“Until the election, the general theme will be uncertainty, which will have implications not just on the stock market, but on the US dollar and Treasuries,” said Chad Morganlander, a money manager at Stifel, Nicolaus & Co. “The probability that was factored into the market and the global financial system was a Hillary Clinton victory – investors now need square their books going into the election based on whatever new odds come out.”

Peso and the polls: the Mexican currency (white line) is tracking Donald Trump's election chances (yellow line, ... Peso and the polls: the Mexican currency (white line) is tracking Donald Trump’s election chances (yellow line, currently at about 43.5 per cent in the Real Live Politics poll average)  Back to top

commodities

The tide has clearly turned for the mining sector: not only are prices for many commodities on a tear, now the number of job vacancies within the industry is picking up.

But that’s not to say there’s going to be another mad rush to the mines in the hopes of scoring a $150k truck driving job like in the last boom.

Job vacancies have just picked up from their 2015 lows and are still well off the peaks from several years ago. On top of that, most of the vacancies are for temporary positions, underscoring a sense that this mini-boom could be over soon.

Still, it is a recovery, as CBA senior economist Michael Workman points out.

“Our view is that it is still a positive development in a sector with a strong cost control focus. It indicates that rising prices trigger an initial shift towards more temporary workers to expand output in the most cost effective manner,” he says in a note to clients.

Whether we’ll see more permanent positions in coming months will likely be determined by the sustainability of the recent price rises, he points out, adding that a higher Aussie dollar could “complicate” the employment decisions in the resources sector.

While the recent rises in coking and thermal coal prices have attracted most attention, rising gold and nickel prices have helped boost profits and employment.

“The upturn in mining‑related employment will add to the generally positive trend in national vacancy numbers translating to sufficient jobs growth to keep mild downward pressure on the national unemployment rate,” Workman says.

Workman also notes that the times of super-high salaries in the sector are also over.

“One of the outcomes of the significant decline in resource sector jobs is a major change in related wages costs that favours the employers,” he says, adding that mining wages growth is down to 1.3 per cent annually, the lowest since the series began in 1998.

shares up

Shares in hyped lithium miner Orocobre have surged 14 per cent to $3.63 after the company on Friday said it was still getting high prices even as it missed its own production forecasts.

The company posted sales revenue of $33.5 million from its lithium facility, up 45 per cent quarter-on-quarter. The company’s production from its lithium facility rose 2 per cent q/q to 3103 tonnes. That production figure was at the very bottom of the miner’s reduced guidance 3000–3200 tonnes it provided at the FY16 result.

The miner reaffirmed its second-quarter output guidance and didn’t change its full-year forecast.

The numbers provided “tangible evidence that production and strong prices have turned into cash flow,” Deutsche Bank analysts wrote, maintaining their buy rating and a 12-mth price target of $4.30.

Although “a disappointing quarter operationally“, Macquarie analysts pointed out that the miner is “still achieving high prices despite missing their own estimates”.

“With gross margins of greater than 60 per cent, we continue to believe that no further capital injections will be required for Phase 1’s loans to be repaid.”

Macquarie has an outperform rating and a $4.20 price target.

While Orocobre shareholders will be cheering today’s price move, short sellers, who have ramped up bets on the company’s stock falling, will be feeling the squeeze.

The chart below shows short interest in the stock is close to 8 per cent from not much only a few weeks back.

The shares reached as high as $5 in June from $1.33 in December last year, but have since cooled off to be “only” 57 per cent up in 2016. 

Short interest in Orocobre has rocketed higher in recent weeks. Short interest in Orocobre has rocketed higher in recent weeks. Photo: shortman.com.au

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ANZ shares are off 0.7 per cent on their return to trade following the announcement that it has agreed to sell its retail banking operations and wealth management businesses in five Asian countries to DBS of Singapore.

NZ said its operations would be sold in Singapore, Hong Kong, China, Taiwan and Indonesia. It did not reveal a price tag but said the sale price represented an estimated premium to net tangible assets at completion of around $110 million

ANZ said it would take a net loss of around $265 million, including various write-downs and costs. It said the sale was expected to increase its common equity tier 1 capital ratio by around 15 to 20 basis points and there will be “a small impact on ROE [return on equity] and EPS [earnings per share].” 

DBS Group reported the deal in its third-quarter earnings in Singapore on Monday morning. ANZ said “most people” employed in the affected operations would join DBS. 

ANZ is currently briefing analysts and investors on the deal. 

The deal reflects the unwinding of the the “super-regional” strategy for ANZ pursued by former CEO Mike Smith, who was hired by ANZ from HSBC in 2007 and was replaced by Shayne Elliott in January this year. 

Mr Elliott said in a statement filed with the ASX that “Asia remains core to ANZ’s strategy.” 

