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Shares edged modestly lower despite Commonwealth Bank of Australia hitting a record high on further evidence of a hot property market, and official data showed increased business investment intentions outside the mining sector.
The benchmark S&P/ASX 200 Index shed 7.7 points, or 0.1 per cent, on Thursday to 5519.5, while the broader All Ordinaries Index also lost 0.1 per cent to 5499.2, as mining stocks pulled the index down after yet another fall in the iron ore price to a 2014 low.
Local shares followed Wall Street lower at the start of trade, while Asian markets were subdued in the afternoon.
When the Australian session closed the Nikkei was up less than 0.1 per cent following a worse-than-estimated drop in Japan's latest retail sales data.
Australian Bureau of Statistics data showed a sharper than expected slump in capital expenditure over the first three months of 2014. However, more importantly capital expenditure intentions for the year to June 2015 were stronger than economists had predicted, buoying the market.
"Not only was the capex report better than forecast but it showed encouraging evidence of a transition in the economy to the non-mining sector," Nomura interest rates strategist Martin Whetton said.
The spot price for iron ore, landed in China, fell 1.3 per cent to a 2014 low of $US96.80 a tonne. The commodity price for Australia's biggest export has lost 28 per cent year-to-date.
Resources giant BHP Billiton fell 1.3 per cent to $37.49. Main rival Rio Tinto lost 2.2 per cent to $60.07 as it announced plans to downsize operations at its Mongolian joint venture Oyu Tolgio copper and gold mine. Iron ore miner Fortescue Metals Group shed 3 per cent to $4.54 as chief executive Nev Power told investors the company would consider expanding into the oil and gas sector.
The Australian dollar jumped to its highest in more than a week on Thursday, buoyed by an encouraging outlook for business investment.
The currency rose more than half a cent to as high as US93.02¢ in the wake of the first-quarter capital expenditure numbers released by the Australian Bureau of Statistics. The currency was fetching US92.88¢ in late trade.
The figures showed that capex fell by 4.2 per cent in the March quarter, contributed to by an 8.7 per cent reduction in mining investment. However, the ABS also published estimates for 2014-15 and these were revised up substantially from the previous quarter.
Now, capex in the coming financial year is expected to reach $137 billion, up 9.3 per cent from an initial estimate of $125 billion, with mining investment not predicted to drop as much as initially feared, and investment in services picking up.
Commonwealth Bank capital markets economist Gareth Aird said the data was "definitely a good set of numbers", as it showed an improvement of capex in the non-mining economy.
"It certainly got a reasonable bump up," said Joe Capurso, a currency strategist with the Commonwealth Bank, who predicted the dollar would move towards the 93-cent mark, supported by European trade.
"The Aussie dollar will be at 93c by the end of the week, if not tonight. In our view it will be high 90s by the end of the year."
The Westfield Retail Trust vote has officially been deferred, with another meeting to be held in the next 10 to 14 days, according to the chairman.
Increasing stockpiles in China have continued to weigh on the iron ore spot price, with the bulk metals hitting a 2014 low.
But some analysts are predicting a relief rally in the near future.
Overnight on Wednesday, the benchmark iron ore spot price, measured at the Tiajin port in China, slipped 1.3 per cent to $US96.80 per tonne.
The falls are expected to continue overnight, with the Dalian iron ore futures in China slipping 1.4 per cent on Wednesday afternoon.
Despite a more than 28 per cent fall in 2014, taking the price of iron ore to its lowest level since September 2012, the price is still more than $US10 off the low of $US86.90 hit at that time.
The majority of analysts are not predicting the price to plunge down to those levels in the near-term, with most forecasting a slight recovery in the second half of this calendar year.
"We will see a relief rally in the coming month, in June-July," ANZ head of commodities Mark Pervan said.
"Markets should see both steel and iron ore prices rebound off an oversold base. The point we're seeing now is probably not indicative of current market conditions," Mr Pervan said.
Iron ore has faced a number of headwinds in 2014, with supply increasing despite a slowdown in China's property sector, the country's largest consumer of iron ore.
Fortescue is having to offer steeper discounts on its iron ore as demand from Chinese steel mills falls. Photo: Reuters
The people have spoken, with 82.5 per cent of votes from the floor wanting an adjournment. The Westfield Retail Trust board is now debating whether to adopt what was a non-binding resolution.
Meanwhile, the man who caused all the fuss, BT’s Peter Davidson, has told Business Day’s Carolyn Cummins that even while the costs associated with an adjournment would be regrettable, “given the position that Westfield adopted this morning that Scentre would be spun out irrespective of a merger with WRT, we’d argued that’s a material change and shareholders need to consider it”.
And here are the best and worst stocks for the day.
Best and worst performing stocks in the ASX 200 today.
The dollar has jumped above 93 US cents for the first time since early last week, as European traders come online and digest the upwardly revised business investment intentions (capex).
