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Markets Live: ASX staggers higher

by October 31, 2016 General

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


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.


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) 


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.

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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:


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


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


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.

Read more.

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

market open

Investors are once again looking very wary in early trade after last week’s heavy bout of selling, with a further 2.8 per cent drop in AMP and as shareholders await from confirmation from ANZ around the sale of Asian businesses.

The ASX 200 index is down a handful of points at 5279, with mining getting support alongside some big bluechips such as CSL and Wesfarmers, up 1 per cent and 1.4 per cent, respectively.

CBA, NAB and Westpac are all a little lower in the order of 0.2 per cent, as shareholders await ANZ‘s update and return to trade. Singaporean bank DBS looks to have already spilled the beans, though, telling the market this morning in a quarterly update that it plans to buy ANZ wealth and retail banking units across five Asian countries.  DBS Group is Southeast Asia’s largest lender.

Yield names such as Scentre Group, Transurban and Sydney Airports are enjoying a drop in Aussie bond yields this morning after global bond rates took a hit on Friday night.

BHP is up 0.3 per cent, Rio 0.7 per cent and Fortescue 1.4 per cent, but South32 is treading its own path and is 1 per cent down.

Qantas is off a hefty 4.4 per cent following a disappointing quarterly trading update.

Winners and losers in early trade. Winners and losers in early trade. Photo: Bloomberg Back to top

shares down

Bell Potter analysts have labelled AMP‘s business update on Friday as “shockingly bad” in a note to clients titled “A car crash in slow motion”, while their peers at Credit Suisse downgraded the wealth giant to “neutral” and both slashed their share price targets.

Meanwhile S&P pushed the outlook on AMP’s credit rating to negative watch from stable, but kept it at “A+”.

AMP shares tumbled by more than 10 per cent after it wrote down the value of its life insurance business by $668 million and warned conditions in the industry had worsened further.

“Overall this is a disappointing update and we believe the worst isn’t over,” the Bell Potter analysts wrote in a note to clients on Friday, in which they reaffirmed their sell rating and pushed their 12-month price target for the stock down 55 cents to $4.15. The shares last traded hands at $4.68.

“We see AMP as a car crash occurring in slow motion, with our revised expectations moving AMP to an ex-growth company, with negative earnings per share growth expected in FY18 and beyond. We have not factored in any capital return from the company until the regulatory approval is provided, with potential for around 15 cents per share.”

While the underperformance of AMP’s life insurance business “will get a lot of attention” following Friday’s update, but the Bell analysts say they believe AMP’s low-cost super products – Flexible Super and Flexible Lifetime Super, which account for just under $50 billion in funds under management – “are in serious trouble”.

“The products compete directly with the major banks and industry funds, and in the recent quarter the combined net-flows were negative $501 million. The September quarter also marks the first time Flexible Super (which is the new and open product) achieved negative flows in the period.

“This is consistent with our view that AMP is becoming increasingly uncompetitive and unable to respond threats on multiple fronts.”

Credit Suisse analysts cut their rating on AMP to “neutral”, highlighting also that things could get worse for the business before they get better, and agree that a mooted release of capital to shareholders will “be delayed”.

“Our revised $ target price [from $5.75) suggests that there may be value in the AMP share price at these levels; however, downside risk to earnings remains in our view,” they write.

Qantas expects underlying first-half net profit to fall up to 13 per cent as it slashes costs to cope with declines in international airfares.

In its first-quarter earnings report, Qantas said it expected underlying profit before tax of between $800 million and $850 million for the six months to December 31, compared with $921 million for the same period a year earlier.

“Like most carriers globally, we are seeing international airfares below where they were 12 months ago,” Qantas chief executive Alan Joyce said in a statement.

“The impact of that is tempered by the competitive advantages we’ve been working hard to fortify, including our strong domestic position and diversified loyalty business.”

Qantas said its first-quarter revenue has dropped 3 per cent to $3.98 billion due to increased international competition and subdued domestic demand.

Passenger numbers were up 2.5 per cent to 13.2 million, boosted by a 2.2 per cent growth in capacity in the three months to September 30.

Qantas revenue sinks as competition bites. Qantas revenue sinks as competition bites. Photo: Brent Winstone


Here’s a quick state of play for markets as we approach the open of Asian trade:

  • SPI futures down 3 points or 0.1% at 5250
  • Aussie dollar trading at 75.96 US cents
  • On Wall St, Dow -0.1%, S&P 500 -0.3%, Nasdaq -0.5%
  • In New York, BHP +0.6%, Rio +0.9% 
  • In Europe, Stoxx 50 -0.2%, FTSE +0.1%, CAC +0.3%, DAX -0.2%
  • Spot gold +0.6% to $US1275.47 an ounce
  • Brent crude -1.6% to $US49.69 a barrel
  • Iron ore +1.5% to $US63.96 a tonne
  • LME aluminium +1.1% to $US1718 a tonne

