Business

Markets Live: Dollar drops below US93c

That’s it for Markets Live today.

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

Thanks for reading and your comments.

See you all again tomorrow morning from 9.

 

need2know

Confirmation of continuing low interest rates domestically and the promise of increased monetary policy support in Europe have buoyed shares.

The benchmark S&P/ASX 200 Index and the broader All Ordinaries Index each added 0.5 per cent, on Tuesday to 5658.5 points and 5656.8 points respectively. Telstra Corporation led the bourse up 1.4 per cent at $5.66

Local shares had little direction at the open after equity markets in the United States were closed for the Labor Day holiday on Monday. In Europe investors are idling ahead of the highly anticipated European Central Bank meeting on Thursday. Many economists are tipping the ECB will introduce quantitative easing style stimulus.

“There could be instability in the month ahead if the ECB does a complete about-face on austerity policy while risks are high in Ukraine,” Prime Value Asset Management chief investment officer Han K Lee said.

Some strategists have predicted the ECB will announce €1.4 trillion worth of stimulus on Thursday, which will more than make up for the expected end of extraordinary stimulus in the United States next month, he said.

“The Bank of Japan is likely to do something similar in the coming months, meaning global equity markets are set to be supported as the market is flooded with money,” Mr Lee said.

“Printing money is an unsustainable solution and on a fundamental basis it looks like a bubble is building in equity markets, but it is very difficult to predict the timing of these events,” Mr Lee said.

As was expected, the September policy meeting of the Reserve Bank of Australia elected to hold the official cash rate at its record low 2.5 per cent, for the 13th meeting in a row.

The accompanying statement from RBA governor Glenn Stevens highlighted concerns about “spare capacity” in the labour market and declining wages growth. The statement made no change from previous months in concluding with the view that, “the most proudent course is likely to be a period of stability in interest rates”.

Mr Lee is tipping the RBA will keep the cash rate on hold until mid 2015, only raising it after the US Federal Reserve has started lifting its rates.

Read more.

analysis

And here are the best and worst performers in the ASX 200 for the day.

A couple of radioactive stocks headed the list, uranium miner Paladin Energy and Qantas Airways, the former on the uranium price crossing a key threshold and the latter on hopes that the company can avoid a total meltdown.

Gold miners were among the hardest hit, while Transfield Services gave up some more of Friday's massive jump.

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

Japan's Nikkei share average ended at a seven-month high in active trade as the yen slipped to a seven-month low against the US dollar, sending exporters higher on hopes of a boost to earnings.

The Nikkei gained 1.2 per cent to 15,668.60, the highest since mid-January. A total of 2.4 billion shares changed hands on the main board, the biggest since early August.

A planned cabinet reshuffle by Prime Minister Shinzo Abe also supported sentiment, traders said.

The Nikkei business daily reported that Abe has decided to bring Yasuhisa Shiozaki, a veteran Liberal Democratic Party (LDP) and vocal proponent of overhauling Japan's Government Pension Investment Fund, for the labor and welfare minister post.

dollar

The Australian dollar plunged below US93¢ for the first time in more than a week, dropping in the wake of a weakening yen and as the Reserve Bank of Australia continued its mild jawboning of the currency.

The local currency started its downward dip shortly after 11am AEST, dropping from US93.35¢ in early morning trade to US92.85¢ within 30 minutes as it shadowed a similar drop in the Japanese currency against the greenback.

The drop in the yen was triggered by speculation over Japanese government pension fund reform, according to Commonwealth Bank of Australia chief currency strategist Richard Grace.

On Tuesday morning the Nikkei newspaper reported Prime Minister Shinzo Abe may appoint a vocal proponent of Japan's pension fund to the health and welfare ministry in a cabinet reshuffle on Wednesday.

Mr Grace said the potential reshuffle caused the yen to weaken as the market anticipated an increased emphasis on foreign assets ahead of the formal review of the fund later this month.

He said CBA expected the yen to weaken further over the coming year, but kept its forecast for the Aussie against the greenback at US94¢ by the 2014 end.

Read more.

The Australian dollar dived against its US counterpart before the RBA made its September rates announcement.
The Australian dollar dived against its US counterpart before the RBA made its September rates announcement.  Photo: Glenn Hunt
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market close

After a wobbly start, shares have forged to a solid gain after the big miners recovered early losses to help the benchmark index close at the day's high.

The ASX 200 added 29 points, a 0.5 per cent gain, to 5658.5, while the All Ords lifted 28 points to 5656.8.

Telstra was the biggest single contributor to the market, closing 1.4 per cent higher. Origin jumped 3 per cent after a bullish note from a broker and a gas discovery in one of its joint ventures in Western Australia.