The Aussie's currently fetching 92.88 US cents, after hitting 93.02 US cents a couple of minutes ago.
Some strong economic data gave the market a shot in the arm after a weak start, but it wasn't enough to stop a slight backslide at the close of trading.
The ASX 200 and All Ords slipped 8 points to 5519.5 and 5499.2, respectively.
Miners led the falls after iron ore fell overnight and futures trading during the day suggested a further drop tonight.
BHP dropped 1.3 per cent, Rio 2.2 per cent and Fortescue 3 per cent.
Banks were mixed, either recording slight gains or losses, and there were more stocks down then up today.
Toll Holdings jumped 4.9 per cent on a restructure, while Wesfarmers gained 0.6 per cent after announcing plans to expand overseas.
Telstra was the biggest boost to the market, up 0.8 per cent.
The latest from the Westfield drama: Dick Warburton’s team has emerged from the dressing sheds and, after a bit of debate on both sides, has agreed to put an adjournment motion it to the floor.
We’re told the punters are now lining up to register for the electronic handheld devices that will be used to vote on whether there should be a vote.
This has not pleased some of the older shareholders present, and has also brought into focus an important side issue for a significant bloc of WRT shareholders – the distinct lack of a decent cup of tea at the event.
The top and bottom 10 stocks according to the analysts.
Nine Entertainment Network is the stock most loved by the broker analysts, while its competitor Ten Network is the least popular, according to a survey of broker ratings using Bloomberg data.
The table below has the top 10 rated stocks according to consensus analyst ratings, using a numerical chart where a score of 5 is a unanimous strong buy, 3 a hold, and 1 a strong sell.
Of course, the recommendations need to be taken with a grain of salt. For one, they are usually on a 12-month horizon. Second, some make their valuations on a relative expected return (against the benchmark or other stocks within the industry). And three, making a decision based on somebody else's research can be a risky business!
More drama at the Westfield Retail Trust vote this afternoon.
An adjournment has been called after BT fund manager Peter Davidson called for a time-out in the light of chairman Frank Lowy’s statement this morning that he would push ahead with a split even if it was voted down.
This was material new information that needed to be considered, Davidson said.
Chairman Dick Warburton subsequently called a halt to talk it over with the independent directors.
No doubt there’s more to come on this.
Fortescue Metals Group said it will consider a push into the West Australian gas market, as it urged the federal government to force oil and gas companies to develop or relinquish their leases.
Chief executive Nev Power said that while there were many companies better equipped to develop new gas fields for domestic use, if they did not develop the fields, Fortescue would consider it.
“We still believe that provided there is the opportunity to develop it there will be plenty of companies lining up to develop it. Only if there was nobody else [would Fortescue develop the fields],” Mr Power told reporters in Perth today.
He was releasing a Deloitte Access Economics report that found WA’s gas reservation policy should be abandoned in favour of a free market forced to develop retention leases or lose them.
The report argues there are commercially viable reserves that could supply the WA domestic gas market but are not being developed because WA government’s gas reservation policy links LNG exports with domestic gas industries, leaving domestic gas contracts to be priced at LNG netback prices.
By abandoning the reservation policy and applying more “rigorous” assessments of retention leases gas fields better suited to domestic supplies would be developed, the report argues.
Fortescue is one of WA’s biggest energy consumers, spending $US800 million a year. If it converted it’s entire energy use to gas, it would represent between 8 per cent to 10 per cent of the local market.
Here's the latest from the Westfield split AGM: As the meeting of Westfield Retail Trust begins, chairman Dick Warburton has said 74.1 per cent of proxy votes were in favour of the huge Westfield restructure.
With the proposal requiring a 75 per cent ''yes vote'' to go ahead, votes in favour from the floor are needed to green-light the deal.
Regional markets are mixed:
- Japan (Nikkei): +0.05%
- Hong Kong: +0.4%
- Shanghai: flat
- Taiwan: -0.1%
- Korea: -0.3%
- ASX200: -0.2%
- Singapore: +0.9%
- New Zealand: flat
‘‘Investors are more positive on equities as bond yields drop on expectations the European Central Bank will do something big next week,’’ said Mark Matthews, Singapore-based head of Asia research for Julius Baer. ‘‘Valuations in Asia look attractive, with those for Chinese equities incredibly low. Japan has become pretty cheap, too.’’
The Australian dollar has risen about half a cent to the day's of 92.87 US cents on the back of the strong capex figures - but it's interesting that financial markets are now betting on a rate cut over the next 12 months.
At just 4 per cent it's a slim chance, admittedly, but it's the first time since early March that even a few basis points of a rise are priced in. And it's well below the 80 per cent-plus chance of a rate hike seen in April, according to Credit Suisse data.
Even though markets are now seeing a small chance of a rate cut over the next 12 months (white line), the dollar rose on the capex figures.
Veteran programmer John Stephens says the Seven Network did not induce him to breach a contract with Ten and his decision to walk away from the deal was primarily due to the enormity of the task that lay ahead of him at the struggling network.