On today’s corporate calendar:

  • Origin releases Q3 production update
  • Qantas provides Q1 update

Latest from broker analyst news:

  • AMP cut to sell at Bell Potter (more on this in a moment) and to neutral at Credit Suisse
  • Wesfarmers raised to overweight at JP Morgan
  • Crown raised to buy at UBS
  • Ardent Leisure cut to hold at Bell Potter
  • Aurizon cut to hold at Shaw & Partners
  • Carsales raised to hold at Shaw
  • Northern Star raised to neutral at Goldman Sachs
  • Sandfire raised to neutral at GS
  • Western Areas cut to sell at GS

With fears of massive volatility in the case of a Trump victory, it seems unlikely money managers are going to put too much money to work this week, writes IG strategist Chris Weston:

The market gave us a reasonable idea about how it plans to react to a Trump victory, with politics dominating Friday’s US trading session.

The gap between Clinton and Trump has closed somewhat in various probability models, with a Sunday poll conducted by ABC/Washington Post saw Clinton’s prior 12 point lead reduced to just 1 point (46 per cent to Clinton/45 per cent Trump).

The interesting dynamic here is that despite a strong headline US Q3 GDP report of 2.9 per cent growth the interest rate market couldn’t really care less and the increased chance of Trump in the White House has actually seen the chance of a December rate hike fall to 70 per cent. Keep in mind that if we scratch under the surface of the GDP report we can see domestic demand (GDP ex-inventory and trade) growing a slower pace from Q2 at 1.4 per cent.

So politics has shown once again that it trumps any economic data points and the fact the S&P 500 fell 1 per cent over the ensuing hour (from when the FBI news was released), while the US dollar-Mexican peso exchange rate spiked 2.1 per cent [which means the peso weakened] and healthcare was sold aggressively painted a clear picture.

If the market saw the FBI news as a Trump positive, but stopped short at feeling it was a genuine game-changer, then it really shows what will happen if Trump gets into power. There will be carnage in financial markets and the underlying concern remains around who can influence the Federal Reserve (Fed) and clearly market participants’ would need to fully understand the relationship between Trump and the Fed before they started to increasing risk to portfolios.

Read more.

Rising bond yield causing ASX to underperform

As the ASX 200 is the global poster boy for traders to pick up dividend income, the ASX underperforms when bond yields rise. (This video was produced in commercial partnership between Fairfax Media and IG Markets)

market open

Investors hoping for some relief after last week’s heavy losses are likely to be disappointed as there is plenty ahead to keep markets on edge, with key central banks including the RBA and the US Fed and the US election race entering its final stretch.

Stock futures indicate a flat open of the S&P/ASX 200 this morning, giving investors an opportunity to lick their wounds following last week’s 2.7 per cent slide, the biggest since June. But a bigger rebound in shares is unlikely just yet, considering the number of risk events over the week, and after the latest twist in the US election battle contributed to market jitters.

News on Friday that the FBI is reviewing fresh evidence in its probe of Hillary Clinton’s email server sparked a selloff in US stocks and pushed the CBOE Volatility Index – Wall Street’s fear gauge – to a two-week high. It also triggered a flight to the relative safety of bonds, ending a selloff that had driven global yields – which move inversely to prices – to five-month highs.

Globally, the main event of the week is the two-day US Federal Reserve meeting on Tuesday and Wednesday (US time), and while the central bank isn’t expected to lift its key rate just yet, investors will be looking out for any comments indicating the timing of future hikes.

Two other key central banks meet next week, the Bank of England and the Bank of Japan, and while neither is expected to change its rates setting, the meetings are likely to remind investors that monetary policy in the world’s largest economies is still diverging, with only the US en route to higher rates.

Locally, the key event for the market is the RBA’s rates decision on Tuesday, Melbourne Cup day.

Financial markets are all but ruling out a rate cut, pricing in a just 4 per cent chance of a move, but in the latest Bloomberg survey a sizeable minority of economists – 6 out of 27 – predicted a cut was possible this week, pointing to stubbornly low core inflation.

Read more.

Markets have trimmed expectations of another RBA rate cut. Markets have trimmed expectations of another RBA rate cut.  Back to top

ANZ shares are in a trading halt ahead of a 10:30am AEDT announcement in which the bank is expected to announce the results of a review into the bank’s review into its Asian retail and wealth business.

CEO Shayne Elliott will hold an investors briefing at 11am, the company said in an ASX release this morning.

It comes as investors and analysts await ANZ’s full-year results due on Thursday. Progress on the strategic review into ANZ’s Asia business was one of the key things analysts and investors were watching out for, given chief executive Elliott’s willingness to address the business. 

ANZ makes about 10 per cent of its profit from its international business, most of which is in Asia.

Good morning and welcome to the Markets Live blog for Monday.

Your editors today are Jens Meyer and Patrick Commins.

This blog is not intended as investment advice.

BusinessDay with wires.