Markets Live: Bulls back in saddle

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need2know

Australian shares snapped a two-day losing streak to record strong, broad-based gains.

A lift in the iron ore price and a better than expected local jobs report helped the market extend early gains, following a strong lead from Wall Street, which rose despite a large downward revision in GDP growth over the first quarter.

The benchmark S&P/ASX 200 Index jumped 1.2 per cent on Thursday to 5464.3 points, while the broader All Ordinaries Index added 1.1 per cent to 5446.8 points, led by the big banks.

Official government data showed Australian household wealth posted the biggest quarterly rise in four years during the three months to March, while the job market improved in the three months to May.

Major Asian markets also provided positive cues in the afternoon session.

On the local bourse, it was a rally in the big four banks that drove the gains. Commonwealth Bank of Australia bounced 1.3 per cent to $82.06, while Westpac Banking Corporation lifted 1.8 per cent to $34.43. ANZ Banking Group rose 1.4 per cent to $33.90, and National Australia Bank gained 1.3 per cent to $33.24.

Australia’s biggest mortgage lenders have led the market higher over the past 12 months as record low official interest rates have fuelled demand for housing loans. Now investors are questioning whether this trend can continue.

“The property sector is not in bubble territory and we do not expect a collapse, but Australia has seen the best of this cycle of house price gains,” Altair Asset Management chief economic adviser Stephen Roberts said.

Even if the Reserve Bank of Australia leaves the cash rate on hold for an extended period, it could be many years before another property price boom and this could prompt people to shift more money into equities, Mr Roberts said.

Australia’s financial accounts, released by the Australian Bureau of Statistics, showed total household wealth rose $137.9 billion in the March quarter to a record $7.7 trillion.

A separate survey of job vacancies produced by the ABS recorded a 2.1 per cent rise in the number of positions advertised over the three months to May.

Resources giant BHP Billiton rose 0.8 per cent to $36.50. Main rival Rio Tinto added 1.4 per cent to $59.90 after the spot price for iron ore, delivered in China, lifted 0.4 per cent to $US93.70 a tonne. When the ASX closed on Thursday, Dalian iron ore futures trading in China was tipping a strong rise overnight.

Read more.

analysis

And here are the best and worst for the day, with STW Group coming up trumps following its announcement of an acquisition and after it confirmed earnings guidance.

Ten gave up some of its recent gains, while gold miner Regis Resources was the biggest decliner in the top 200, down a modest 2.1 per cent.

Best and worst performing stocks in the ASX 200 today.
Best and worst performing stocks in the ASX 200 today. 
banks

A powerful Senate inquiry has called for the Commonwealth Bank of Australia to face a royal commission to investigate fraud, forgery and allegations of a cover-up inside its financial planning arm.

Thousands of Australians have lost their life savings as a result of allegedly shoddy financial advice given to them by planners at the country’s biggest bank.

The inquiry said the bank’s existing compensation program for financial planning victims should be completely re-done, and the offers made to victims reviewed.

Inquiry chairman, Labor Senator Mark Bishop, has indicated this could increase the CBA’s compensation bill from about $51 million to $250 million.

The inquiry has also called for a wider investigation into the financial planning arms of other industry players including Macquarie Group.

Other recommendations of the inquiry, which was sparked by Fairfax Media reports of widespread misconduct among financial planners and managers at the CBA, include changes to the Australian Securities and Investments Commission to make the corporate regulator leaner, meaner and more effective.

 “There was forgery and dishonest concealment of material facts,” the inquiry found in its report, tabled on Thursday. “Clients lost substantial amounts of their savings when the global financial crisis hit; the crisis was also used to explain away the poor performance of portfolios.

“Meanwhile, it is alleged that within CFPL there was a management conspiracy that, perversely, resulted in one of the most serious offenders, Mr Don Nguyen, being promoted.”

The report concluded that “ASIC has limited powers and resources but even so appears to miss or ignore clear and persistent early warning signs of corporate wrongdoing or troubling trends that pose a risk to consumers.”

 It said in one case ASIC was shown to be “a timid, hesitant regulator, too ready and willing to accept uncritically the assurances of a large institution that there were no grounds for ASIC's concerns or intervention.”

Read more.

Calls for a royal commission: Senate inquiry wants a probe of CBA's financial planning arm.
Calls for a royal commission: Senate inquiry wants a probe of CBA's financial planning arm. Photo: Dominic Lorrimer
market close

Local shares have snapped a two-day losing streak to record solid gains, led by surging banks stocks.

