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Wednesday, November 13th, 2019

Markets Live: Next bruising for banks

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by April 5, 2016 General
japan

The ASX is still struggling to find a bottom, down 1.3 per cent, while Japan’s Nikkei has plunged to a six-week low, after the stronger yen hurt the overall market mood.

The Nikkei was down 2.1 per cent to 15,789.97 in mid-morning trade after hitting as low as 15,758.41 earlier, the lowest level since February 24.

The US dollar dropped below 111.10 yen during Asian morning trade and dragged down exporter shares. 

Analysts said that worries that the strong yen may erode exporters’ profits will likely continue to weigh on the market.

“Investors are concerned that Japanese companies are losing their ‘weak-yen appeal‘,” said Kazuhiro Takahashi, equity strategist at Daiwa Securities. “Many people are thinking it would be difficult for exporters to forecast on-year gains in their earnings for this fiscal year.”

On the other hand, Takahashi said that companies announcing shareholder returns may be bought as well as defensive shares, such as construction firms, which rely on domestic demand.

According to Nomura Securities, share buybacks exceeded 5 trillion yen in the last fiscal year ended March, marking a new record high, and will likely increase further in this fiscal year.

Around the region, Hong Kong’s Hang Seng is now down 1.4 per cent, Korea’s Kospi has lost 0.9 per cent but the Shanghai Composite is trading flat.

“There is a bit of a risk-off theme at present with oil prices down and equities in negative territory in the U.S.,” said Khoon Goh, a senior foreign-exchange strategist at ANZ.

Japanese stocks have dropped to a six-week low. Japanese stocks have dropped to a six-week low. Photo: Eugene Hoshiko

shares down

Downer EDI is under more pressure to win new rail contracts after losing a key mining services contracts with Fortescue.​

Downer’s shares are down 6.15 per cent at $3.51 after the contractor revealed late yesterday that Fortescue would perform its own mining services work at its Christmas Creek iron ore mine in Western Australia from October. 

The mining services contract is estimated to contribute around $400 million of annually to Downer’s group revenues, and account for about 20 per cent of its mining work-in-hand, according to Citi.

Fortescue said it was moving to an “owner-operator” model to cut costs. The iron ore miner has been gradually getting rid of external contractors, last year dumping Macmahon Holdings and using only Downer to provide drilling, blasting and haulage services.

But analysts had not expected Fortescue to also dispense with Downer when the contractor’s existing agreement expired on September 30. Downer has provided services at the Christmas Creek mine since 2010.

Citi analyst Richard Johnson said the contract loss was “disappointing” and reduced his forecasts for Downer’s 2017 and 2018 net profits by 6 per cent to $155 million. The loss is not expected to impact Downer’s 2016 results.

Fortescue, founded by Andrew Forrest, will no longer use external contractors at its Christmas Creek iron ore mine. Fortescue, founded by Andrew Forrest, will no longer use external contractors at its Christmas Creek iron ore mine. Photo: Jacky Ghossein

commodities

Incoming Rio Tinto chief executive Jean Sebastien Jacques should start his time at the helm with a “once in a career opportunity”  and buy prized Peruvian copper asset Cerro Verde from struggling major Freeport-McMoRan.

That’s the view of analysts from London-based Bernstein, who argue that low copper prices and a looming copper supply shortage make this the time to strike. 

“For Jacques…an acquisition of Cerro Verde could be career defining, and firmly mark the end of the strategically cautious period that Rio Tinto lived through under Sam Walsh,” analyst Paul Gait said. 

Rio Tinto has made no secret of its desire to expand its copper operations. It is currently in the final stages of approving a huge underground mine expansion of its Oyu Tolgoi copper mine in Mongolia, and has flagged a willingness to buy further top-quality projects that come to market. 

Gait said now is the time to buy in copper, despite the big prices paid in recent deals. 

