Markets Live: China data cheers

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need2know

Shares posted their best day since early February boosted by a strong lead from Wall Street, a bounce in the iron ore price, and a better than expected reading of Chinese demand for Australia’s major exports.

The benchmark S&P/ASX 200 Index and the broader All Ordinaries Index both lifted 1 per cent, on Thursday to 5479.9 and 5458.1 respectively with the gains broadly based and all major sectors advancing.

Mining stocks rebounded as the spot price for iron ore, landed in China, recovered 1 per cent at $US98.50 a tonne. However fears remain that the commodity price of Australia’s biggest export could continue to slide as increased global production collides with slowing demand growth and credit tightening in China.

Australia’s biggest producer of iron ore, Rio Tinto, rallied 2.6 per cent to $60.96, while iron ore miner Fortescue Metals Group bounced 3.6 per cent to $4.59. Resources giant BHP Billiton gained 1.3 per cent to $37.65.

The market, and miners in particular, got an extra boost after a monthly measure of Chinese factory activity unexpectedly jumped to a five-month high. The HSBC Flash China Manufacturing purchasing managers index lifted 1.6 points in May to 49.7 beating the consensus forecast for 48.4. Alumina added 7.1 per cent to $1.43.

Australia’s biggest oil producer Woodside Petroleum rose 1.2 per cent to $41.72 following an investor briefing on the heels of Wednesday’s announcement it has abandoned an Israeli joint venture. Shareholders now expect a special dividend if the company can not identify a new investment opportunity.

Gains in the big four banks also helped propel the market higher.

Building materials supplier James Hardie lifted 5.7 per cent to $14.47 after showing full year profit more than doubled.

Read more.

analysis

And here are the best and worst from the top 200 at close.

 

 

Best and worst performers in the ASX 200 today.
Best and worst performers in the ASX 200 today. 
Takeover

NIB has teamed up with Suncorp’s Apia business to target the $10 billion over-50s health insurance market for the first time.

It's a move that may steal market share from sector leaders Medibank Private and Bupa.

The partnership will allow the Newcastle-based nib to target a growing and lucrative market, without compromising its brand awareness among younger people.

“It gives us access to that attractive and growing market without diluting the focus of the nib brand on the under 40s market,” Rhod McKensey, nib’s group manager of Australian health insurance, said.

Mr McKensay said average premiums paid by the over-50s market were 40 per cent higher than the under-40s.

Under the arrangement, Apia, which has about 700,000 customers aged over 50 years, will sell health insurance under its own brand that is “white-labelled” by nib. Apia will pay a commission and nib will remain as the underwriter and provide ongoing customer service.

Read more.

nib's new strategy will see it target the growing over-50s market.
nib's new strategy will see it target the growing over-50s market. Photo: NDavey@illawarramercury.com.au
earnings

The private equity owners of Peters Ice Cream have entered into exclusive negotiations with French ice-cream giant, R&R, in a deal to sell the iconic brand for over $400 million.

The talks signal a float of Peters Ice Cream is becoming a remote prospect.

Peters’ owner, Pacific Equity Partners, has been sounding out fund managers about a prospective IPO for the past few months with institutional investors asked this week to cough-up for the business or risk being frozen out in favour of a trade sale.

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market close

Shares have enjoyed a strong day's trading, with miners and banks leading broad gains.

The ASX 200 finished 55 points higher to 5479.9, while the All Ords added 54 points to 5458.1; both equivalent to a 1 per cent rise.

BHP gained 1.3 per cent while Rio jumped 2.6 per cent, joining a host of iron ore miners that felt the relief of a steadying iron ore price.

Banks were up, led by NAB, which finished 1.5 per cent up, ANZ 1.2 per cent, while CAB and Westpac added 0.6 per cent.

James Hardie is up 5.7 per cent on a strong profit result.

Treasury Wine was the single biggest drag on the market, down 2.6 per cent.

shares up

We mentioned earlier that Lynas is up – now by 9.1 per cent to 12 cents.

The price movement is apparently ahead of the rare earths miner’s $30 million shareholder share purchase plan offer, which closes on Friday.

The offer, which is only available to existing shareholders, prices the stock at a discount of 17.5 per cent to the average price over the exposure period. 

Also, there are reports that Chinese authorities are discussing heavier taxes on local rare earth producers and an announcement on the changes will probably be made during the second half of the year.

retail

An independent expert has found that David Jones shares are worth as much as $4.14, but the retailer's board is standing by its endorsement of South African retailer Woolworths’s $4.00 a share takeover offer.