The supermarket owners chipped in, Wesfarmers gaining 1 per cent after announcing it would cut up to 600 jobs at its Melbourne HQ, while Woolies advanced 0.6 per cent.

The big four banks finished higher, aside from NAB, which eased.

AGL and Amcor were the heaviest drags on the index as both traded ex-dividend.

forecast

In the wake of today’s cash rate decision and statement, here’s a quick snap shot of when economists believe the RBA’s “period of stability” in interest rates will end (in chronological order):

  • CBA: First hike will be in February.
  • TD Securities: Expect a rise in March.
  • Barclays: RBA will start “to raise rates in Q1 2015 as the economy improves and with the cash rate at 3.5% by the end of that year”.
  • HSBC: hike in June quarter of 2015, “though much depends on the AUD outlook”.
  • ANZ: Tightening cycle begins in May 2015.
  • JP Morgan: “First step along the road to policy normalisation in August next year”.
  • Westpac: “Our official forecast is for a 25bp increase in the cash rate at the Board meeting in August next year.”
  • RBC Capital Markets: “Given a number of cyclical as well as structural challenges, we remain comfortable with our view for an extended period of steady cash at 2.50% until Q4 2015”.
  • NAB: The bank “still expects the next move in the cash rate will be up, but not until late 2015”.
elizabeth-knight_127x127
Illustration: John Spooner
Illustration: John Spooner 

The corporate pruning revealed in the recent reporting season pleases shareholders but fails to stimulate growth, writes BusinessDay columnist Elizabeth Knight:

Are the chief executives of Australia's listed companies turning into a bunch of crowd-pleasers, bowing to shareholders' desire for higher dividends and to engage in share buybacks?

Could it be that the balance of power has shifted from the boardrooms to the shareholders they serve?

The evidence is clear from last week's close of the 2014 reporting season that dividends are king. Those companies that have rewarded investors with buybacks and bigger dividend payouts have had strongly performing share prices. Nothing wrong with that.

However, the flip side of this coin is that aggregate capital expenditure is declining at a greater rate than analysts have forecast – an outcome that leads one to wonder if there is too much emphasis on short-term popularity and not enough on medium- and longer-term growth.

Sure, some companies are returning money to their shareholders and financing their businesses by other means. For example, there is an increase in the amount of finance being obtained in the cheaper corporate bond market.

From a company's perspective, this makes sense because debt, today, is historically cheap and equity is not. However, even if we back out the funds raised in debt markets it is clear that this generosity towards shareholders is primarily being financed by companies spending less on investment.

Read more.

quote

In the video at 3:47 below there's this zinger from Clive Palmer on why the benefits of super are a "fallacy":

"We know as a statistical fact that over 50 per cent of Australians will be dead by the time they get access to their super."

It follows, then, that super is "just a way to allow merchant banks to make large fees out of the Australian population".

politics

The Senate has passed the mining tax repeal bill after the Abbott government reached a deal with the Palmer United Party to scrap the tax but keep the associated compensation.

The deal means millions of workers will not receive a promised boost to their superannuation, with the PUP agreeing to let the government delay the increase to improve the bottom line.

Compulsory super, currently set at 9.5 per cent of an employee's wages, had been set to increase to 12 per cent by July 2019.

PUP has made a deal with the government that will sacrifice that increase in order to keep spending associated with the mining tax.

Here's more

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trading halt

For the record, today's non-decision by the RBA marks the longest stretch of keeping rates on hold since 2005-06 when the central bank kept rates unchanged also for 12 consecutive meetings.

But it's still a bit to record inertia, which lasted 17 meetings from February 1995 through early July 2006, before the bank cut by 50 basis points to 7 per cent on July 31 of that year.

Of course, most economists expect the Reserve Bank to stay put for an "extended period", or well into next year, meaning we could set a new 'longest ever' spell. But not before 2015.

iron

Iron ore will drop to $US75 a metric tonne in the second half of next year as rising supplies from Australia and Brazil worsen a global glut and the slowdown in China’s property market curbs demand growth, said broker CLSA.

The commodity used to make steel will average $US80 a tonne in 2015, down from an earlier full-year estimate of $US85, and $US75 a tonne in 2016 and 2017, down from estimates of $US80 for both years, according to a report from analyst Ian Roper dated yesterday.

By quarter, prices were seen at $US90 in January-to-March next year, $US80 in the second quarter and $US75 for the final two three-month periods, according to the report.

Iron ore has lost 35 per cent this year as producers including Rio Tinto expanded low-cost supplies, pushing the market into a glut. New-home prices in China, which buys about 67 per cent of seaborne ore, fell in July in almost all cities that the government tracks, boosting concern that economic growth is faltering. While demand for iron ore was sluggish, supply is spectacular, Roper wrote in the report for the unit of Citic Securities Co, China’s largest brokerage by market value.