“Copper prices are low, and whilst the copper price expectations implied by copper asset transactions, and which anyone would surely have to pay for Cerro Verde, are well above current market prices, the need for Freeport to sell in order to fix its own financial difficulties presents a unique opportunity to acquire assets.

Copper demand is expected to outstrip supply by 2018 or 2019, which should help lift prices. Gait expects the structural deficit to hit by “the end of the decade”. 

Rio's incoming CEO should think about snapping up some copper assets, Bernstein says. Rio’s incoming CEO should think about snapping up some copper assets, Bernstein says. Photo: Glenn Campbell

shares down

Nine shares have tumbled as much as 29 per cent to an all-time low following the TV broadcaster’s revenue update.

Bad weather and a poor showing from the West Indies cricket team this summer and a poor start to the ratings year, including the disastrous launch of Reno Rumble, all weighed on Nine’s revenue to start 2016.

Nine’s television revenues were down 11 per cent in the third quarter of the financial year, compared with the corresponding period, which the company said was also affected by an earlier Easter and no Cricket World Cup.

Nine shares are down 21 per cent at $1.2025, after earlier hitting a record low of $1.08.

Following the conclusion of the third quarter, Nine said that the advertising market remained subdued in March, expecting it to record a low single-digit decline for the current financial year, versus previous guidance of ‘flat to down marginally’. 

"Nine's summer of cricket was adversely impacted both by the weather and the standard of the competition," Nine said in ... “Nine’s summer of cricket was adversely impacted both by the weather and the standard of the competition,” Nine said in a trading update. Photo: Cameron Spencer

eco news

It’s not helping the local mood that the trade deficit has just blown out to $3.41 billion in February, coming in well below the $2.5 billion deficit predicted.

This came as imports were hardly changed at $28.675 billion, while exports fell 1 per cent to $25.265 billion.

The January gap was revised down from $2.9 billion to $3.16 billion.

The Aussie dollar has slipped further, hitting the day’s low of 75.79 US cents.

Less exports contributed to a blow-out in the trade deficit. Less exports contributed to a blow-out in the trade deficit. Photo: Jessica Shapiro Back to top

ASX

Losses are accelerating on the local sharemarket, as regional bourses open lower and as the oil slump deepens.

The big banks are now leading the market lower, falling between 1.25 per cent (NAB) and 1.75 per ent (Westpac).

Miners and energy stocks are also mostly lower – apart form gold stocks, which are registering some gains after the price of the precious metal rose overnight.

In Japan, the Nikkei has dropped 1.4 per cent and Hong Kong’s Hang Seng is down 0.9 per cent, while the Kospi in Korea has shed 0.65 per cent.

dollar

The Aussie has dropped below 76 US cents on a combination of weaker commodity prices, yesterday’s soft retail sales numbers and rising expectations the RBA may jawbone the currency in its statement today at 2.30pm.

“We don’t expect the RBA to move today but what will be important is what they say about the currency,” said CBA currency strategist Joseph Capurso, a currency strategist. “The prospect of a change in RBA rhetoric is weighing on the Aussie.

The currency rose as high as 77.23 US cents on March 31, the strongest level since July 1, after relentlessly rising during the month.

The Aussie “might be getting a bit ahead of itself,” governor Glenn Stevens said in a speech in Sydney on March 22.

In the March policy statement, he said the currency “has been adjusting to the evolving economic outlook”.

That echoed a line the governor has used since August last year when the RBA ended more than a year of commentary indicating some depreciation may be warranted.

The strength of the Australian dollar this year may force the RBA to jawbone the currency in its policy statement this week. The strength of the Australian dollar this year may force the RBA to jawbone the currency in its policy statement this week. 

Tenants market: residential rents are barely budging.

Missing passport pages, salaries being paid by obscure offshore companies and crudely translated supporting loan documents are some of the reasons why ANZ has announced its latest residential property lending tightening.