“Our strategic priority is to create a simpler, better capitalised, better balanced bank focussed on attractive areas where we can carve out winning positions…

“This transaction simplifies our business while allowing us to continue to benefit from higher levels of growth in the region through a focus on our largest, most successful business in Asia – banking large corporate and institutional clients driven by trade and capital flows particularly with Australia and New Zealand,” he said. 

ANZ will report its full-year earnings for 2016 on Thursday. 

Mr Elliott said that while retail and wealth in Asia had grown to be a profitable business, “without greater scale ANZ’s competitive position is not as compelling.”

“Having looked carefully at the business in recent months, it is clear the environment we face has changed and to make a real difference for our retail and wealth customers, we would need to make further investments in our Asian branch network and digital capability. Further investments do not make sense for us given our competitive position and the returns available to ANZ,” he said. 

The sales would be completed during 2017 and early 2018 and are subject to regulatory approval, ANZ said.

ANZ is selling Asian branches to DBS of Singapore. ANZ is selling Asian branches to DBS of Singapore.  Photo: josh robenstone

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Lots of news around this morning, including a sweeping credit outlook downgrade by one of the global ratings agencies of everything related to Aussie real estate.

Standard & Poor’s has placed the ratings outlooks of 25 Australian banks, insurers and buildings societies on negative watch as it becomes concerned about rising household debt and property values.

The change in ratings outlooks comes as the agency adjusted its assessment of Australia’s economic risk trends from stable to negative, impacting its calculations of financial sector ratings. 

Among the largest institutions impacted are AMP Bank, Bank of Queensland, Bendigo and Adelaide Bank, Macquarie whose current ratings were placed on negative outlook.

Several other building societies and regional lenders such as Cuscal and CUA also had their ratings outlook revised to negative.  

The ratings outlooks of the major banks have already been placed on negative outlook because of the action taken on the AAA Australian sovereign rating, which was placed on negative outlook.

But the agency said it would lower the stand-alone credit profile, or base credit rating, of the big four if there was “continued strong growth in private sector debt or property prices.”

In July, Standard & Poor’s placed Australia’s AAA rating on negative outlook, which flowed through to similar impact on the major bank’s AA- credit ratings which factors in the strong likelihood of government support.

The rating action was prompted by what it believed were rising imbalances in the Australian financial system.

“Economic risks facing all financial institutions operating in Australia are rising due to the strong growth in private sector debt and residential property prices in the past four years, notwithstanding some signs of moderation in growth in recent months,” the agency said.

While S&P said its base case was that growth in debt and property prices would moderate, there was a one in three chance that the strong growth would continue, leading to increased risks of a property crash that would hurt the nation’s lenders. 

Read more ($).

Australian inflation-adjusted property prices and private sector debt growth. Australian inflation-adjusted property prices and private sector debt growth. Photo: S&P

dollar

Australia’s key commodity exports, iron ore and coal, have been on a spectacular rally over the past weeks, yet the dollar is stuck below US77¢ as larger forces hold back the currency.

Since early August, the Aussie has made about a dozen attempts to jump the US77¢-level – the latest last week following a strong headline inflation number – only to be knocked back immediately. 

Over that period, coking coal prices have soared 150 per cent, thermal coal is up nearly 50 per cent and even iron ore has risen by 6.3 per cent, with price gains accelerating over the past two weeks.

Yet despite those two tailwinds, the Aussie is trading pretty much exactly where it was just after the August rate cut, at around US76¢.

“All this should be bullish for the Australian dollar,” said Westpac currency strategist Sean Callow, noting the currency’s “vertigo” above US77¢.

The Aussie’s misfortune is that the environment is even more bullish environment for the greenback as market expectations of a December US rate rise top 70 per cent, while global bond yields have bounced higher amid shifting inflation expectations, Mr Callow said.

Meanwhile, market expectations of a rate cut by the RBA – another key determinant of the currency – have been scaled back significantly.

Mr Callow, who reckons the Aussie is trading at roughly fair value, said that was only likely if the Federal Reserve resisted lifting rates, due to a negative economic shock such as zero growth in employment, or if other major central banks surprised with more easing.

A Donald Trump victory in the US presidential election could also give the Aussie a boost, as it might cause the Fed to hold rates steady in December.

While the bar remains high for a topside break in the Aussie dollar, the currency is actually tipped to fall next year, as the current prices rises in commodities aren’t deemed to be sustainable.  

“For those taking a longer-term view there’s a fair bit of scepticism around the commodities rally,” Mr Callow said, tipping the Aussie would drop back below US70¢ by the fourth quarter of 2017.

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Over the longer run, the Aussie dollar follows commodity prices. Over the longer run, the Aussie dollar follows commodity prices. Photo: ANZ, Bloomberg Back to top

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