The ASX 200 added 62 points, or 1.2 per cent, to 5464.3, while the All Ords jumped 60 points, or 1.1 per cent, to 5446.8.

Westpac was up a full 1.8 per cent, with the remaining three big banks gaining between 1.3 and 1.4 per cent.

Miners chipped in as well, with BHP adding 0.8 per cent and Rio 1.4 per cent.

Westfield Corp continued its solid start, up another 3.1 per cent.

Among the losers were a number of listed property trusts, as a host of stocks in the sector traded ex-dividend.

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Farming

The fall in dairy prices from record levels is not expected to reverse any time soon with a wave of new supply overwhelming even China’s insatiable demand for milk products.

A flurry of takeover activity in Australian dairy and skyrocketing milk powder prices has underscored the opportunity that rising wealth and changing diets in Asia present for dairy producers.

But a report issued by agricultural lender Rabobank argues there will be limited improvement in global dairy prices this year as China works through excess stocks.

“The pull back in Chinese purchasing has been particularly significant, with evidence that the Chinese industry has accumulated excess inventories after a period of vigorous buying, improved local milk production and weaker local sales,” said Rabobank analyst Tim Hunt.

In Australia, the frantic three-way takeover battle for Warrnambool Cheese & Butter, Hong Kong businessmen William Hui’s purchase of United Dairy Power and Paramalat’s takeover of WA’s Harvey Fresh have all elevated the dairy export opportunity in the minds of investors.

Australia’s biggest dairy exporter, Murray Goulburn, is planning a partial public listing on the ASX to help fund its next phase of growth.

Rabobank does not expect dairy commodity prices will increase again until late 2014 or early 2015 as China works through ...
Rabobank does not expect dairy commodity prices will increase again until late 2014 or early 2015 as China works through its stockpile and global consumption recovers. Photo: Arsineh Houspian 
earnings

Caltex will book a fall of up to $20 million in first half net profit, coming in below analysts expectations, on a larger-than-expected hit from the imminent closure of its Kurnell refining operations.

The group said that it expected to book between $150 million and $170 million in replacement cost operating profit for the half, compared to $171 million the previous year.

UBS had been tipping $196 million, while Bell Potter had put a range of $175 million to $190 million.

There is a chance the fall could flow through to the full-year dividend.

The profit decline stems in part from a one-off earnings hit from the closure Caltex’s refining business at Kurnell, with Caltex forecasting a loss of $65 million to $85 million for its refining and supply business. That compares to $43 million in red ink the previous year.

Caltex is being increasingly viewed as an industrial stock, as opposed to a refining stock, cemented by the transformation of Kurnell, in Sydney, from a refining operation to an import terminal. Refining will stop at Kurnell in the December quarter.

So the figure the market is likely to be paying more attention to is Caltex’s marketing EBIT - which the group tips will grow 5 per cent to $395 million for the half, in line with UBS’ prediction of $396 million.

Caltex shares are 0.7 per cent higher at $21.74.

Beverages

Treasury Wine Estates is set to strike exclusive supply deals with major liquor retailers Woolworths and Coles whereby it will only sell some of its lesser-known brands in outlets controlled by one of the two firms.

The deals to quarantine some of those brands to be sold only in Woolworths outlets, or only those operated by Coles, are part of the plans by new chief executive Mike Clarke to try and generate better growth at the less profitable end of Treasury’s 83-strong wine brand portfolio.

“We are going to have a good look at Brand A as an exclusive,’’ Mr Clarke said.

He declined to specify which of the more commercial brands might be included in this strategy built around a retailer exclusive.

There are also plans to remove between 10 to 15 brands from the lower-end of the portfolio either through a sale, a joint-venture arrangement or by simply discontinuing a brand.

That whittling down of the portfolio would be a gradual staged process to extract maximum value and avoid a fire sale of brands all in one hit.

“They could be sold or they could be a joint venture,’’ he said.

But the top 20 ‘”power brands’’ which Mr Clarke has outlined for several weeks as being integral to his turnaround strategy for Treasury and will receive most of a 50 per cent increase in marketing spend will be untouchable in the overhaul. A collection of around 20 other brands which are referred to internally at Treasury as “regional champions’’ will also be quarantined.

The “power brands’” include Penfolds, Wolf Blass, Lindemans, Rosemount, Wynns, Matua Valley from New Zealand and the Californian wine brands Chateau St. Jean and Beringer.

