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Markets Live: Banks sink market

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You can read a wrap-up of the action on the markets here.

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need2know

Early gains on the sharemarket were erased after bank stocks suffered a late morning decline as the interim report from the financial system inquiry spooked shareholders.

The benchmark S&P/ASX 200 Index closed virtually unchanged on Tuesday at 5515.3, as did the All Ordinaries Index at 5495.7

The federal government’s financial system inquiry, headed by former Commonwealth Bank of Australia boss, David Murray, was released before market open. It criticised superannuation fees and flagged the big banks may need to lift their capital ratios and face increased competition from smaller financial institutions .

In response, Commonwealth Bank of Australia shares fell 0.3 per cent to $81.50, while Westpac Banking Corporation slipped 0.21 per cent to $34.07. ANZ Banking Group declined 0.9 per cent to $33.23, while National Australia Bank bucked the trend to rise 0.5 per cent to $34.01.

The potential impact of the Murray inquiry on the big lenders’ earnings outlooks “comes at a time when sector valuations are looking stretched and investors seem to have used these issues as an opportunity to reduce their exposure to banks and deploy their capital elsewhere,” head of investment market research at Perpetual, Matthew Sherwood, said.

“There is no rhyme or reason to it,” Mr Sherwood added.

“It appears that the Australian market is trading in a narrow range. When it hits 5300 investors seem to think that is a buy signal and when it hits 5500 they seem to think its a sell signal,” Mr Sherwood said.

The Reserve Bank of Australia released minutes from its July board meeting, and revealed a largely unchanged tone, although the dollar jumped after the central bank repeated its refrain that the local unit remains ”high by historical standards”.

Read more.

banks

Australia’s big banks could face a double whammy of tougher capital rules and more intense competition in the $1.3 trillion mortgage market, under proposals being considered by the government’s financial system inquiry.

In an interim report published this morning, the inquiry panel led by former Commonwealth Bank chief David Murray canvassed several measures that would curb the dominance of the country’s biggest banks in home lending.

On the critical question of whether Australia's banks are "too big to fail", the report also signalled a case for action.

Among a range of potential responses, it floated forcing banks to set aside billions more in capital, and tougher rules that would force lenders hem to "ring fence" their critical retail banking operations

Concerns about competition were a key driving force behind the inquiry, the first of its type in almost two decades. Treasurer Joe Hockey promoted he was in Opposition in 2010, amid a fierce public debate about the power of Commonwealth Bank, Westpac, NAB and ANZ in home lending.

The 460-page report found that Australia’s banking system was competitive, though it had become more concentrated since the global financial crisis.

But in a win for the smaller regional banks, it signalled there was scope to level the playing field.

Read more.

Smaller lenders should be able to better compete with the big banks for mortgages.
Smaller lenders should be able to better compete with the big banks for mortgages. 
dollar

The minutes of the Reserve Bank’s latest board meeting failed to change the course of the Australian dollar on Tuesday, but that may not always be the case.

''It is a big step to flip back to an easing bias,'' Westpac senior currency strategist Sean Callow said.

''They haven’t taken it yet and that would be a game changer for the Australian dollar to decline. If they [the Reserve] started to talk about an easing bias, then it would run to US92¢.''

Mr Callow said the minutes showed that Reserve officials are closely monitoring economic conditions and that next week’s inflation figures will be key to future interest rate moves.

''The RBA is not yet sufficiently worried about the pace of growth in the economy. Unless we get a big downside surprise on inflation next week, they are probably still on hold in August,'' he said.

The currency rose after the release of the Reserve Bank minutes to flirt above US94¢ before trading at about US93.91¢ about the time the sharemarket closed.

The Reserve has only recently returned to trying to jawbone, or talk down, the currency after it pushed above US95¢ in June. Some currency experts believe it may return to between US97¢ and US99¢ by the end of this year.

Traders are now pricing in just under a 50 per cent chance of a rate cut by December 31, according to Bloomberg.

''For a market that has been pricing a pretty substantial risk of a rate cut in the coming months, it didn’t get anything specific to indicate that there was a swing to the dovish side from the RBA,'' Mr Callow said.

If a rate cut does happens in the next six months, that is likely to put downward pressure on the local currency.

Read more.

analysis

And here are the roosters and feather dusters for today.

 

 

Best and worst performers in the ASX 200 today.
Best and worst performers in the ASX 200 today. 
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market close

Shares have enjoyed a late afternoon rally to finish flat for the day, after plunging bank share prices early looked likely to leave the benchmark index in the red.