ANZ, a bank that has hitched its future to regional growth, was also noticing a sharp increase in the number of loan applications from foreign Australian residents sourcing income from overseas. “They were not what we would call traditional mortgage applications,” a senior ANZ official said.

Foreign payments for the loans are originating from across China, Hong Kong, Malaysia, Singapore and Indonesia. But in many cases the bank, which has an extensive network of retail and business banking contacts across the region, had no record of the companies claimed to be paying the salaries.

ANZ last week told mortgage brokers it will not accept mortgage applications where 100 per cent of income funding the mortgage application is foreign and has tightened lending criteria for other foreign residents.The bank said it had not found any instances of money laundering but conceded there might be a risk.

Other major lenders claim they monitor applications without having a ban on any group, or category. CBA said it has “special requirements” for income earned in foreign currencies involving documentation about its source.

I

Risk assets such as stocks, corporate bonds and bank loans have been trading in a wide and volatile range, taking investors on a roller-coaster ride up and down, including most recently a rally of about 10 per cent in US equity markets.

This phenomenon is likely to continue in the short-term, says Allianz global adviser Mohamed El-Erian, listing eight characteristics of this financial environment:

  1. Pronounced fluctuations within the trading range reflect primarily the tug of war between a weakening global economy and continuing liquidity injections from central banks and corporate balance sheets.
  2. The fluctuations are accentuated by patchy market liquidity: On the way up, prices overshoot levels warranted by the exceptional funding that markets obtain. That backing includes the monetary stimulus programs of central banks (notably the Bank of Japan, the European Central Bank and the People’s Bank of China), as well as the deployment of corporate cash for share repurchases, higher dividend payouts and mergers and acquisitions. On the way down, prices fall below what would otherwise prevail on the basis of fundamentals.
  3. This behaviour is likely to continue in the short-term, shifting the opportunities for higher monthly/quarterly returns away from conventional strategic long-term portfolio positioning and toward more short-term trading and volatility trades.
  4. Because today’s markets are heavily influenced by the direct and indirect involvement of central banks, correlations among asset classes are less reliable, weakening the effectiveness of risk mitigation through traditional portfolio diversification. Although it remains necessary, such diversification is no longer sufficient to ensure effective risk management. Accordingly, fluctuating cash levels not only provide agility for tactical positioning but also act as a risk mitigator.

Read the other four here.

Brace for more fluctuations, Mohamed El-Erian warns. Brace for more fluctuations, Mohamed El-Erian warns.  Photo: Peter Braig

market open

Shares have opened slightly lower, following falls on global markets and further drops in commodity prices.

The ASX is down 0.1 per cent at 4989.5 and the All Ords has slipped 0.1 per cent to 5064.8.

Energy stocks and miners are leading the way down, but the losses aren’t major (yet).

BHP has dropped 1.4 per cent, Rio is down 0.6 per cent, Origin has slipped 2.2 per cent and Woodside is down 2 per cent.

The big banks are all slightly lower while Telstra is eking out a gain of 1 cent.

Nine is the biggest loser among the top 200, shedding nearly 20 per cent on a gloomy trading update that says TV revenue is down about 11 per cent for the quarter.

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SPONSORED POST

Oil is getting ever more “interesting”, writes IG market strategist Evan Lucas:

As the cheap oil cycle began in mid-2014, the windfall was soaked up by household consumption. Cheap fuel boosts spending and in turn filters into growth –  this is simple economic theory. 

However, there is an ‘equilibrium point’ to cheap oil. The increase in household spending due to the cheap end-user price is offset by the collapse in capex and opex spending from producers, creating a drag on growth.

Energy producers both in Australia and globally are showing that in the current low oil price environment, growth and economic inputs have suffered and are more than offsetting household spend.

The collapse in capex globally (just look at the cuts by Shell, BP, Exxon-Mobil and Woodside to programmed projects) is clearly outweighing the consumption boost, the impact on employment, confidence and investment weighing on growth.