Mr Stephens defected to Ten from Seven in March, only to backflip on the deal days later and remain with Seven. Ten sued Seven, alleging it induced Mr Stephens to breach the contract and sought to stop him working with its rival free-to-air broadcaster for two years.
The Supreme Court of NSW ruled on Thursday that the contract that Stephens signed with Ten remains active, but did not grant Ten injunctive relief to stop him working at rival Seven.
Mr Stephens told Fairfax Media on Thursday that Ten's fortunes appeared bleak after its coverage of the Sochi Winter Olympic Games concluded and that,at 67 years old and after a hip replacement, he feared the task was too great.
"In essence I took into account my age, the fact that Ten looked like they were about to hit a pretty tough period after the Winter Olympics," he said
"Over that weekend when I did change my mind I thought to myself: 'Do I really need this at my age?' I've been through enough stress and pressure over the years, working for Network Ten 25, 30-odd years ago and I worked for Nine and Kerry Packer all those years... they were stressful enough."
Mr Stephens said Seven did not induce him to breach the contract with Ten.
Despite being accused by the competition regulator of abusing its power over suppliers, Coles is vowing to cut more costs out of its business and drive supermarket prices further down to underpin another five years of profit growth.
The company’s incoming managing director, John Durkan, outlined ambitious plans to transform Australia’s second-largest food and liquor chain into one of the world’s leading retailers in a speech to investors yesterday.
A veteran of the cut-throat British grocery market, Irish-born Mr Durkan said the Wesfarmers-owned Coles, had improved a lot over the past six years but was lagging grocery chains overseas in sales per meter of floor space, freshness, supply chain efficiency and the cost of doing business.
“We can move the dial quite considerably and on some of those things we can be world leaders,” he said in a defiant speech to investors.
But even though Mr Durkan’s stance may upset some suppliers, he conceded that some global retailers have reduced costs too far.
“I’m not suggesting we have to get to best practice on all of those,” he said.
“On some measures, some people around the world have gone too far, particularly driving costs down. But it demonstrates the fact we have a lot of opportunities still.”
Known for his uncompromising stance with recalcitrant suppliers and his unrelenting focus on costs, Mr Durkan’s position has been under a cloud since early May.
Three weeks ago the ACCC launched legal action, alleging that Coles engaged in unconscionable conduct by using unfair tactics and misleading information to force smaller suppliers to pay additional rebates to cover the cost of a new supply chain program.
In response to a reader request, here's a 3-year chart comparing iron ore stockpiles with the price (we ran a 1-year chart earlier).
Eyeballing it, no evidence of seasonality in stockpiles.
Iron ore stockpiles at Chinese ports (white line) against the commodity's price (yellow line) over three years.
ABS capex numbers.
Finally, there are signs of life in investment outside Australian mining, writes JP Morgan economist Stephen Walters, describing the ABS private capex numbers released this morning as “on balance, better than expected”.
Actual spending over the March quarter was weaker than expected, but companies have indicated that spending will fall by less than previously estimated over the year to June 2015, “as the economy slides further down the face of the mining capex cliff”.
“Even better, though,” Walters writes, “there was an upside surprise in reported spending intensions by firms outside mining and manufacturing, previously the missing piece of the ‘growth rotation’ narrative.”
“Indeed, RBA officials consistently have communicated that this rotation in investment in the wake of the peak in the mining capex boom was on track.
“Now, they have decent evidence to support their contention, which had for a while sounded more hopeful than emphatic.
“To be fair, the RBA’s statement earlier this month described the signs of improvement in investment outside mining as ‘tentative’, but the indications from today’s report are much better than tentative.”
Scrub out that small chance of a rate cut?
Asian stocks swung between gains and losses as investors weighed a worse-than-estimated drop in Japan’s retail sales before a report that’s expected to show the US economy contracted last quarter.
The MSCI Asia Pacific Index is up 0.5 per cent, reversing an earlier loss of 0.2 per cent. The gauge is headed for its biggest monthly increase since September, amid optimism the US economy can withstand a reduction in stimulus and that Chinese policy makers will step in to bolster slowing growth.
The value of global equities climbed to a record $US63.8 trillion this week and the Standard & Poor’s 500 Index reached an all-time high.
Investors “should not read too much into [Japan's] April retail sales numbers,” Vasu Menon, vice president of wealth management in Singapore at Overseas-Chinese Banking said. “It turned out to be worse than expected. As we progress into the second quarter and third quarter, some of the negative impact from the Japanese sales-tax hike will wear off.”
Around the region:
- Japan’s Topix index is marginally ahead as the nation’s retail sales fell 13.7 per cent in April from March, the most in at least 14 years after the first consumption-tax increase since 1997 depressed consumer spending. The drop was worse than a forecast 11.7 per cent decline by analysts in a Bloomberg survey.