“The oversupply situation is only going to worsen over the next few years,” said Singapore-based Roper. The property-market slowdown in China “looks increasingly serious for steel demand next year,” he said.

Ore with 62 per cent content at the Chinese port of Qingdao dropped to $US87.62 a dry tonne on Aug. 29, the lowest level since October 2009, according to Metal Bulletin. The price, which was at $US87.79 a tonne yesterday, averaged about $US94 a tonne this quarter compared with $US121 in the first three months of 2014.

“For the first time in over a decade, the need to eliminate iron ore supply, rather than incentivise it, is determining prices,” said Roper. About 200 million tonnes of capacity may exit the market as prices drop toward $US80 a tonne in the first half of next year, he said.

china

Here's a timely yarn after the RBA today in its statement included explicit reference to weakness in China's property market:

China's financial system is "almost certain" to face a full blown banking crisis according to a senior international economist.

Gabriel Stein, of economic consulting firm Oxford Economics, told a Sydney audience on Tuesday that Chinese authorities were understating the extent of bad loans on their banks' books and faced tough choices in dealing with the potential bank failure. 

"We don't know when there will be a China banking crisis and how it will play out but it is almost certain there will be one," said Mr Stein, a professor at the University of London who served as chief economist at consulting firm Lombard Street from 1991 to 2012.

“We do think the financial risks are high. Bad loans are understated.

“If you compare to 20 years ago, credit growth had been the same and the Chinese authorities owned up to about 30 per cent of non-performing loans in the banking system. They currently claim it's one per cent”.

Mr Stein warned of a "a loss of confidence and a brief slump in activity".

"There is a possibility of contagion through countries with banking links to China such as Hong Kong, Taiwan and Korea."

Read more - if you dare.

Even the failure of a small bank could trigger a crisis of confidence in the Chinese financial system, says economist ...
Even the failure of a small bank could trigger a crisis of confidence in the Chinese financial system, says economist Gabriel Stein. Photo: Reuters
dollar

The Australian dollar is hovering around 93 US cents, rebounding a bit from the day's (and week's) low of 92.85 US cents it hit around 2pm.

The sudden sllde in the dollar earlier in the day was driven by the weaker yen against the greenback, affecting the Australian and Japanese cross rates, economists say.

“The Japanese demand for the Aussie has been dwindling as it is getting too expensive”, Westpac's Robert Rennie says.

Rennie says a series of business surveys indicating weak Japanese gross domestic product print triggered the fall of the Japanese currency against the US dollar, which in turn reduced the Japanese demand for the Aussie.

“As we wander through early September you start to get business surveys that give you a reasonable sense of GDP. Those are fairly closely watched,” Rennie says.

analysis

Here's how economists are reacting to the RBA's decision:

Su-Lin Ong, senior economist, RBC Capital Markets

No surprise, the neutral bias is intact. The key themes are the same. I would say the modest tweaks are slightly dovish. There are references to the weakening property market in China, spare capacity in the labour market, ongoing discussion about the currency being too high. There is nothing suggesting they will move on rates any time soon. I have GDP up 0.5 per cent in Q2... Q3 looking better than Q2. But still, there are a number of challenges with the rotation of growth occurring.

Michael Blythe, chief economist, CBA

The RBA is probably still digesting the mixed news we're getting, some of it like the labour market is disappointing. Others like the capex data have been positive. Until there is a clearer read, I don't think we're going to get much of a signal one way or the other for where rates are going. Certainly there is nothing in there that suggests rate cuts are a possibility, but clearly rate rises are still somewhere in the distance. We see a modest tightening cycle from February 2015.

Stephen Walters, chief economist, JPMorgan

It's not much changed from last time, there's a few bits and pieces where they've changed the wording, particularly around the capital spending side, but really the message is the same they've just said it in a different way.

On the exchange rate there's a comment about it being higher relative to fundamentals which is sort of the same thing they said before which was high relative to commodity prices, but it sounds more emphatic.

But the policy guidance we look at is identical and also the wording around a period of stability in interest rates is still there, so that's been used consistently all year ... it's a bit of an uneventful release by the look of it.

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rba

The RBA has cited spare capacity in the labour market and concerns about the Chinese property market as it kept interest rates on hold at 2.5 per cent.

The cash rate has been at that level since August last year.

Noting again that global growth is continuing at a moderate pace, it said: "China's growth remains generally in line with policymakers' objectives, with weakening property markets a challenge in the near term."

For Australia, the RBA noted "gradually improving business conditions and some recovery in household sentiment after a weaker period around mid year".

After reiterating that resource investment was declining sharply, it said "investment intentions in some other sectors continue to improve, though these areas of capital spending are expected to see only moderate growth in the near term".