Oil needs to migrate to US$50 a barrel to have a mildly positive effect. Consumption would still be elevated as end-price would still be well below the ten-year average, but US$50 a barrel would be conducive enough to stimulate production capex as internal rates-of-return would pop back above investment thresholds at major oil firms.

Oil is therefore the first catalyst to watch in the second quarter, if Doha fails as is expected, oil is likely to slide back to mid-to-low US$30 a barrel and markets will respond to oil being ‘too cheap’ similar to the January-February trade period.

Oil fell 1.5% yesterday and saw seven out of the bottom ten ASX 200 companies being oil exposed. With oil falling a further 3 per cent overnight, the bottom ten will be dominated again by energy plays.

Click here for the full article and more.

Oil is getting more interesting. Oil is getting more interesting. 

eco news

Disappointing economic news and concern about the federal budget are continuing to worry consumers.

The ANZ-Roy Morgan consumer confidence index fell 1 per cent in the week ending April 3, with levels now having edged lower for three consecutive weeks.

While confidence levels remain above the long-range average, the slip of the index to 113.4 means the four-week moving average is now falling.

ANZ’s head of Australian economics Felicity Emmett says consumers are concerned about the future of the economy.

“The disappointing news-flow around the economy seems to be creating uncertainty about the economic outlook for households,” she said.

“Employment growth has slowed, retail sales have disappointed and house prices have softened.”

Emmett said government machinations ahead of the federal budget on May 3 could also be affecting confidence.

“With the coalition now behind in the polls and Prime Minister Malcolm Turnbull’s personal ratings falling, optimism over the potential for the current government to implement lasting reform seems to be fading,” she added.

The sub-index covering views about the economy over the next five years fell a sharp 7.6 per cent, while the outlook for the next 12 months fell 0.8 per cent.

Despite concerns about the wider economy, consumers were surprisingly more upbeat about their own hip pockets. Households’ views of their current finances compared to the same week a year ago were up 2.6 per cent.

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Virgin Australia’s credit rating has been placed on review for a possible downgrade by Moody’s, amid ongoing uncertainty over the airline’s capital structure, the level of shareholder support and its slower than expected reduction of debt.

Last week, Air New Zealand said it could sell all or part of its 26 per cent stake in the Australian carrier, in a move that led rival ratings agency Standard & Poor’s to revise its ratings outlook to “negative” from “stable”.

Virgin does not have an investment grade credit rating from either agency, with Moody’s rating its senior unsecured debt as B3 and S&P rating it as B-. Virgin’s corporate rating is B2 from Moody’s and B+ from S&P.

The Moody’s announcement came as one of Virgin’s major shareholders, billionaire Richard Branson’s Virgin Group, agreed to sell his 22 per cent stake in another carrier, Virgin America, to Alaska Airlines as part of a takeover deal. Virgin Group will receive about $US570 million in proceeds from the sale.

“I would be lying if I didn’t admit sadness that our wonderful airline is merging with another,” Branson said of Virgin America in a blog entry. “Because I’m not American, the US Department of Transportation stipulated I take some of my shares in Virgin America as non-voting shares, reducing my influence over any takeover. So there was sadly nothing I could do to stop it.”

In the US, foreign ownership of domestic airlines is capped at 25 per cent, whereas in Australia up to 100 per cent of a domestic airline can be owned by foreign shareholders.

Richard Branson's Virgin Group owns a 10 per cent stake in Virgin Australia. He stands to further boost his wealth with ... Richard Branson’s Virgin Group owns a 10 per cent stake in Virgin Australia. He stands to further boost his wealth with the imminent sale of Virgin America to Alaska Air Group.  Photo: Glenn Hunt

The yield on the Australian 10-year

Economists expect the RBA to keep interest rates on hold today, but some are still expecting a rate cut on federal budget day in May if rates stay on hold in the United States. 