- China’s Shanghai Composite Index has dropped 0.1 per cent, while Hong Kong’s Hang Seng Index has gained 0.4 per cent.
- South Korea’s Kospi index is down 0.1 per cent. The nation’s current account surplus narrowed to $US7.12 billion in April from a revised $US7.29 billion in March, data released by the Bank of Korea today showed.
- Singapore’s Straits Times Index is 0.8 per cent higher, heading for its highest close in a year. Morgan Stanley raised its rating on Singapore shares to overweight from equal-weight, citing stabilizing economic growth and limited earnings risks, analysts wrote in a report to clients.
As Woodside shares trade around their highest for almost three years, the stock is increasingly attracting the bears thanks to market worries about a lack of near-term growth, the temptation of an acquisition and expected tougher competition in gas supply to Asia.
Bernstein Research today become the fourth broking house to downgrade its recommendation on Woodside Petroleum stock since last Thursday’s investor briefing, citing a “chilly Siberian wind” that is blowing through the Pacific gas market thanks to last week’s mega-deal on gas supply between Russia and China.
Bernstein’s downgrade to market-perform, follows similar downgrades to neutral by Citigroup and JPMorgan, while Goldman Sachs has cut its call to sell, all in the last few days.
Woodside last week abandoned its proposed $US2.5 billion investment in the Leviathan gas field in Israel, saying the deal was no longer attractive, given the risks. The decision reassured investors about management discipline in capital spending decisions, and also inflated investor expectations of another capital return.
“While we applaud Woodside’s decision to walk away from Leviathan, we think it is likely that they will look for something else to fill the ‘growth gap’, Bernstein’s Neil Beveridge said. “Increasingly we expect management will want to grow rather than return cash to shareholders, which means an acquisition at some point, which is likely to be value negative for investors.”
Goldman Sachs analyst Mark Wiseman describes Woodside’s reducing reserve life as “a concern” and says it “has the potential to drive a more significant de-rating if not successfully addressed.”
He sees peak production for Woodside occurring this year from existing assets, with declines then due to maturing oil fields in WA and lower deliveries of gas within the state.
Citigroup analyst Dale Koenders still gives a tick of approval to Woodside’s delivery on its strategy and capital discipline, but prefers the upside potential in Santos and Origin Energy.
Shares are down 0.2 per cent at $42.04.
Funtastic shares have entered a halt until Monday at the latest pending the release of a “trading update”.
The latest from the fairly turbulent Westfield AGM, courtesy of Carolyn Cummins: the proxies for the vote for Westfield Holdings to demerge from Westfield Retail Trust was 97.84 per cent for and against 2.16 per cent.
That's the Westfield group approving it. The big one is the next vote after 2pm when Westfield Retail Trust shareholders vote on their part of the demerger deal.
The consequences of them not approving will be that Westfield Group pursues its other options including a decoupling of its business from WRT.
At the Westfield Group meeting shareholders put Frank Lowy through the ringer with Stephen Mayne from the Australian Shareholders Association at one stage calling him "oppressive".
Lowy responded, "I object personally to these character assassinations."
"Aren't you tired Mr Mayne, because I'm getting a little tired," Lowy said following Mayne's interjections.
During the meeting Lowy's re-election as director was overwhelmingly approved by more than 90 per cent shareholders. Shareholders also overwhelming approved the remuneration report.
Proposed split: Frank Lowy. Photo: Nic Walker
Suncorp's leadership team wants to focus investors on the benefits of innovative technology in its business, as they digest Tuesday's news of its $500 million write-down.
The Queensland-based insurance and banking group is hosting an investor day in Sydney in which it is highlighting expected gains to be made in terms of productivity, savings and customer service from ongoing investment in technology, which it hopes will appeal to investors concerned by current difficulties.
Chief executive officer Patrick Snowball highlighted expected savings of $225 million in the 2015 financial year and $265 million in 2016 from an ongoing simplification program. This will include rationalising remaining legacy technology systems, and will be complimented by the implementation of a new banking platform known as Ignite and move to a more advanced cloud computing solution it is calling multi-cloud.
Mr Snowball said the simplification plans would be largely completed in 2015 with major programs continuing through 2016 including the new banking platform, a real estate consolidation plan, finance reporting systems optimisation, procurement simplification and a newly commenced business intelligence project.
He said the new business intelligence unit was formed by bringing together a team of 850 data analysts, modellers and technology specialists under Suncorp Business Services CEO Jeff Smith.
Mr Smith said Suncorp had adopted working methods borrowed from Silicon Valley players to develop new systems and services, and sought to highlight benefits derived from a so-called "smart workplace" where workers from across offices communicate virtually via large LCD screens.
Capital expenditure figures from the ABS are out and private capex dropped 4.2 per cent over the March quarter, well below the consensus forecast of a 1.6 per cent fall.
But while the headline numbers look horrible, early chatter is the data is actually strong - there are a number of components as ever - and the Aussie dollar has gone up.