Those in the next set of around 20 brands in the regional champions list include Devil’s Lair from Western Australia’s Margaret River region and Coldstream Hills from Victoria’s Yarra Valley.

politics

After Gerry Harvey proudly proclaimed he is happy to work forever, this is piece from Bloomberg provides an interesting counterpoint:

Treasurer Joe Hockey wants to raise the nation’s retirement age to 70, the highest in the world, to prevent an aging population from draining state coffers. Miner Noel Chatterton laughs at the idea.

“Good luck with that,” said the driller, who at 48 will be among the vanguard of workers who would be affected by the proposed change. “My hands are already about stuffed. The way my body is, I’ll be lucky to be able to work until I’m 60, let alone 70.”

Hockey has pledged to end what he called the nation’s “age of entitlement” and repair a budget deficit forecast to reach $49.9 billion this fiscal year. Australia is leading the charge for a group of advanced economies from Japan to Germany that are pushing up the retirement age to head off a gray time bomb caused by a growing army of pensioners and a declining pool of taxpayers.

The ratio of working-age Australians to those over 65 in the world’s 12th-largest economy is expected to decline to 3:1 by 2050 from 5:1 in 2010. In Japan it’s already below 3:1 and in Germany it’s close to that level, according to the International Labor Organization.

 “While Australia is the first to raise the age to 70, it won’t be the last,” said Steve Shepherd of international employment agency Randstad Group in Melbourne. “The world will be watching this.”

Read more.

IPO_float

Monash IVF advanced on its issue price of $1.85 a share in early trade on Thursday to touch $1.97 a share shortly after it listed at 12.00pm AEST.

Monash IVF, a 40-year old reproductive services provider formerly owned by Monash University, raised $315.6 million by selling 170.7 million shares at $1.85 each in its initial public offering earlier this month.

Australian private equity firm Ironbridge, which bought a majority stake in Monash IVF in 2009, had said it would keep 5 per cent after listing.

CSLA’s healthcare analysts initiated coverage on the stock with an “outperform” on Thursday.

Monash IVF is the second largest fertility service provider in Australia. In 2013, it expanded to Asia, acquiring KL Fertility in Malaysia. It also has a co-operative agreement with clinics in China.

“Our focus will remain on building our footprint in Malaysia and looking to expand our service across the broader ASEAN region,” chief executive James Thiedeman told Business Day on Tuesday.

The company has experienced steady growth leading up to the float. In 2013, its earnings before interest, taxes, depreciation and amortisation was $34.9 million, up from $32.1 million the previous financial year.

The listing follows competitor Virtus Health’s float in June 2013 and since then, that company’s shares have climbed by 50 per cent.

Read more.

Investors have shown a liking for the fertility sector.
Investors have shown a liking for the fertility sector. 
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need2know

Iluka Resources growth options are expanding, this time with the prospect of the purchase of UK-listed Kenmare Resources, a Stg334 million mineral sands group.

Earlier this month, Iluka entered into a joint venture with Brazil's Vale which may see it launch a jointly owned venture in that country.

Iluka confirmed it has made an offer for Kenmare, without giving details.

The shares are 1.1 per cent lower to $8.21.

money

AGL Energy, several of its rivals and certainly investment bankers will be celebrating the utility’s win against the competition regulator over the $1.505 billion takeover of Macquarie Generation.

NSW consumers, however, have reason for concern.

The Australian Competition Tribunal’s decision on Wednesday that the public benefits of AGL buying the 4600-megawatt baseload generator outweigh the competition risks certainly has some backers.

Richard McIndoe, the outgoing head of one of AGL’s biggest competitors, EnergyAustralia, was one high-profile critic of the ACCC’s vetoing of the deal. He said the regulator was overly concerned with the market concentration the deal would bring, ignoring the realities of operating in the sector.

Some small retailers – among those the ACCC was seeking to protect – also backed AGL.

Ben Burge, head of the Australian arm of New Zealand’s Meridian Energy, rejected the suggestion the takeover would harm the ability of junior retailers to compete. He argued the ACCC’s concern about the availability of hedge contracts wasn’t valid, based on Meridian’s experience in building its online Powershop retail business.

In a sign the tribunal wasn’t wholly convinced, it is insisting AGL makes at least 500 MW of hedge contracts available to smaller retailers every year for seven years – similar to the offer AGL made to the ACCC back in February when it sought to relieve the watchdog’s concerns.

Utilities who are worried that the ACCC would block other deals, such as the upcoming privatisation of Queensland generators, can also breathe a sigh of relief, as can their advisers.

But ACCC chairman Rod Sims still fears the worst, and if he’s right, then NSW consumers will pay the price.