The ASX 200 closed at 5511.3 and the All Ords at 5495.7.

The financial sector was the biggest drag on the market after investors digested the potential impact from the interim Murray report, which was released before market open.

ANZ was the worst hit, down 0.9 per cent, while CBA fell 0.3 per cent and Westpac 0.2 per cent. NAB bucked the trend and added 0.5 per cent.

Miners gave support to the market, with BHP up 0.5 per cent, Rio 1.2 per cent and Fortescue 1.7 per cent. Woodside added 0.6 per cent, while Beach Energy was up 2.7 per cent.

Farming

One of Australia’s largest privately owned food marketing and distribution businesses, Menora Foods, has been put on the sale block following inbound strategic approaches, sources have told the AFR's Street Talk column.

It is understood Menora, whose shareholders include chief executive Sam Schachna and one of its founders, Daniel Gluck, has appointed investment banks CIMB and Moelis & Company to manage an auction.

Menora secured a marketing and distribution deal with the London-listed Premier Foods for its Peckish range of rice snacks in May this year and also distributes brands such as Cobram Estate olive oil, Wattle Valley cheeses and dips, and Maille mustard.

It is similar to Manassen Foods, which was acquired by China’s Bright Food in 2011. The sources suggested Menora makes sales of about $170 million and could be worth as much as $100 million.

Menora was set up more than 45 years ago in Melbourne and has more than 150 staff across Australia and New Zealand, according to its website.

Menora distributes brands such as Cobram Estate olive oil, Wattle Valley cheeses and dips, and Maille mustard. Photo: ...
Menora distributes brands such as Cobram Estate olive oil, Wattle Valley cheeses and dips, and Maille mustard. Photo: Melanie Dove 
gas

The top picks in the energy sector are Oil Search, Drillsearch Energy and Karoon Gas, say analysts at UBS, ahead of a slew of quarterly reports.

Woodside reports its latest production numbers on Thursday, with Santos the next day. Oil Search is July 22 and Drillsearch two days after. Late in the month comes Beach (July 29) and AWE (July 30), followed by Roc, Horizon, Karoon and Tap on July 31.

The PNG LNG project is now producing gas, to the benefit of Oil Search and Santos, which both have stakes. “But OSH also has exposure to Taza delineation in Kurdistan and participation in Elk/Antelope development,” write the UBS analysts, who have a buy rating on the stock and a 12-month price target of $11 a share.

“We forecast Drillsearch to hit top end of its FY14 production guidance range (3.3 mmboe), with share price weak following the bid for Ambassador Oil and Gas,” they write. “We continue to expect Karoon's share price to be primarily driven by the farm-out of interests in its Browse and South American acreage.”

They rate both stocks a buy with price targets of $1.80 and $6.50, respectively.

Ahead of quarterly reporting, Oil Search, Drillsearch and Karoon Gas are UBS analysts' top picks. Source: UBS
Ahead of quarterly reporting, Oil Search, Drillsearch and Karoon Gas are UBS analysts' top picks. Source: UBS 
money

Takeovers, changes to investment regulations and demand for high yielding, ‘‘safe haven" bricks and mortar assets, attracted close to $10 billion of cash to the Australian commercial real estate sector over the past few months, according to new data.

This trend is tipped to continue in the coming months, boosted by Asian-based insurance companies, which have access to more than $7 trillion, thanks to a liberalisation of investment regulations.

The buying has been in direct assets across office towers, shopping malls and hotels as well as indirectly through real estate investment trusts, which offer a ‘‘safe haven’’, pseudo-bond market stability in a low interest rate environment.

The REITs head into the 2014 reporting season next month with the average return tipped at about 10 per cent on a total return basis.

Recent asset sales include, in Sydney, the Sofitel Wentworth Hotel in Phillip Street and the Ausgrid site, 570 George Street, which were snapped up by Singaporean investors, while US company Blackstone bought a half share of the Westpac headquarters at 275 Kent Street - with an accompanying deal to buy other Mirvac properties valued at $824 million.

In Melbourne, Chinese and Hong Kong investors bought into the hotel market with the boutique Ovolo and Park Hyatt.

Some recent sales have come from China and Singapore and expectations are that the inflow will continue to be strong for a range of properties, with a focus on city-based offices that can be converted to apartments.

There are suggestions a number of China-based buyers are looking at a number of landmark Sydney office towers. This includes 4 Bligh Street and AMP’s 338 Pitt Street.

Read more.