The good news is that the second estimate for private capex in the next financial year has been revised up to $137bn from $125bn in the first estimate.
"In our view, today’s CAPEX release does not materially change our outlook for monetary policy," write the ANZ economics team.
"The decline in mining investment has been well flagged and is broadly in line with RBA expectations and will act as a drag on economic activity going forward.
"Meanwhile, non-mining investment intentions continue to point to only a very gradual increase in non-mining investment, which continues to support our view that the RBA is likely to keep rates on hold for an extended period of time."
Apple has agreed to buy Beats Electronics for $US3 billion ($3.25 billion), its biggest-ever acquisition, nabbing a popular line of headphones and a nascent subscription music-streaming service as the iPhone maker seeks to rev up growth.
Beats founders Dr Dre and music-industry executive Jimmy Iovine will join Apple. The purchase price is $US2.6 billion, with another $US400 million that will vest over time. The acquisition is projected to close in the fiscal fourth quarter.
The deal signifies that Apple chief executive Tim Cook is willing to use the company's $US150.6 billion in cash more aggressively, a departure from predecessor Steve Jobs' playbook of acquiring smaller companies to bring in technology and talent.
As sales of digital media downloads fall, buying Beats gives Apple a foothold in internet-based streaming, where Google's YouTube, Spotify and Pandora dominate.
"Music is such an important part of all of our lives and holds a special place within our hearts at Apple," Cook said.
The deal indicates how the CEO, who is facing pressure to jump-start Apple's sales amid cooling iPhone and iPad sales, is shifting to acquire growth. Even as Google and Facebook have spent billions on acquisitions, Apple previously avoided tie-ups of this size.
Its biggest past purchase was the $US400 million deal for NeXT in 1997, which brought Jobs back to Apple.
Not so different: Apple and Beats Electronics. Photo: AP
ASX chief executive Elmer Funke Kupper has played down the threat of high frequency trading in Australia and called again for the government to review its 15 per cent ownership restrictions on the local bourse.
Speaking at a stockbrokers' conference in Melbourne, Funke Kupper said while Michael Lewis' new book, Flash Boys, was "all true", high frequency trading did not exist in Australia "on the same scale or with the same impact" as it does in the United States.
"In Australia, our regulators have made sure that the interests of end investors are prioritised," Funke Kupper said. "The aggressive strategies prevalent overseas are uneconomic under Australia’s regime.
"Here, the behaviour of HFT is more aligned with the broader market. And as a result, we
have few concerns at the moment.
Funke Kupper's comments echo those by the corporate regulator, the Australian Securities and Investments Commission, earlier this month, which said the situation in Australia did not match the "hype" following the release of the book.
Funke Kupper said restrictions around on maker-taker pricing, regulatory fees and tick sizes helped keep the problem at bay in Australia.
"The regulatory settings and the market structure in Australia are materially different than in the United States.": ASX chief Elmer Funke Kupper. Photo: Dean Sewell
More positive data from the housing sector, where record low interest rates appear to be driving the recovery the economy needs to fill the hole left by falling mining expenditure.
The HIA reports that new home sales – a positive indicator for broader economic activity – have grown for the fourth consecutive month.
Private sector new home sales gained 2.9 per cent to be up by 6 per cent over the
three months to April this year.
Multi-unit sales increased by 9.3 per cent in April, while detached house sales grew 1.8 per cent rise, marking the sixth consecutive increase for this component.
“The recovery in new home building is a key plank in Australia’s economic growth, as evidenced by the March quarter construction work done figures released yesterday,” said HIA Chief Economist, Harley Dale in a statement.
“A healthy April for new home sales provides a promising start to the June 2014 quarter.”
New home sales rose for the fourth month in a row. Source: HIA.
CIMB analyst Daniel Blair says he came away from Nine Entertainment Co’s inaugural investor day with “reinforced” confidence in the media company’s digital and events businesses, as well as “improved” confidence in its free-to-air television network.
Nine had set itself a hefty target of taking 40 per cent of the metropolitan free-to-air advertising market by 2015 but, until yesterday’s investor briefing, had given little detail to the investment community about how it would get there.
The network won over many analysts and fund managers after showing its improvement in the Perth and Adelaide markets, where it bought TV stations last year.
Blair said the briefing helped boost his confidence that Nine could reach the magical 40 per cent mark.
Rival Seven West Media secured a 40.1 per cent revenue share last year, although with Ten Network Holdings in the doldrums and slipping below a 20 per cent share in April, it is not inconceivable that both Nine and Seven could take 40 per cent each in 2015.
Eight of the nine brokers, including CIMB, have some version of a "buy" on the stock, with an average target price of $2.58. The stock last traded hands at $2.19.
Australia has more than iron ore to offer, and Andrew Forrest is diversifying: China is so desperate for good beef that Twiggy will be taking sample parcels of steak in his luggage on his next trip.