AGL has argued that NSW consumers will benefit overall, given its financial capacity to invest in Macquarie’s large Bayswater and Liddell power plants in the Hunter Valley, which will increase availability and therefore deliver savings that can be passed on to customers.

That AGL will pass on those benefits seems to be a point about which Sims has doubts.

He pointed out again after the tribunal’s decision that the takeover will mean that three largest power producers in NSW have been sold to the three largest retailers. That “permanent structural change” in the market will come at a price for consumers through less competition, and there will be no opportunity to turn back the clock.

Read more ($).

analysis

Tabcorp is now the best performer in the top 200, ahead of what investors obviously believe will be a favourable finding by the Supreme Court of Victoria on compensation from the state government - due at 4:30 (see post at 9:49).

Fellow claimant Tatts is up 3 per cent.

Not in the best performers but off to a great start is Monash IVF. Since midday the stock up 4.9 per cent on its listing price of $1.85, to $1.94.

Best and worst performers in the ASX 200 so far.
Best and worst performers in the ASX 200 so far. 
mining

BHP Billiton and Rio Tinto, the world’s two biggest mining companies, may need to rein in the size of widely anticipated share buybacks if this year’s 30 percent slump in iron ore deepens in the second half.

“The most pertinent question is whether Rio will be bold enough to proceed with a much-mooted share buyback in early 2015 if iron ore ends 2014 on a weak note,” Macquarie analyst Jeff Largey wrote in a June 24 report. The bank estimates BHP could buy back 5 per cent of its market value and Rio 10 per cent, about $19 billion of shares at yesterday’s prices.

Waning Chinese demand coupled with an expanding worldwide glut of the steel-making material saw iron ore decline to $US89 a metric ton on June 16, the lowest since September 2012. Analysts widely expect London-based Rio to bolster its cash return beyond its dividend when reporting earnings in February. BHP Billiton, the world’s biggest mining company, has also been forecast to return cash to investors as early as August.

“We question whether Rio may look to limit the scope of a potential buyback,” Largey said. “A weaker-than-expected iron ore price and a share buyback may limit future funding flexibility.”

Rio Chief Executive Officer Sam Walsh said in a December interview that the company’s drive to strip out more than $2.3 billion of costs since the start of 2013 would provide the board with options to return cash to investors. The board will decide on the size of any possible return prior to its full-year earnings announcement in February, he said.

If the price of iron ore averages below $US100 a ton this year, BHP and Rio “may struggle to justify a share buyback program and expect to meet credit metrics,” Largey said. Still, if the price rebounds toward the bank’s estimated second-half average of $108 a ton, a buyback could be justified, he said.

Operations at Rio Tinto Group's West Angelas iron ore mine in the Pilbara region of Western Australia. Photographer: Ian ...
Operations at Rio Tinto Group's West Angelas iron ore mine in the Pilbara region of Western Australia. Photographer: Ian Waldie/Bloomberg 
eco news

Job vacancies in Australia rose to their highest in over a year in the three months to May, a second straight quarter of gains that hint at a welcome sign of returning demand for labour.

This morning’s data from the Australian Bureau of Statistics showed total job vacancies rose 2.6 percent in the three months to May in seasonally adjusted terms, following a 2.7 percent increase the previous quarter.

Vacancies of 147,100 were also up 2.6 percent on the same quarter last year and the highest since early 2013.

Vacancies in the private sector rose 1.3 percent in the May quarter, from the previous quarter. Public vacancies rebounded 17.6 percent but from historically very low levels. Employment in the public sector had been hit by belt tightening by Federal and state governments.

Analysts value the vacancies series as it has proved a reliable leading indicator of labour demand and turning points in employment. The pick up in vacancies should also help offset softness seen in some of the monthly indicators of job advertisements.

Job vacancies increased over the March quarter - a positive sign for employment.
Job vacancies increased over the March quarter - a positive sign for employment. 
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shares up

STW Group is the best performing stock in the top 200 so far today, up 9.7 per cent to $1.42, following this morning’s announcement it has bought retail marketing company Active Display Group, “Australia’s largest point of sale display and signage organisation,” the company said in an announcement.

STW will spend $35.2 million by the time the acquisition is completed, Bloomberg reports.

The company also said confirmed earnings guidance provided in the May AGM and that the acquisition will “deliver additional earnings,” Bloomberg reports.

malcolm-maiden_127x127

Treasury Wine Estates pulled off a rare feat on Wednesday. It announced a significant asset write-down, and sent its shares up by almost 5 per cent.

