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Saturday, August 24th, 2019

Markets Live: The Brexit bounce

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by June 29, 2016 General

Stand-alone house sales in New South Wales dropped the most since August 2010 in May, data from the Housing Industry Association show, another indication the property boom is losing momentum.

Detached house sales in the state fell 11.5 per cent, the data show.

Record prices and tighter bank mortgage lending criteria are denting affordability and construction of new homes, with Sydney prices growing at the slowest pace in almost three years in the first quarter, according to Australian Bureau of Statistics data.

“There is nothing alarming to a reversal in the trend for new home sales,” said HIA chief economist Harley Dale. “There is a cyclical downturn ahead for new residential construction activity, as new home sales signal, but the early pull-back will be mild by historical standards.”

Strength in home building has proved a major plank for economic growth in recent years and the pipeline of approvals still points to high levels of construction ahead.

Photo: Bloomberg

A weaker pound should trigger bargain hunting overseas buyers. A weaker pound should trigger bargain hunting overseas buyers. 

By voting to leave the European Union, Britons have delivered a potential windfall to tourists eager to snatch up Burberry trenchcoats, Harrods Stilton and Liberty scarves on the cheap.

The outcome of Thursday’s referendum sent the British currency plunging, making the country’s goods and services cheaper for foreign buyers. Consumers reacted immediately: Searches by Chinese for UK holidays “skyrocketed” on Ctrip.com International’s travel booking app, the company said, while Chinese news site Phoenix implored visitors to London to “Buy, Buy, Buy”.

A slumping pound is a much-needed shot in the arm for UK luxury companies as the Chinese are the biggest buyers of high-end goods and make most of their purchases overseas. They made 270,000 trips to the UK last year, up 46 per cent, according to tourism website VisitBritain. British Airways owner IAG said Tuesday that the weaker pound will boost tourist flows to the UK.

“I wouldn’t be surprised to see Chinese and Middle Eastern tourists flocking to the UK as their purchasing value has increased,” said Edouard Meylan, chief executive officer of Swiss watchmaker H. Moser & Cie. “People are ready to travel to get a 5 to 10 to 20 per cent discount.”

More visitors to the UK would be a boon for British companies such as Burberry Group and Mulberry Group that have struggled amid slowing luxury demand and terror attacks in Europe. The UK is the world’s sixth-largest market for luxury spending, at 15.5 billion euros ($US17.2 billion). Britain’s gain could come at the expense of retailers in Japan, casinos in Macau and jewelers in Hong Kong.

Any short-term fall in the pound will affect the number of visitors to London, said Harrods managing director Michael Ward. But those benefits could take time to materialise as Chinese tourists sort out visas and book hotels, according to Ctrip.com. Some luxury companies may also raise UK prices if the pound’s weakness persists. And investors are bearish on what the EU referendum means for the broader sector, as reflected in sliding stock prices for France’s LVMH and Gucci owner Kering.

“You only purchase luxury products for one reason: if you’re feeling good about yourself,” HSBC analysts said in a note. The EU referendum “will likely put another layer of doubt on a consumer who already has accumulated many.”

Read more here.

Despite the acrimony, the two major parties’ policies have a lot in common, writes SMH’s economics editor Ross Gittins:

I get criticised by rusted-on supporters of both sides of politics when I say this, but that doesn’t stop it being true: there are differences between the two sides’ policies, but they’re not as great as they want us to believe (and their supporters do believe).

So let’s identify the main points of agreement and disagreement. Most argument in election campaigns is about economic issues, with much less disagreement on other issues.

On economic management the parties are agreed on the issue which, though it’s rarely acknowledged by either side, is by far the most significant: that the day-to-day management of the economy be left to the Reserve Bank, acting independently of the elected government.

That just leaves the government in control of its budget, which does have effects on the economy in the short and longer term but, because it’s all the pollies have left to argue over, gets more attention than it deserves.

On getting the budget back into surplus – and so getting the level of public debt falling rather than continuing to rise – there’s little to choose from. The Coalition isn’t in any hurry, and nor is Labor.

Malcolm Turnbull says his policies won’t have the budget back to surplus until 2020-21, after which the surplus will stay tiny.

Bill Shorten‘s plans say he will get back to surplus in the same year, though he’d spend an extra $16.5 billion over the four years, but then add an extra $27 billion to the surplus in the following years to 2026-27.

The main differences between Labor and the Coalition occur because Labor would not proceed with the government’s planned cuts to spending on education and health while, on the other hand, it would continue the 2 per cent “deficit levy” on income above $180,000 a year but wouldn’t proceed with the government’s planned cut in company tax.