The Westpac building in Kent Street in Sydney.
The Westpac building in Kent Street in Sydney. Photo: Mayu Kanamori
japan

Japanese stocks look cheap on a relative and absolute basis, although investors should be prepared for some bumps along the way, say strategists at Societe Generale.

In a note to clients, the SG strategists note that while economic "reforms are clearly under way, investors are frustrated by the current slow pace and have expressed concerns about the ability of Abenomics to boost growth, thus fuelling volatility in the stock market".

The French investment bank's analysts now recommend buying "value" stocks, such as banking groups Sumitomo Mitsui and Mizuho, Daiwa Securities, Japan Airlines and Daihatsu Motors.

They point out that the country's sharemarkets look close to their cheapest ever against bonds. They also use a proprietary equity risk premium model to measure the absolute value in the market, using a measure of the cost of capital, calculated as the discount rate at which the present discounted future cash flows is equal to the current level of the equity market.

Their conclusion is the Japanese equity market is undervalued, as the cost of capital is "well above its historic average".

That is pretty wonkish, which brings us to the chart below that shows Japanese shares trading at a 21 per cent discount relative to Asia ex-Pacific equity markets, and a 41 per cent discount relative to global equities. They are also at a 20 per cent discount to US stocks.

Japanese stocks look good value versus other Asian, US, and European equities. Source: Societe Generale
Japanese stocks look good value versus other Asian, US, and European equities. Source: Societe Generale 
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shares down

Credit rating agency Moody’s has cut its rating on Nufarm as the crop protection group’s inventory build in South America puts strain on the balance sheet.

Nufarm has made working capital management a key priority as the company bolsters its inventory to meet surging demand for agricultural chemicals in the fast-growing South American region.

However, Moody’s has downgraded Nufarm’s corporate family rating to Ba3 from Ba2 and slashed its rating on the company’s $US325 million ($346 million) senior unsecured notes to B1 from Ba3.

“The downgrade of Nufarm’s ratings reflects our expectation that operating conditions in Australia will remain challenging in the next 12-18 months and that working capital will continue to pressure credit metrics,” Moody’s analyst Saranga Ranasinghe said.

Two consecutive dry seasons in Australia and an elevated cost base have taken their toll on Nufarm’s earnings in recent years.

In March and April, the company announced the closure of two Australian manufacturing plants and one facility in New Zealand, as well as up to 165 job cuts.

Nufarm shares have sunk 3.3 per cent to $4.51.

Telco

Telstra is seeking to launch profit-sharing agreements with major Asian telecommunications providers in exchange for building their 4G mobile networks.

Telstra chief financial officer Andy Penn said the company had built its Asian strategy on three pillars including technology services, long-term investments and mobility partnerships.

While Telstra has previously flagged sending its staff to sell its mobile network expertise to regional telcos, this is the first time the company has said it is willing to co-invest and profit share with the various operators.

“The only way that people [in Asia] can get access to the internet and access to connectivity is through mobile networks and ... many of the mobile networks in Asia at the moment are 2G- or 3G-based networks,” he said. “The extent of LTE (4G) coverage is only about 10 per cent.

“There’s opportunities for us to take the capabilities we’ve got in managing and running these networks to look for areas where we can invest.”

Telstra signed a profit sharing agreement for enterprise technology services with Indonesia’s biggest telco, Telekom Indonesia, in January and helped build Vietnam’s mobile networks.

Mr Penn said the company was ramping up the number of strategic advisors and telco experts in the region in part to win more mobile network sharing deals. But he acknowledged Telstra had not signed any major contracts in the space.

“You’ve got to generate an enormous amount of activity in order to execute on a relatively small number of opportunities,” he said. “Absolutely [these would] include the profits.

“But obviously Telstra is not the only party that can see the opportunity so we need to be realistic in terms of what it means to us.”

china

Chinese banks lent a much stronger-than-expected 1.08 trillion yuan ($185.1 billion) worth of new yuan loans in June as Beijing steps up efforts to stimulate the world's second-largest economy.

Markets had expected banks to write 915 billion yuan in new loans for the month, up modestly from May.

Broad M2 money supply jumped 14.7 per cent last month from a year earlier, the People's Bank of China said in a statement on its website on Tuesday, also higher than a forecast of 13.5 per cent in a Reuters poll of economists.

"While a fall in short-term lending rates hinted at a higher supply of funds during the month, the money swirling in the market reflects the urgency of the authorities to ramp up economic activity," said Chester Liaw, an economist at Forecast Pte in Singapore.

Outstanding yuan loans grew 14 per cent from a year ago, better than a predicted 13.8 percent rise.