After recently visiting Chinese supermarkets and seeing limited Australian beef available, Forrest returned home and developed a plan, including buying his own processing company, to boost shipments of the meat from Australia, the third-largest exporter.
“In China, I am being asked, ‘Andrew where can I get high quality reliable beef',” the Fortescue Metals founder said. When he goes back next month, “I am going to take it in and give everyone a pack,” he said.
Forrest, who bought Western Australia’s only licensed beef exporter to China this year, said Australia could boost its production by 50 per cent should it secure a supply position in the Chinese market. China, already the biggest consumer of meat, might double beef imports by 2018 as rising wealth changes diets, Rabobank estimates.
“I see longer term, higher sustained prices,” driven by steady demand from China, Forrest said. He was considering buying more farms or companies to help boost output, he said.
Move over iron ore, China's appetite for Aussie steaks is growing. Photo: Eddie Jim
With the federal budget, the government may have over-delivered on the ‘sharing the pain’ message, possibly delaying the economic recovery, Morgan Stanley notes:
- The budget didn’t tighten fiscal policy much in the near term (about 0.1 percentage point in 2014-15), but we believe the combination of broken promises about ‘negative surprises’ and the breadth of reform fronts opened without notice has had a deeper impact on spirits.
- Consumer sentiment fell by 7 per cent in May, while the diffusion index of expected family finances hit an all-time low (post-1975).
- Auction clearance rates have moderated, and national dwelling prices have fallen by 1.7 per cent month to date, with Melbourne down 3.0 per cent.
- However, with the East Coast Recovery carrying more momentum than hoped into 1Q14, we believe any set-back will delay, but not de-rail Australia’s growth transition.
A picture says a thousand words: iron ore's slide in 2014 has been largely been because of a flood of supply.
In the second quarter, BHP Billiton, Rio Tinto and Fortescue added an extra 9 million tonnes of the bulk metal to the market.
Chinese steel prices have fallen to record low, with many producers complaining they cannot sell their inventories, and US producers bemoaning the entry of China's product into their domestic market.
So, with a flood of supply in iron ore and a lack of demand for steel, it should come as no surprise that port inventories of iron ore are at record levels.
Iron ore stockpiles at Chinese ports are at record highs.
The Westfield AGM has kicked off, and the electronic voting system works.
The test question was: ‘NSW will win the Rugby League’s State of Origin series: for or against?’ After a few laughs, the result was made public: 98.2 per cent of attendees believe NSW will indeed with the State of Origin, 1.8 per cent do not.
Shareholders will vote on a controversial restructure of both groups. The proposal is to merge the Australasian businesses of Westfield Group and Westfield Retail and re-brand them as Scentre Group.
Westfield chairman Frank Lowy will tell investors that 98 per cent of WDC securityholders who have voted by proxy are in favour of the restructure. However, he notes is is still tough to predict a result.
Shares have opened a little lower, dragged down by miners and with banks also easing.
The ASX 200 is 12 points, or 0.2 per cent, lower at 5515.3, while the All Ords has fallen 10 points to 5496.5.
BHP is down 1.5 per cent and Rio Tinto 2 per cent, while Fortescue has retreated 2.2 pert cent on weaker iron ore prices overnight.
All the major banks have retreated slightly.
Toll Holdings is 1.4 per cent higher after announcing restructuring plans.
Another big investor has decided to reduce its exposure to fossil fuels, with AMP Capital announcing that its ‘‘responsible’’ funds would have limited scope to invest in certain mining and energy companies.
The changes will see 56 companies ruled out of bounds for the funds, and see the affected industries grouped with pornographers, weapons manufacturers, gaming companies, uranium miners, and producers of alcohol and tobacco.
In a move that follows bans by several church funds and banks in northern Europe, AMP said the changes were in response to ‘‘growing interest and concern’’ about climate change from investors.
Funds operated by AMP for ‘‘Responsible Investment Leaders’’ will no longer invest in companies that derive more than 20 per cent of their earnings from thermal coal, coal-fired power generation, oil sands and the conversion of coal to liquid fuels.
The 20 per cent limit means two of Australia’s biggest coal miners, BHP Billiton and Rio Tinto, could still be included in the fund because their biggest exposures lie in other commodities.
A spokesman for the Minerals Council of Australia said the decision would not hurt local coal miners, who are already battling chronically low commodity prices.
‘‘This decision, involving a boutique investment fund, is of no real consequence to the coal sector,’’ he said.
Ahead of the Italian elections, investors had started to remove money from Italian bond funds in the sort of volumes not seen since late 2012, pushing up yields on the country’s government bonds.
When Matteo Renzi and his Democratic party won a landslide victory the yields, which move inversely to prices, started to fall once again.
This sudden volatility in Italy’s benchmark government bond yields has encapsulated growing market nervousness that borrowing costs across countries hit hardest by the eurozone crisis may have fallen too far for comfort, and has prompted questions about the relative stability of the markets.