Read more.

age 28/6/2016 Simon Letch CARTOON age 28/6/2016 Simon Letch CARTOON Illustration: Simon Letch

Tenants market: residential rents are barely budging.

Airbnb, which lets users list their homes and apartments for short-term rentals, is in talks for a new round of investment that would value the company at about $US30 billion ($41 billion), according to people briefed on the matter.

Under the terms of the new fundraising, Airbnb will have tripled its valuation in two years.

Airbnb plans to use the financing to further feed its growth plans and international expansion, said these people, who spoke on condition of anonymity.

The company, based in San Francisco, has been expanding in new markets over the last two years, with a 700 per cent increase in business from Chinese travelers, the company has said. Last year, Airbnb opened its operations in Cuba for the first time.

Airbnb is also experimenting with alternative lines of revenue, for example, by letting tourists include add-on services in their trips like restaurant reservations and museum tours.

The equity funding comes in addition to a $US1 billion debt facility that Airbnb has secured, according to a Bloomberg report this month.

Kim Rubey, a spokeswoman for Airbnb, declined to comment.

Despite the recent volatility in the public markets, some private companies have still been able to attract funding. Startups like Airbnb and Uber have been garnering billions of dollars as they seek to expand globally.

A $US30 billion valuation would make Airbnb the second-highest-valued startup in the United States behind Uber, which is now valued at $US62.5 billion, according to a list compiled by CB Insights.

Airbnb plans to use the financing to further feed its growth plans and international expansion. Airbnb plans to use the financing to further feed its growth plans and international expansion. Photo: James Horan

elizabeth-knight_127x127

Central bankers are getting ready to act, including our own, writes BusinessDay columnist Elizabeth Knight:

We are now beginning stage two of the Brexit fallout:  We have witnessed the immediate shock and the accompanying carnage on world stock markets. Now we will witness interest rates around the world start to fall as central banks attempt to cut off any prospect of recession off at the pass.

Australia will be no exception.

The chance of the Reserve Bank deciding to drop interest rates by a quarter of a per cent in the next month or even the next week are now better than they were before a mob of Britons made the mistake of deciding to go it alone in an economic sense.

And the volatility in sharemarkets remains. After seesawing over the past four days the Australian stock market opened up almost 1 per cent.

The UK, European and US equity markets rebounded overnight to recover some of the losses sustained since last Friday. But no-one is prepared to say markets don’t go down again. Investors are fractious, sensitive and reactive to any fresh triggers.

Prior to the Brexit shock there were a reasonable number of economists betting the RBA would cut Australian interest rates in August after it had received fresh quarterly consumer price index numbers that provided it with an update on inflation. The conventional wisdom was that a weak set of inflation numbers in the June quarter would trigger another cut.

But the world economy really changed last week. Many would consider that the RBA would see a rate cut next Tuesday as a bit premature given that the real fall out of the Brexit vote remains uncertain. But some believe a pre-emptive move by the RBA is not out of the question.

If the RBA decides to wait, then August is a really good bet.

Read more.

Can rate policy counter Brexit pain?

There is little left in the monetary policy arsenal to help the global economy weather the impact of Brexit

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The big lenders have been put on high alert by lower milk prices for farmers, writes BusinessDay columnist Adele Ferguson:

Murray Goulburn‘s decision to open 2017 farmgate prices below the cost of production and below market expectations will put farmers in the gun and banks on high alert to revisit their exposure to the dairy sector.

The banks have already been running the ruler over New Zealand where their exposures are much higher. Nevertheless there are billions of dollars of credit exposure to dairy farms in Australia.

For instance, National Australia Bank and ANZ each have an estimated $1.5 billion exposure to the Australian dairy industry. In ANZ’s case, impaired loans for forestry, fishing, agriculture and mining was $892 million out of a total exposure of $49 billion at its most recent balance date. Two-thirds of this exposure related to agriculture of which $13 billion related to dairy, most of which is in New Zealand.

Brett LeMesurier, head of research at APP Securities, which last week won the best research house at the Stockbrokers Awards, said the market should expect higher rates of bank impairments from Australian dairy exposures following Murray Goulburn’s farmgate price announcement.

NAB made no specific provisions for New Zealand dairy in its last result, notwithstanding that it had more than $500 million in impaired loans. It seems the bank’s judgment was that the value of the farms would exceed the outstanding debt obligations.

That is all well and good, but if milk prices continue to fall, it stands to reason that the property values of the farms will come under pressure. This is the potential source of more bad debts.