A survey of Treasury's wine businesses and brands has generated a write-down of up to $260 million after tax that will be included as a non-cash item in its result for the year to June 30 when it is released in August. Mid-range wines in the United States are the source of most of the write-down, and it is a significant hit, equal to about 8.6 per cent of shareholders' equity.

A mixture of investor relief, speculation and appreciation of the way new chief executive Michael Clarke is changing the company overwhelmed the write-down news, however.

Treasury's shares closed 24¢ higher at $5.07 - 8.5 per cent above a $4.70 share approach from US price equity group Kohlberg Kravis Roberts that Treasury said on May 20 had been rejected. It's up another 1.2 per cent to $5.13 today.

There was relief that Treasury didn't downgrade earnings guidance that had already been cut by $40 million, to between $190 million to $210 million in January.

Clarke didn't say outright on Wednesday that January's guidance would be met, but he did say that he felt ''pretty positive''.

He is boosting Treasury's marketing budget by 50 per cent and a fridge giveaway that will accompany purchases of $200 of Penfolds wine in the new financial year is already boosting wholesale shipments.

With the June 30 rule-off date only four days away, a profit result within the guidance range looks assured.

Read more.

NZ

Dollar weakness amid an uncertain US economic recovery has driven the New Zealand currency to within one cent of a record high against the greenback as the gap in interest rates widens.

Borrowing in dollars to buy the kiwi - a strategy known as the carry trade - has returned 3 per cent this month, the most among major currencies. A dollar gauge fell to the lowest in five weeks after data yesterday showed the economy contracted more than estimated, supporting the Federal Reserve’s commitment to ultra-low interest rates.

The Reserve Bank of New Zealand was the first central bank in a developed nation to exit record-low rates this year, raising borrowing costs three times.

“Whenever there’s a broad-based dollar sell-off, the kiwi tends to outperform.” said Sam Tuck, a senior currency strategist at ANZ Bank New Zealand Auckland. “If you’re looking for carry, the kiwi is the go-to currency because of our hawkish central bank.”

The US dollar fell 0.3 percent to 87.68 cents against New Zealand’s kiwi, the weakest since May 6. It dropped 0.7 percent yesterday.

The kiwi is within one US cent of a record high against the greenback.
The kiwi is within one US cent of a record high against the greenback. 
Telco

NBN Co and Telstra have signed a deal worth about $150 million to connect 206,000 homes and businesses with the Coalition's preferred fibre-to-the-node technology.

The deal means Telstra builds the national broadband network in mostly regional areas across NSW and Queensland with construction taking around 12 months.

These include Gympie and Bundaberg in Queensland as well as Hamilton and Warner in NSW.

If successful, Telstra's pilot will be one of the biggest fibre-to-the-node rollouts and could help it win billions of dollars worth of NBN deals.

Where Labor connected homes and businesses directly with fibre optic cabling, the Coalition prefers a cheaper option that runs fibre to streetside node cabinets in a process that saves time and delivers slower internet speeds.

Around 1000 nodes will be involved in the rollout, which will help connect about 200,000 premises to the NBN. But it is understood the project has no bearing on the major renegotiation of Telstra's existing $11 billion deal with NBN Co.

Telstra shares are up 0.8 per cent to $5.21.

Read more.

Superannuation

Large numbers of workers approaching retirement will be forced into modest lifestyles devoid of creature comforts unless the superannuation system is given a comprehensive overhaul.

The grim finding was released on Wednesday by Deloitte, which found that Australians need to start contributing an extra 5.5 to 7.5 per cent of salary to super in addition to existing arrangements or risk coming up short.

Deloitte superannuation adviser Wayne Walker said it was important Australians not get too complacent about the compulsory retirement savings system, which now accounts for $1.8 trillion.

"Sometimes when you look at the lawn from a distance and it looks pretty good but when you get close up the problems are obvious," he said.

The "Adequacy and the Australian Superannuation system" paper forecasts that 75 per cent of retirees will still be eligible for all or some of the age pension in 20 years time.

Central to the improvements flagged by the paper was a recommendation that concessional contributions be amended from yearly limits to a lifetime cap.

For the year 2014/15 investors are limited to making tax advantaged contributions of $30,000 or $35,000 for the over 50s.

"We think there needs to be lifetime limits and they need to be realistic," said Mr Walker.

"Once you fall behind you stay behind. A figure of $40,000 or $50,000 would only offset those years where there was little in the way of contributions."

Read more.

Deloitte says Australians need to start contributing up to an 7.5 per cent of salary to super in addition to existing ...
Deloitte says Australians need to start contributing up to an 7.5 per cent of salary to super in addition to existing arrangements. Photo: Nic Walker
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