Independent expert Grant Samuel & Associates has valued David Jones shares at between $3.73 and $4.14 a share but says Woolworths’s takeover offer is fair and reasonable and therefore in the best interests of shareholders.

The independent experts report is not due to be released until next week, but David Jones released an excerpt from the report two hours after being asked by Fairfax Media, if the top end of the independent expert’s valuation range exceeded the offer price.

David Jones said the offer price was within the expert’s range and represented a substantial premium over the David Jones share price before the offer was made. Furthermore, in the absence of the Woolworths offer or any alternative offer it was likely that under current market conditions the shares would trade at prices well below $4.

The Federal Court has approved a meeting of David Jones shareholders to consider and vote on the proposed offer.

gas

Embattled resources company Metgasco has launched a furious broadside at the state government, questioning the legality of suspending its northern NSW drilling licence and slamming Energy Minister Anthony Roberts’ decision to announce its referral to corruption authorities.

In a statement to the stock exchange, Metgasco chairman Len Gill says the company has written to Premier Mike Baird requesting an "immediate review" of the licence suspension, which has led to $18 million being wiped off the company’s share value.

Mr Roberts announced last week that he had suspended Metgasco’s gas exploration licence at Bentley, near Lismore, due to a lack of community consultation and concerns "about the way in which Metgasco has characterised its activities".

The company’s shares have since halved to 43 cents.

The minister also said he had referred the licence to ICAC "following receipt of information concerning shareholdings and interests in Metgasco Limited".

It later emerged that Tony Bellas, the chairman of Metgasco’s largest shareholder, ERM Power, is in business with Dennis Jabour, the nephew of corrupt former Labor powerbroker Eddie Obeid.

Mr Roberts announced the decision just days before police were due to be called in to break up a long-standing protest on the site.

The cancellation is estimated to cost the company $3 million.

Read more.

Metgasco shares have plummetted since a gas drilling licence in northern NSW was suspended.
Metgasco shares have plummetted since a gas drilling licence in northern NSW was suspended. 
japan

Japanese interest in the Australian market has swelled this year with rising demand for bonds capturing the attention of the RBA and underpinning Australian dollar strength.

On Tuesday RBA assistant governor for financial markets Guy Debelle revealed a sharp increase in buying from Japanese investors.

"The most recent data suggest that demand for Australian debt from Japanese investors has started to pick up," Dr Debelle said in a speech in Adelaide discussing the capital flow outlook.

Historically, Japan has been a big source of demand for Australian government debt, he said.

But the rebound in demand has had the side effect of helping prop up the Australian dollar.

Nevertheless ,the RBA's rhetoric so far suggests that it is more tolerant of a steep Australian dollar than it was last year because the economy is in better shape.

The currency was trading at US92.60¢ on Thursday afternoon, benefiting from better Chinese manufacturing output data.

Rates experts say that Japanese investors are enticed by the superior liquidity of Australian securities, which means buyers of Australian debt can be readily found in the secondary market if an investor wants to unload their portfolio.

The stimulatory policy settings of the Bank of Japan and expectations for even greater BoJ bond-buying this year have given Japanese investors motivated by yield more reason to look outside Japan.

Read more.

Japanese retail bond buyers, known by the moniker "Mrs Wattanabe" have helped prop up demand for the Australian dollar.
Japanese retail bond buyers, known by the moniker "Mrs Wattanabe" have helped prop up demand for the Australian dollar. Photo: Reuters
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world news

One for the history books: India has pushed Australia out of the world's top 10 largest sharemarkets.

The Indian bourse's market cap rose to $US1.42 trillion at the beginning of this week, rallying from just $US1.14 at the beginning of the year on optimism surrounding the election of Narendra Modi as PM.

India's market cap squeezed past Australia's $US1.41 trillion. And the Sensex has outperformed the ASX200 so far this week, so it's establishing itself in the top 10.

These are the top 10 markets, according to Bloomberg:

  1. US
  2. Japan
  3. UK
  4. Hong Kong
  5. China
  6. France
  7. Canada
  8. Germany
  9. Switzerland
  10. India
analysis

It's time to revisit iron ore and in particular Rio Tinto, which has underperformed other diversified miners, RBC Capital Maket notes:

  • Iron ore weakness in 2Q14 is not unexpected: In recent weeks we have seen many of the miners trade down, we think mainly on the back of weakening sentiment in the iron ore market. We believe the weakness is mainly driven by the incremental supply brought on by Rio's 290, FMG's Kings and BHP's Jimblebar projects, for which two of those projects had strong 2Q14 commissioning plans to reach nameplate production.
  • However, high port inventories, a recent destock at the mills and a weaker steel environment in China have also added to recent price pressure.  Incremental iron ore additions should ease in 2H14.
  • Despite the still cautious market outlook for iron ore in the near term, we think Rio is worth revisiting as we head into June 2014 for four reasons: First, incremental volumes from the Australian projects should ease in 3Q14 as both Rio and FMG have hit nameplate production in 2Q14. Second, we still expect a more gradual ramp up from BHP's Jimblebar over the coming 6-9 months. Third, we would expect steel production in China to peak over the late summer months. Fourth, Rio remains least exposed to MUA strike risk in the off chance that should happen.
  • Product differentiation of increasing importance: We think the next round of focus on iron ore will be on product differentiation, not just pricing. We think iron ore product and market positioning could be a main driver of investor confidence for iron ore companies as we head into 2015.
  • We still like Rio from current levels into year-end 2014 The stock is now just 2-3% away from our ideal purchase price range. We would use any further weakness in the iron ore price in coming weeks to rebuild positions in Rio for the coming 6-9 months. We reiterate our outperform rating on Rio Tinto.
china

China’s economic growth rate will slip below 7 per cent as it curtails its $US1.7 trillion shadow banking sector but it won’t cause a global crisis, according to a senior advisor at Pimco, the world’s largest bond fund manager.

Richard Clarida, Pimco’s global strategic advisor and former US Treasury assistant secretary, said China and its shadow-lending sector, which had grown to 20 per cent of its economy was a major focus at the fund in formulating its view on global interest rates.

“China has an enormous shadow banking system but it also has an enormous wallet,” Clarida told Fairfax Media at the fund’s New York offices. “The central bank has $US4 trillion in foreign currency reserves and policymakers clearly have the will to limit the growth of the shadow banking system.

“The question for us, isn’t the wallet or the will, but the execution capability of the plan,” he said.

Clarida says that while China’s shadow banking sector posed a threat to Chinese growth, its potential impact on the rest of the global economy was less clear.

“We do believe they will begin to limit the shadow banking sector and this will slow growth in China. Our baseline is we get growth in the 6’s [per cents].

“It’s not necessarily systemic to the global economy. Part of the reason is that China still has a largely closed financial system so you can’t get a lot of legal capital flight and most of the money that flows into China is not hot money but foreign direct investment.”

healthcare

Medical device maker Cochlear is losing market share, says analysis of a strong yearly result from Swiss rival Sonova that reported over 50 per cent revenue growth in its hearing implant division, which was bolstered by a new product release.

Sonova’s cochlear implant division Advanced Bionics reported a 54 per cent rise in revenue in the year ended March 2014 to CHF195 ($236 million). That was a 36 per cent rise in constant currency and was 24 per cent above consensus estimates, Deustche Bank analysts said.

“This strong growth was driven by the launch of Naida, which drove a strong lift in new recipient and processor upgrade sales,” the analysts said in a note.

Naida is a small, lightweight sound processor that competes against Cochlear’s Nucleus range.

Sonova said customers upgrading to the new sound processor accounted for about 20 per cent of its implant revenues in the year. With the overall market growing at about 10 per cent a year, this suggests the company’s growth came at the expense of Cochlear’s share, the broker said.

Sales of Naida in the key US and European market were reported to be strong.

Sydney-based Cochlear launched a new sound processor in the US, the Nucleus 6, last year. However, it is a scaled-back version, which is still awaiting approval from the Food and Drug Administration for its complete set of new features.

“We believe the delayed FDA approval of all the N6’s features has continued to weigh on Cochlear’s market share,” Mr Low said.

Cochlear has provided guidance to the market of a second half net profit of between $70 million and $80 million, but the analysts said they remained “cautious” on that forecast due to subdued sales in the US.

analysis

Looking at the movers and shakers among the top 200 so far today, and rare earths miner Lynas is up 13.6 per cent - for reasons unknown. Likewise, not sure why Alumina is up 7.5 per cent (something about more buyers than sellers?).

Qube is up 5.9 per cent, on this news:

"Logistics group Qube and rail operator Aurizon have secured exclusive rights to progress with a development of an intermodal terminal at Moorebank in Sydney’s southwest, ending a long running dispute over who should develop the freight hub."

Iron ore plays enjoying a bit of a resurgence - Arrium and Atlas Iron are up handily. (Rio is 2.7 per cent higher and Fortescue is up 3.1 per cent.)

OzForex is doing well, maybe on the prospects of a nice surprise come Tuesday when it reports full-year results.