Murray Goulburn’s opening price comes at the worst time for the National Party, particularly its party leader Barnaby Joyce, just days out from the federal election.

When farmers hurt, it quickly becomes a political issue. David Basham, acting president of advocacy body Australian Dairy Farmers, told Fairfax Media that farmers would now endure 12 months of being paid less for their milk than the cost of producing it.

Read more.

There are billions of dollars of credit exposure to dairy farms in Australia. There are billions of dollars of credit exposure to dairy farms in Australia. Photo: Louie Douvis

euro

Of the myriad issues that must be resolved in a renegotiation of Britain’s relationship with the European Union, few are as important as prized passporting rights enjoyed by financial services companies.

Passporting is based on the EU principle of mutual recognition and allows banks and insurers in one member nation to provide services in other member nations without additional licensing.

The system helps explain London’s status as a global financial capital because it enables foreign institutions, such as Goldman Sachs or Macquarie Group, to set up regulated business in Britain and operate across the 27 other members of the bloc. 

Before the referendum campaign, some people argued that London was well placed to withstand Brexit. 

“Will it stop London being a destination of choice for the high-end money? I don’t think so,” Australian-born hedge fund manager Sir Michael Hintze said earlier this year.

“There is still a rule of law here. It is a safe haven and has been over the centuries. All the way from the Huguenots [French Protestant migrants in the 16th and 17th centuries].”

He admitted some banks could find the loss of passporting rights problematic. London mayor Sadiq Khan said such a scenario would be nothing short of a disaster.

Now that British voters have decided to leave the EU, the risks to London’s finance sector are very real. Banks have already begun to weigh up the merits of shifting operations out of Britain, having approached euro zone regulators about securing licenses. 

Australian insurer QBE, which earns about a third of its income from premium in Britain and Europe, says it will have to use newly established licensed EU entities. 

How this issue is handled will not just have big implications for London’s financial services industry but other renegotiation sticking points, including the vexed issue of immigration

The problem for whoever replaces David Cameron as prime minister is that immigration and passporting are linked.

Read more at the AFR ($).

Can Britain retain passporting rights prized by banks while rejecting EU immigration rules? Can Britain retain passporting rights prized by banks while rejecting EU immigration rules? Photo: Matt Cardy

commodities

Rio Tinto has reduced its exposure to tax havens over the past year but its Singapore marketing hub continues to be investigated by the ATO.

The resources giant said 17 of its 600 subsidiaries were domiciled in tax havens, and eight of those were dormant.

Rio said five of the remaining nine were acquired through acquisitions, and turnover had been reduced in others.

The exposure to tax havens is down from the previous year, when 20 Rio subsidiaries were located in such nations and only two were dormant. 

Rio considers a tax haven to be a jurisdiction with a corporate tax rate below 10 per cent.

The declaration was made in Rio’s annual “taxes paid” report, and comes after Rio confirmed last year that its Singapore office was being scrutinised by Australian tax officials.

The company said negotiations with the ATO were ongoing.

“We are engaged in discussions with the ATO in relation to the pricing of iron ore marketing services,” the company said.

The taxes paid report revealed that Rio’s tax payments had fallen in line with commodity prices.

The company paid $US7.1 billion in taxes and royalties to governments around the world in 2014, but that fell to $US4.5 billion in 2015.

 Australia continues to get the lion’s share of Rio’s tax and royalty payments, with $US3.3 billion to flowing to Australian governments in 2015, down from $US5.7 billion in 2014.

The Federal and Western Australian governments received the biggest share of that spend.

Mongolia, which is home to Rio’s Oyu Tolgoi copper project, was one of the few nations where Rio’s tax spend increased year on year.

The company paid $US278 million in the developing nation in 2015, up from $US185 million in 2014.

Only Australia and Canada received more tax payments from Rio in 2015.

Read more.

Rio Tinto paid $US4.5 billion in tax in 2015. Rio Tinto paid $US4.5 billion in tax in 2015. Photo: Louie Douvis

Post referendum, markets will now be driven by speculation around what the next step for the UK will be. Post referendum, markets will now be driven by speculation around what the next step for the UK will be. Photo: Getty Images

SPONSORED POST

What path Brexit takes from here is setting up another binary outcome for markets, writes IG Markets analyst Angus Nicholson:

The Brexit crisis looks like it may be heading into an awkward period of uncertainty as the cogs in the British and EU bureaucracies slowly begin to whirr into action.