"Public spending is scheduled to be subdued. Overall, the Bank still expects growth to be a little below trend over the year ahead," the RBA said.

It added: "The recorded rate of unemployment has increased recently, despite some improvement in most other indicators for the labour market this year.

"The Bank's assessment remains that the labour market has a degree of spare capacity and that it will probably be some time yet before unemployment declines consistently."

Read more.

banks

As the Reserve Bank left the cash rate at a record low of 2.5 per cent, National Australia Bank says its customers are rushing to lock in fixed mortgage rates below 5 per cent.

Three-year fixed loans are generally the most popular with borrowers, but NAB said there was a surge in applications for five-year loans last month after banks cut their rates below 5 per cent for this term.

Five-year loans accounted for almost a third of all fixed applications, head of products and markets Antony Cahill said. Two-year loans were also unusually popular, accounting for a quarter of all applications, while 20 per cent of applicants wanted one-year loans.

Aside from locking in fixed rates, the bank also says 85 per cent of its customers are paying off more than the minimum on their home loan.

“What we are now seeing is customers opting for our five-year term in greater numbers than we’ve seen before,” Cahill said said.  “This reflects that today’s customers are taking a more sophisticated approach to managing their debt.

jobs

Supermarket chain Coles plans to cut between 500 and 600 jobs from its head office in Melbourne as part of a renewed efficiency drive aimed at freeing up funds to reinvest in reducing food and liquor prices.

The job cuts are expected to be announced in Melbourne by new Coles managing director, John Durkan.

Coles was not immediately available to comment on the job losses, which represent almost 20 per cent of the 3000-strong workforce at Coles' Tooronga headquarters.

However, Mr Durkan told investors last month that, faced with continued cost pressures, Coles needed to simplify and reduce its cost of doing business.

"To enable further investment in value in fresh food, we will continue to drive productivity and efficiency through our business and we have significant opportunity to do so through simplifying our business," he said.

It is understood that most of the jobs cuts are in back office functions including payments, accounts and IT rather than in customer-facing services.

Coles is believed to be planning to outsource its IT department - sending some functions offshore - emulating suppliers and competitors such as Pacific Brands.

Sources said the job losses would deliver significant cost savings, some of which would be invested back into reducing grocery prices.

Coles has already cut costs in supply chain, logistics and stores, closing about 20 distribution centres over the last five years and optimising transport.

"The low hanging fruit has been picked - now they are looking at other areas," one source said.

Read more.

Coles is planning job cuts to free up funds for its food business.
Coles is planning job cuts to free up funds for its food business.  
quote

Here's the statement by the RBA explaining its decision:

At its meeting today, the Board decided to leave the cash rate unchanged at 2.5 per cent.

Growth in the global economy is continuing at a moderate pace. China's growth remains generally in line with policymakers' objectives, with weakening property markets a challenge in the near term. Commodity prices in historical terms remain high, but some of those important to Australia have declined this year.

Financial conditions overall remain very accommodative. Long-term interest rates and risk spreads remain very low. Volatility in many financial prices is currently unusually low. Markets appear to be attaching a very low probability to any rise in global interest rates or other adverse event over the period ahead.

In Australia, the most recent survey data indicate gradually improving business conditions and some recovery in household sentiment after a weaker period around mid year, suggesting moderate growth in the economy is occurring. Resources sector investment spending is starting to decline significantly. Investment intentions in some other sectors continue to improve, though these areas of capital spending are expected to see only moderate growth in the near term. Public spending is scheduled to be subdued. Overall, the Bank still expects growth to be a little below trend over the year ahead.

The recorded rate of unemployment has increased recently, despite some improvement in most other indicators for the labour market this year. The Bank's assessment remains that the labour market has a degree of spare capacity and that it will probably be some time yet before unemployment declines consistently. Growth in wages has declined noticeably and is expected to remain relatively modest over the period ahead, which should keep inflation consistent with the target even with lower levels of the exchange rate.

Monetary policy remains accommodative. Interest rates are very low and have continued to edge lower over recent months as competition to lend has increased. Investors continue to look for higher returns in response to low rates on safe instruments. Credit growth has picked up a little, including most recently to businesses. The increase in dwelling prices continues. The exchange rate, on the other hand, remains above most estimates of its fundamental value, particularly given the declines in key commodity prices. It is offering less assistance than would normally be expected in achieving balanced growth in the economy.

Looking ahead, continued accommodative monetary policy should provide support to demand and help growth to strengthen over time. Inflation is expected to be consistent with the 2–3 per cent target over the next two years.

In the Board's judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates.

Rates

The RBA has left the cash rate unchanged at 2.5 per cent, as widely expected. Next will be the careful parsing of the central bank's statement - stay tuned.

The Aussie dollar, which has eased below 93 US cents today, moved back above that mark on the news.

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