Best and worst performing stocks in the ASX 200 so far today.
Best and worst performing stocks in the ASX 200 so far today. 
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Beverages

Treasury Wine Estates is attracting interest from other private equity players following Kohlberg Kravis Roberts’s (KKR's) $3.1 billion takeover bid, announced on Tuesday, with chief Michael Clarke’s plans for turning around the troubled winemaker already winning early support from potential bidders.

Mr Clarke is particularly well known to the New York-based KKR who hired him only nine months ago to help advise on a £1.5 billion bid for drinks brands Lucozade and Ribena, owned at the time by GlaxoSmithKline.

Relations between Mr Clarke and KKR remain cordial, insiders said, and it is believed that if the US private equity firm eventually grabs control of Treasury Wine they will keep Mr Clarke on to run the business for them and endorse his strategy to resuscitate the winemaker’s earnings.

Mr Clarke is well known within private equity circles. Since stepping down from running British food giant Premier Foods Plc in June last year he has worked with a string of private equity firms including KKR which is now circling Treasury Wine after approaching the board in April with an offer of $4.70 per share.

TWE shares are 1.6 per cent lower at $4.99.

airlines

Qantas' decision to freeze its domestic capacity is unlikely to push up the prices of airfares by much in the near term, because the airline has been struggling to fill seats even while offering historically low prices.

Demand in the Australian market is low, with consumer confidence down and the mining boom having receded.

For that reason, Merrill Lynch analyst Matthew Spence doesn't think Qantas will have the ability to push up fares by much in the near term. CBA analyst Matt Crowe said the capacity freeze was likely a sign that demand was even worse than expected and warned the federal budget's cuts to middle class welfare from July could further dampen demand.

Qantas' ability to raise prices will also be dependent on Virgin's response to the capacity freeze. Virgin could start lifting its own capacity to gain market share in a move that would damage both carriers financially, or it could follow Qantas' lead and halt further increases.

Qantas, which has boosted capacity by around 3.5 per cent since January, will not add any more from July to September. It had planned for a 2.5 per cent increase during that period but has removed some off-peak flights from the system and will use smaller aircraft on some other flights.

Qantas is keen to emphasise that it isn't shrinking – it will instead be halting further growth.

earnings

New Zealand accounting software developer Xero has said its annual net loss had widened on increased costs related to product development and expanding its market presence, but that revenue had jumped.

It said it expected strong growth to continue for the foreseeable future.

The company said its annual loss for the year to March 31 was NZ$35.5 million, in line with guidance of about NZ$35 million, and wider than last year's loss of NZ$14.4 million.

Xero reported operating revenues of NZ$70.1 million, up 83 percent on last year, with 2015 annualised subscriptions of NZ$93 million.

The company has not paid any dividends since its founding as it is accumulating funds - NZ$210 million as of March 31 - for product development and expansion into the United States and Britain

Xero's locally listed shares are down 1.5 per cent to $29.89.

china

Today's stronger than expected HSBC China flash manufacturing PMI reading suggests that downwards pressure on the manufacturing sector has eased markedly, Capital Economics China economist Julian Evans Prichard says:

  • It appears that warming foreign demand played a large role, with the export orders component rising to its highest level since 2010. This supports our view that exports are much stronger than suggested by headline export growth, which has been dragged down by over-invoicing to avoid capital controls a year ago.
  • The recovery of both PMIs in recent months suggests that the government's targeted measures to support the economy, which were announced last quarter and include spending on railways and public housing, are seeing some success at moderating the pace of China's slowdown to a level that policymakers are comfortable with.
  • Indeed, although recent weakness in real estate and heavy industry has been a drag on growth, this has been at least partly offset by a rebound in infrastructure investment and improving foreign demand.
  • Today's PMI further supports the view that while downwards pressure on the economy remains we aren't seeing as rapid a slowdown this quarter as last.
IPO_float

PAS Group, the popular owner one of Australia’s largest retailer-wholesalers, will make its debut on the stock exchange on June 18, following Wednesday’s raise of $120 million.

The successful bookbuild has priced the owner of female fashion brands such as Metalicus, Review and Black Pepper, at a 8.9 times price earnings multiple to 2015’s profits.

PAS Group’s peers like Oroton and Kathmandu typically trade at a price earnings multiple of around 12 to 17 times.

Both retail and institutional investors showed up in force for the equity raise, drawn in by the relatively high yield of 8.5 per cent.

The private equity-backed PAS Group has rapidly expanded over the past decade mushrooming from 18 stores in 2005 to more than 220 outlets across Australia and New Zealand.

The company is targeting 340 outlets by 2017.

Rod Walker, the former boss of Freedom Furniture, will chair the retailer.

A prospectus for PAS Group’s IPO will be lodged on Friday.

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