Both the Conservative and Labour parties in the UK are set to elect new leaders in the coming months and Article 50 – the starting pistol for an EU exit within two years – is still yet to be called. The crux of the issue is what a post-Brexit UK should look like, many are calling for the “Norway Option” where the UK keeps full access to the European single market as a member of the European Economic Area (EEA) but has no say in EU politics.

But members of the EEA still have to abide by the EU’s rules on the free movement of people and the Brexit vote was largely won on restricting immigration to the UK. This is really the challenge for the Brexiteers: how does one avoid crashing the UK economy by leaving the EU single market and yet at the same time win some restrictions on immigration that would appease a deeply disgruntled electorate?

And this is where the binary decision for markets occurs. If the Brexiteers look like they are veering towards leaving the single market, then global markets will begin to sell off sharply. On the other hand, if the Brexiteers look like they are trying to push for some sort of “Norway Plus” deal then they will start to rally. And there’s a good chance markets will move dramatically on indications of either over the next couple of months.

But the rally we have seen in global assets overnight based on the premise that cooler heads will prevail and that the UK is unlikely to wilfully do something against its own self-interest was definitively disproven last Friday and should be cold comfort for investors.

Read more.

market open

Shares have followed the overseas lead and extended a post-Brexit relief rally that began yesterday afternoon.

The ASX 200 is 48 points, or 0.9 per cent, higher at 5151, as more than three quarters of the index members post gains.

Stocks exposed to the UK which have been whacked in recent days are pushing higher, although they remain well down overall. So far this morning:

  • BT Invt Mgt +6.1%
  • IRESS +5.2%
  • QBE +3%
  • Computershare +2.6%
  • CYBG +2.4%
  • Macquarie +2.1%
  • GBST +2%

Back to the broader market, and the big banks are enjoying support, with the major lenders by between 1.1 and 1.7 per cent.

Miners are well higher, buoyed by the better sentiment. BHP is up 2.4 per cent and Rio 1.9 per cent. Energy shares are the biggest winners, rising 2.4 per cent as a group after oil extended its rally overnight. Woodside is up 1.4 per cent.

Stocks that outperformed during the Brexit blues are underperforming this morning, including utilities and the likes of Telstra, which is 0.3 per cent lower.

Caltex is up 4.2 per cent as investors see something to like in the company’s profit update this morning.

Photo: Patrick Commins Back to top

Vocus Communications is seeking to raise $650 million to buy Ontario Teachers Pension Plan and CIMIC Group’s cables and data centre owner, NextGen Networksas exclusively foreshadowed by the AFR’s Street Talk on Tuesday night.

Credit Suisse launched the deal this morning. 

Vocus will pay $700 million for the NextGen acquisition with additional amounts for two extra projects. The total consideration announced by the company is $807 million.

Macquarie Capital is advising NextGen. 

Vocus outlined the $652m fully underwritten capital raising, via an entitlement offer and placement, this morning after the stock entered a trading halt.

The company plans to raise $452 million in a 1-for-8.90 accelerated renounceable entitlement offer with retail rights trading and an institutional placement of about 26.5 million new shares which will amount to $200 million. The institutional offer closes on Thursday and will be followed by a bookbuild on Friday.

The offer price under the entitlement offer is $7.55 per share, a 10.4 per cent discount to the theoretical ex-rights price of $8.42. The stock last traded at $8.52.

As Street Talk revealed a fortnight ago, Vocus has been closing in on NextGen for months with Ontario Teachers seeking an exit. 

NextGen would give Vocus an inter-city fibre network that it does not already own. Vocus currently uses NextGen’s inter-city infrastructure.

Vocus Communications chief executive James Spenceley. Vocus Communications chief executive James Spenceley. Photo: Ben Rushton

money

A squeeze on oil refining margins has hit earnings of Caltex, the country’s largest oil importer and refiner, despite a lift in volumes of petrol sold.

But helping to offset the squeeze, more customers are purchasing higher margin premium fuels, it said, with an ongoing decline in sales of unleaded and E10 products. This left overall sales volumes up slightly at 7.7 billion litres.

For the December half, it has indicated the pretax profit will fall to $310-330 million, down from $375 million a year earlier.

The pretax profit of the supply and marketing arm is expected to rise more than 10 per cent to between $345 and $360 million, it said.

But tighter refining margins have weighed on the performance of its Lytton refinery in Brisbane where the pretax profit is expected to run at $85-95 million, it said.

The unspecified decline at Lytton was due to “lower first half refiner margins, offset by stronger production volumes”, it said.

The average refiner margin was $US9.80 per barrel of oil, down from $US16 a barrel a year ago, it said.