For the group of heavily indebted countries at the “periphery” of Europe enjoying strong demand for new debt sales and falling borrowing costs, the danger is these questions could lead investors to demand higher returns for the risks they perceive. That would leave Italy, Portugal, Ireland, Greece and Spain paying more to service their debts.
“Until now the market for peripheral bonds has been largely moving one way and yields had been falling,” says Laurence Mutkin, head of global rates strategy at BNP Paribas. “Now we have evidence that the market can be two-way and so investors will demand a higher risk premium.”
Toll Holdings has announced that long-serving directors Paul Ebsworth and Wayne Hunt will leave as part of a divisional restructure that is expected to generate savings of $10 million to $12 million a year.
The company will from July 1 cut the number of divisions to five from six, it said in a statement to the ASX this morning.
Toll Express, Toll NQX and Toll Linehaul & Fleet Services will be rolled into Toll Domestic Forwarding division, Toll Liquids and Toll Transitions will become part of Toll Global Resources, the specialised contract-driven parts of Toll Intermodal will merge into the Toll Global Logistics and the Queensland freight forwarding operations will join Toll NQX.
“We have strong businesses, particularly in Australia, but it is critical that in the current challenging market we reduce complexity and costs, improve our productivity and build on our strengths,” Toll managing director Brian Kruger said.
“This restructure will help mitigate near-term ongoing margin pressures as well as ensuring that we maximise the leverage that our company has to any improvements in the external environment.
Westfield Group and Westfield Retail Trust have entered trading halts as they begin AGMs in Sydney with a vote on whether to split Westfield.
Here's a story apparently getting some attention on trading floors today:
Britain needs to start raising interest rates sooner rather than later if it wants to avoid sharp and painful increases in the future, a member of the Bank of England’s rate-setting committee has warned.
In an interview with the Financial Times, Martin Weale, an external member of the BoE’s Monetary Policy Committee, said he thought even a “gradual” rise in interest rates could see borrowing costs rise by up to one percentage point a year – faster than markets are expecting.
Mr Weale said his definition of a “gradual” rate rise would involve the bank tightening by “no more than” 25 basis points a quarter, while investors are betting on an increase of about 1.8 percentage points over three years.
The central bank has repeatedly said rate rises will be “gradual and limited” when the economy becomes strong enough to make them necessary. But Mr Weale warned that if the MPC wanted the pace to be gradual it should not wait too long before making a start.
“If you want to have baby steps you do have to start sooner,” he said in an interview with the Financial Times. “The question is: how close are we getting to ‘soon’? Of course we can never be sure, but the economy . . . has sustained fairly rapid growth in demand.”
“So I’m having to ask the question – and the answer is less definite than it was six months ago – ‘where do I think the interest rate should be at the moment?’”
Sundance Energy Australia an explorer that’s expanding in the Eagle Ford shale formation of Texas, will look at acquisitions of as much as $200 million as some competitors focus on drilling over deals.
Sundance plans to add more acreage in the Eagle Ford through leases, small purchases and potentially larger acquisitions, Managing Director Eric McCrady said.
The company may purchase as much as 25 percent of the more than 50,000 acres it’s evaluating, he said.
“A lot of companies are running a lot of rigs in the Eagle Ford, and people are very focused on drilling the acreage positions they have,” McCrady said. “So that has resulted in a little less competition for smaller deals.”
Sundance’s purchase earlier this week of Eagle Ford assets for an initial $33 million boosts its holdings in the region to 19,500 net acres. It follows Baytex Energy’s $1.9 billion offer for Aurora Oil & Gas to add output in the formation, a focus of the U.S. shale revolution.
“The corporate activity in the Eagle Ford lately highlights the potential there,” Krista Walter, an energy analyst at Morgans Financial said.
With one of its previous acquisitions in the region, Sundance “has done well in reducing costs and increasing efficiencies, so we’d think they could apply the same efficiencies into any new acreage,” she said.
Sundance rose 1.4 percent yesterday to $1.06, reversing a decline earlier today and valuing the company at A$581 million.
Rio Tinto is cutting jobs at its troubled Mongolian copper and gold mine Oyu Tolgoi, citing deteriorating industry conditions and ongoing market volatility.
An internal email to all staff from Oyu Tolgoi president Craig Kinnell says that after an internal cost cutting review the company is “removing a number of roles to better meet the requirements of the business”.
“Workforce reductions are part of the lifecycle of a mining business,” Kinnell wrote. “Given where we are in the lifecycle of our project, and the urgent need to reduce our costs, it is critical to the success of the business to address this now.”
Oyu Tolgoi was in a state of transition as it moved to steady state operations, and the business had to become “agile enough to face tough market conditions” he said.
Oyu Tolgoi is understood to employ about 7000 staff. Rio controls the Oyu Tolgoi project through a 66 per cent stake held by its subsidiary Turquoise Hill Resources subsidiary. The Mongolian government owns the other 34 per cent. The project has been plagued by delays.