A Fairfax Media survey of 12 senior bank and market economists found they were unanimous that the central bank at 2:30pm in Sydney will announce no change to the record low official cash rate of 2 per cent. 

But about a quarter of economists still anticipate a 25-basis-point cut as early as May.

At the heart of this call is the strength in the Australian dollar, which has risen 12 per cent off its six-year low of US68¢ in January to as high as US77¢ last week.

Its strength has come from improving commodity prices, better-than-expected local data and a lowering outlook for interest rate rises in the US.

The market has all but ruled out the Federal Reserve raising rates at its April meeting, and some economists are tipping the dollar to continue to rise as high as US80¢.

That would put pressure on the RBA on the day when the federal government delivers its budget, which was brought forward a week. 

Nomura rate strategist Andrew Ticehurst says a May cut is also likely because the labour force data had been “overstated” and had weakened in the first months of the year, weakness in the economies of its trading partners China, Japan and Korea, and a low quarterly inflation reading.

“In terms of the May call, I would say it’s becoming very close, and it would likely take a very low CPI release on April 27 to get the Reserve Bank across the line as soon as May,” he said.

Read more.

The Australian dollar has climbed 6.2 per cent this month. The Australian dollar has climbed 6.2 per cent this month. 

US news

US stocks slipped from the highest levels of the year as investors assess whether a six-week rally has taken equities too far too quickly. The yen reached an almost 18-month high versus the greenback, while copper capped its longest slide in two years.

The S&P 500 index retreated after a sixth weekly gain in seven restored more than $US1.8 trillion to the value of American equities. Brazilian stocks dropped the most in the world as commodity prices fell and economists forecast a steeper contraction in the economy.

The Japanese currency climbed as investors question central-bank policy prescriptions. Natural gas reached an eight-week high amid a cold snap in the eastern US and WTI crude fell below $US36 a barrel.

US stocks climbed the most in a month last week, pushing gains from a Feb. 11 low to 13 per cent, after Federal Reserve Chair Janet Yellen reaffirmed any interest-rate increases will be gradual even as jobs and manufacturing data signaled the economy continues to strengthen. The Fed will release minutes from its latest meeting on Wednesday night, while traders will have to wait until next week for the start of corporate earnings season.

“There’s a big divergence in opinion right now over whether this rally is a head fake or not and that’s the big question,” Craig Sterling, head of US equity research at Pioneer Investments in Boston, said. “Stocks have gone up on not a lot of volume and we’re kind of at an inflection point right now. It’s going to be an interesting quarter because a lot of companies are not going to have a great quarter.”

European shares are now the cheapest they’ve been against the S&P 500 in more than a year, as the chart below shows.

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need2know

Local shares are poised to open flat ahead of the RBA’s latest policy decision, as the ASX struggles to climb amid continued wariness around the banks.

What you need2know

  • SPI futures up 2pts to 4982
  • AUD at 76.02 US cents, 84.68 Japanese yen, 66.76 Euro cents and 53.29 British pence 
  • On Wall St, Dow -0.3%, S&P -0.3%, Nasdaq -0.5%
  • In Europe, Stoxx 50 +0.3%, FTSE +0.3%, CAC +0.5%, DAX +0.3%
  • In London, Rio +1.7%, BHP -0.4%
  • Spot gold -0.4% to $US1217.25
  • Brent crude -1.7% to $US38.01
  • LME copper -1.5%, zinc -1%, lead -1.7%, nickel +0.6%
  • Iron ore is fetching $US54.80 per tonne 

What’s on today:

  • AIG services index at 9:30am AEST, Trade balance for February at 11:30am, RBA decision at 2:30
  • Japan wages at 10am
  • BoE releases March meeting notes, UK services PMI
  • US ISM non-manufacturing PMI, JOLTS job openings
  • Euro-area services PMIs for March

Read more.

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

Your editors today are Jens Meyer and Patrick Commins.

This blog is not intended as investment advice.

BusinessDay with wires.

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