The central bank also said China's total social financing aggregate, a broad measure of liquidity in the economy, was 1.97 trillion yuan in June versus 1.4 trillion yuan the month before.

"We had previous expected aggregate financing to come in much higher, but still the 1.97 trillion yuan printed is a major upside surprise," Liaw said.

The People's Bank of China has pledged to keep credit and money supply growth at a reasonable level to meet the needs of the real economy. It aims for a 13 per cent annual rise in M2 this year.

The strong growth in money supply in June "is an explicit loosening of (monetary) conditions. Some of this is seasonal. At the end of the quarter there was demand for cash. And evidently, the authorities supplied it," said Tim Condon, economist at ING Bank in Singapore.

japan

The Bank of Japan kept its record stimulus unchanged and forecast inflation will pick up to its 2 per cent price target.

The central bank stuck with its goal of an annual increase in the monetary base of between 60 trillion yen and 70 trillion yen ($690 billion), it said in a statement today in Tokyo, as forecast by all 34 economists surveyed by Bloomberg News. Consumer prices excluding fresh food will rise 1.9 percent in the year starting April 2015, the median estimates of board members showed, matching its forecast three months ago.

Economists have pushed back projections for further easing, as Governor Haruhiko Kuroda signals confidence in the bank’s progress in driving inflation. With the economy forecast to rebound from a contraction last quarter triggered by a sales-tax increase in April, Kuroda’s task is to sustain momentum as rising prices and limited wage gains squeeze households.

“The BOJ is confident about the outlook for inflation,” Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute, said before the decision. “Additional easing is unlikely any time soon, but the BOJ isn’t clear of risks. The rebound could be weaker than expected, pressuring the BOJ to take more action.”

The Nikkei is 0.6 per cent higher.

analysis

UBS predicts BHP Billiton’s pledge to simplify its portfolio will follow a three-stage phase, with the imminent sale of Nickel West paving the way for a demerger followed by the possible elimination of the dual-listed structure.

According to the bank’s analysts, a slimmed down, single-listed entity would be more focused and attractive.

UBS says its three-step process creates value, with Nickel West expected to sell for a premium to its US$340 million ($362.4 million) valuation combined with a projected lift in margins and returns from the disposal of lower quality assets.

Further enhancements include the release of cash generated by the insertion of debt into the demerged entity, which in turn can be channelled towards a buyback, as well as the reduction in complexity and cost associated with maintaining dual-listed structure.

The analysts also point to the closing of the spread between the Limited and the Plc entities along with the heavier index weighting that may trigger an uplift in investment as additional value-generating factors.

However UBS notes that BHP has stated it is committed to a dual-listed structure, even though the analysts note that recent medial reports in Britain suggest otherwise.

Street Talk has reported that Glencore, one of the most high-profile contenders for Nickel West, has bowed out of the race for the West Australian assets.

UBS maintained its “buy” rating on BHP and its 12-month price target of $42.

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gambling

The Socceroos may have bowed out of the World Cup after the group stage but Australian punters kept bookmakers busy, placing more than $287 million in bets throughout the month-long tournament in Brazil.

A survey of the five largest wagering operators has shown varied performance among Australian bookies, although all reported growth on previous tournaments.

Before the World Cup Tabcorp, the country’s largest wagering operator, said it expected turnover of about $120 million – a similar amount to that which the company expected for an entire AFL season.

A spokesman declined to provide a final turnover figure, saying the company would announce its performance at its full-year financial results announcement on August 7.

The company was the exclusive wagering sponsor during broadcasts of the tournament on SBS and played advertisements with former Socceroo goalkeeper Mark Schwarzer. Tabcorp also unveiled a new website built especially for the World Cup.

Sportsbet, which is owned by the Irish wagering giant Paddy Power, reported the greatest turnover of the online-only bookmakers, after punters wagered $74 million.

Online betting exchange Betfair, which is part-owned by James Packer’s Crown Resorts, took $52 million in bets from Australian punters.

William Hill Australia, which owns the Sportingbet and Centrebet brands as well as Tom Waterhouse’s online venture, took in bets of $24 million. A spokesman said multi-bets, which took into account Tatts Group, lagged the field with $17 million.

Read more.

Germany's Mario Goetze scores the winning goal against Argentina in the 2014 FIFA World Cup final.
Germany's Mario Goetze scores the winning goal against Argentina in the 2014 FIFA World Cup final. 
analysis

Putting the likely impact of the Murray review of the financial system to one side, maybe the stellar run in CBA shares over the past 12 months or so is coming to an end.