The forecast includes a gain on inventories of about $70 million, which is down from the inventory gain of $95 million a year earlier.

On a replacement cost basis, the group’s preferred measure, Caltex said  the net profit for the half is expected to come in at between $245-260 million. In the same period a year earlier, the net profit mon this basis was $251 million.

After climbing as high as $37.80 at the start of the year, the company’s shares have traded steadily lower to last fetch $30.90.

...............CALTEX SUPPLIED PIC................ ETHANOL PETROL PUMPS BEING TRIALED IN CAIRNS QUEENSLAND. STORY IAN ... ……………CALTEX SUPPLIED PIC……………. ETHANOL PETROL PUMPS BEING TRIALED IN CAIRNS QUEENSLAND. STORY IAN HOWARTH SPECIALX 111 ***FDCTRANSFER*** Photo: caltex

shares up

Stocks rose worldwide for the first time in three days and the British pound and the euro climbed slightly overnight as investors snapped up Brexit-bashed assets.

Bargain-hunting prevailed, but there was still widespread uncertainty over Britain’s vote to leave the European Union as the bloc’s leaders, including soon-to-be-ex UK Prime Minister David Cameron, held their first post-vote meeting in Brussels.

European shares were up 2.4 per cent , clawing back some of their 10 per cent loss the wake of the UK’s vote in favour of Brexit on Friday.

Wall Street shares also bounced back, with banking shares recovering some of what they had lost.

It sets the scene for strong gains on the ASX this morning. Futures markets are pointing to stocks opening 83 points, or 1.6 per cent, higher.

Britain’s Lloyds and Barclays gained through the day, jumping 7.43 per cent and 3.38 per cent respectively. Italy’s UniCredit rose but then pulled back, to end 1.5 per cent lower, and Spain’s Bankia surged more than 9 per cent before falling back slightly to a 8.2 per cent gain.

Sterling also got a reprieve, gaining 0.9 per cent against the greenback at $US1.33, regaining some ground after hitting a 31-year low of $US1.3122 on Monday. The euro was last up 0.2 per cent against the dollar at $US1.10 after hitting a 3-1/2 month low of $US1.09 on Friday.

Against the yen, sterling rose 2.2 per cent to 136.93 .

“After a few days of a lot of volatility, it looks like we have found some stability,” said TD Securities’ European Head of Currency Strategy Ned Rumpeltin.

Even so, the lack of clarity over how A British exit from the EU will proceed could fuel volatility in the weeks to come.

“I think this is a short-lived rally,” said Paul Nolte, portfolio manager as Kingsview Asset Management.

The major concern for investors – aside from the political ramifications of a split – is whether already struggling banks can survive if Brexit prompts central banks in Europe, Switzerland, Scandinavia and Japan to cut interest rates even more deeply into negative territory.

Read more.

Uncertainty over the exit is expected to fuel more volatility in the markets in the weeks ahead. Uncertainty over the exit is expected to fuel more volatility in the markets in the weeks ahead.  Photo: Bloomberg

need2know

Local shares are poised to rise after global sharemarkets jumped overnight, as the Brexit hangover shows sign of wearing off. 

Here’s what you need2know:

  • SPI futures up 83 points or 1.6% to 5127
  • AUD at 73.8 US cents, 75.83 Japanese yen, 66.63 Euro cents and 55.35 British pence 
  • On Wall St, Dow +1.6%, S&P 500 +1.8%, Nasdaq +2.1%
  • In New York, BHP +4.2%, Rio +3.4%
  • In Europe, Stoxx 50 +2.3%, FTSE +2.6%, CAC +2.6%, DAX +1.9%
  • Spot gold -0.7% to $US1315.22 an ounce
  • Brent crude +3.2% to $US48.66 a barrel
  • Iron ore -0.4% to $US53.65 per tonne 

What’s on today:

  • Housing Industry Association new home sales for May
  • Day of EU economic summit
  • US crude oil inventories

Stocks to watch:

  • Watch energy stocks as oil jumps overnight
  • Perpetual, Qube raised to buy at Morningstar
  • National Storage REIT in trading halt as it raises $260m after acquisition
  • Caltex raised to overweight at JP Morgan
  • Sigma Pharma cut to sell at Goldman Sachs
  • Vocus said to raise $650m to buy NextGen, reports AFR
  • Webjet completes $72m entitlement offer
  • APN cut to neutral at UBS
  • Evolution cut to underperform at Credit Suisse

Read more.

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

Your editor today is Patrick Commins.

This blog is not intended as investment advice.

BusinessDay with wires.

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