US stocks fell, after a four-day rally lifted the Standard & Poor’s 500 Index to a record, as losses among retailers overshadowed gains in phone shares and utilities before a report tomorrow that may show the economy contracted in the first quarter.
Toll Brothers, the largest US luxury-home builder, gained 2.1 per cent after reporting that profit more than doubled.
Twitter jumped 11 per cent, the biggest increase in a month, after Nomura Holdings raised its recommendation on the stock.
The S&P 500 dropped 0.1 per cent to 1,909.78. The Dow Jones Industrial Average retreated 42.32 points, or 0.3 per cent, to 16,633.18.
“After hitting a high, the market is taking a little bit of a breather,” Michelle Clayman, chief investment officer at New Amsterdam Partners in New York. “The fundamentals of the US market still look decent.”
The equities gauge is trading at 16.2 times the projected earnings of its members, compared with a five-year average of 14.3, according to data compiled by Bloomberg News.
A report by the Commerce Department tomorrow may show the US economy contracted 0.5 per cent in the first quarter, following a preliminary estimate of 0.1 per cent annualized growth, according to economists surveyed by Bloomberg News. GDP rose at a 2.6 per cent annualized pace in the previous period. Economists forecast growth of 3.5 per cent during the second quarter.
“People are focusing on the GDP number tomorrow,” John Traynor, chief investment officer of People’s United Bank Wealth Management said.
“There are two camps of investors. They seem to fall down on the side of, ‘Is the economy at a point where it reaches a self-sustaining path?’”
Low volatility and interest rates that are holding in tight ranges have resulted in an “abnormal” trading market, Goldman Sachs president Gary Cohn said. The Chicago Board Options Exchange Volatility Index (VIX) climbed 1.5 percent to 11.68 today. It is about 3 points from a record low.
The price of iron ore has dropped to a fresh 2014 low and could drag the Australian dollar with it on concerns that global stockpiles are growing as demand for the steel making commodity eases.
Iron ore fell to $US96.80 a tonne overnight, the lowest since September 2012 after breaking below the $US100 ($108) a ton mark earlier this month.
The decline in ore is running into its eighth day and is down 28 per cent this year.
By contrast, the Australian dollar is down about 0.43 per cent since the start of this month to US92.33¢ from US92.74¢.
The day that iron ore broke below the $US100-a-tonne mark, the local currency also hit a three-week low.
But the dollar, which is often labelled as the commodity currency because Australia is such a huge exporter of metals, is higher than where it started this year at US86¢.
Citigroup, considered the world's biggest foreign exchange trading firm, is predicting a return to parity for the Australian dollar in the short term as Chinese policy makers look to increase their reserve holdings of the local currency.
Global supplies of iron ore are set to exceed demand by 175 million metric tons next year as exports from Australia and Brazil increase, Goldman Sachs Group predicts, Bloomberg reported.
Steel producers are reportedly hesitant to buy new iron ore given stockpiles at Chinese ports climbed 0.7 per cent to a record 113.30 million tons in the week to May 23 from a week earlier, according to Shanghai Steelhome Information Technology Co.
The price of iron ore is down 28 per cent this year. Photo: Michele Mossop
Local stocks are poised for a weak start after a day of consolidation on Wall Street, while iron ore fell.
Here's what you need2know:
- SPI futures down 13 points to 5524
- AUD at 92.33 US cents, 94.07 Japanese yen, 67.95 Euro cents and 55.27 British pence
- On Wall St, S&P 500 -0.1%, Dow -0.3%, Nasdaq -0.3%
- In Europe, Euro Stoxx 50 +0.1%, FTSE +0.1%, CAC flat, DAX flat
- Iron ore falls 1.3% to $US96.80 per metric tonne
- Spot gold slips 0.5% to $US1259.14 an ounce
- Brent oil down 0,1% to $US109.88 per barrel
What's on today:
- Australia: ABS private capital expenditure data at 11:30am; HIA new home sales for April
- US: Annualised GDP for first quarter, initial unemployment claims for May and pending home sales for April
- Japan: retail sales for April (9:50am AEST), and BOJ’s Shirai speech
Stocks to watch:
- APA Group rated new buy at BBY; price target $7.68
- Karoon Gas: PetroChina may buy company's stake in Poseidon field, says AFR
- Orica trades ex-dividend
- Stockland raised to buy from hold at Deutsche Bank; price target $4.40
- Suncorp has an investor day
- Westfield and Westfield Retail Trust have AGMs in Sydney where shareholders will vote on a Westfield split
- Intelligent Investor has “speculative buy” recommendations on Ausdrill, Bradken, Emeco Holdings, Macmahon Holdings and NRW Holdings in a detailed analysis of mining services stocks
- Deutsche Bank cut Challenger Financial to “sell” from “hold” and has a $6.50 price target on the stock