It was ahead of the curve in pinning a 'buy' on CBA early last year at $60. Now, Bell Potter has downgraded the call to a 'hold', with a 12-month price target of $86.

CBA is to report 2014 results on August 13. The broker is forecasting a post tax profit of $8.59m, which is slightly ahead of the consensus forecast of $8.56m.

In the year ahead, it expects a slight rise in costs largely due to higher compliance and other governance costs that are offset by favourable bad debt charges.

"These lead us to maintain our $86.00 price target," the broker said in a client note this morning. "CBA has, however, had a strong run in the last quarter and especially since our upgrade to a buy rating back in January 2013 when the share price was around $60.

"As such, we feel a hold rating is now more appropriate. This investment view is further underpinned by a 12-month total expected return of around 10%, the fact that the bank appears to be trading ahead of its medium term ROE potential and the narrowing gap between the share price and dividends."

airlines

Online travel group Webjet has unveiled a €21 million ($30.4 million) acquisition of European online hotel provider SunHotels, in a move that will help the Australian company grow its accommodation portfolio.

Webjet had long focused on selling flights rather than hotels but has been pushing into the hotels business, where it competes against Wotif.com Holdings and overseas-owned rivals such as Expedia and Priceline’s Booking.com, and Agoda in some segments, and also in business-to-business selling through its Lots of Hotels brand.

US group Expedia last week agreed to a $703 million takeover of Wotif, which remains subject to approvals from the competition regulator and has sparked concerns from local hotel providers that commissions will rise if the deal is completed.

SunHotels, established in 2002, has an annual turnover in excess of €90 million and has been consistently profitable over the past eight years, including earnings before interest, tax, depreciation and amortisation of €2.6 million in 2013, with 2014 earnings tracking higher.

SunHotels focuses on providing a wide range of hotels and transfers in European resort destinations, selling into the major markets of Scandinavia and Britain.

Webjet will fund the cash purchase through a euro-denominated debt facility. The deal is expected to be completed by the end of next month.

Webjet managing director John Guscic said with the outstanding progress of Webjet’s Lots of Hotels B2B division – which began in February 2013 – and this significant acquisition, the company was well placed to expand B2B operations across a number of regions.

Webjet's share price has added 1.1 per cent to $2.67.

mining

Oz Minerals has lifted its full year copper production target but has warned its gold output may be at the bottom of its forecast range.

The miner now expects to produce between 85,000 and 90,000 tonnes of copper for the calendar year, up from 75,000 to 80,000 tonnes previously.

But gold production is expected to be towards the lower end of the company's 130,000 to 140,000 ounce range.

"As a result of a higher proportion of copper ore and lower proportion of gold-only ore expected in the mill feed for the remainder of the year, while annual production guidance of 130,000oz to 140,000oz is maintained, it may be towards the lower end of this range," the company said in a statement.

The company produced more than 40,000 tonnes of copper and 64,600 ounces of gold during the first half of the year.

Oz Minerals also says the higher copper production has helped to reduce costs.

The company expects to reduce copper cash costs from $US1.20 a pound to $US1.10 a pound for the full year.

Oz Minerals' share price is down 1.3 per cent to $4.26.

shares up

Bit more on Whitehaven Coal, one of the best performing stocks so far today...

The NSW miner's shares have shot up after it said it sold 22 per cent more coal this year than last year and reached record production levels.

However the persistently weak coal thermal coal prices of the last two years were expected to continue in an over-supplied market.

The company's shares last traded 4.6 per cent higher to $1.54.

Full year sales were 10.84 million tonnes, about 22 per cent higher than the previous year and included 1.99 million tonnes of metallurgical coal.

Total coal sales for the June quarter of 2.9 million tonnes were 12 per cent higher than the previous corresponding period.

Whitehaven increased annual production of saleable coal by 26 per cent to a record 10.3 million tonnes.

June quarter production of saleable coal was up 27 per cent to 2.9 million tonnes.

However coal prices fell during the quarter.

Whitehaven gets most of its earnings from thermal coal, but the price it realised during the quarter fell from $US75.19 a tonne to US$72.81.

"While demand continues to grow, albeit at a lower rate than in recent years, a state of oversupply is expected over the next six months," the company said.

Metallurgical coal - used in steelmaking - was down from $US100.79 a tonne to $US93.63, with Whitehaven predicting $US91-$US92 this quarter.

However positive price signs were emerging in that market with about 19 million tonnes of metallurgical coal output removed and more cuts likely to occur in coming weeks.

Read more.

Whitehaven's coal production has hit record levels.
Whitehaven's coal production has hit record levels. 
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