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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.
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.
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.
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.
The Australian dollar dived against its US counterpart before the RBA made its September rates announcement. Photo: Glenn Hunt
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.
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”.
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.
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".
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.
Super benefits a 'fallacy': Palmer
The Palmer United Party has agreed to freeze superannuation contributions as part of the mining tax repeal but super only benefits merchant banks and unions says Clive Palmer.PT1M28S http://www.canberratimes.com.au/action/externalEmbeddedPlayer?id=d-3eqwy 620 349 September 2, 2014
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 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.
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."
Even the failure of a small bank could trigger a crisis of confidence in the Chinese financial system, says economist Gabriel Stein. Photo: Reuters
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.
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.
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."
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.
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.
Coles is planning job cuts to free up funds for its food business.
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.
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.
Rates steady for 13th month
But what will happen next? The Age's economics editor Peter Martin explains what the experts are predicting, and what the markets are betting on.PT1M50S http://www.canberratimes.com.au/action/externalEmbeddedPlayer?id=d-3eqrq 620 349 September 2, 2014
Australia's housing boom leaves other markets far behind, the AFR's Christopher Joye writes:
With Australian house prices reaccelerating over the last three months after spectacular growth on the back of a speculative investment boom, many people are asking how our frothy market compares to the rest of the world.
So the AFR has crunched the numbers, carefully evaluating the performance of the best house price indices across the Western world.
Specifically, we have tracked changes in house prices in Australia, the United States, New Zealand, Britain and Canada since the end of 1995.
We select this period for two reasons. First, the mid-1990s coincided with the big surge in household leverage across Western economies, which was the principal cause of unusually strong house price growth in the ensuing years.
Second, the jump in leverage was itself a function of Western central banks adopting explicit or implicit inflation targets in the mid-1990s, which many believe helped lower inflation and significantly reduce interest rates.
Our findings are striking. Since the end of 1995, Australian home values have experienced total capital gains of 283 per cent, massively outstripping any other peer country. The closest competitors are British and New Zealand house prices, which have risen by 194 per cent and 181 per cent, respectively, over the same period. Compared to the US, Australian home values have climbed 2.7 times further.
The same pattern holds if we start the analysis at the end of 1999, which allows us to include Canadian housing data. Canada’s resources-backed economy, which only experienced a dip in house prices during the GFC and is dominated by five strong banks, is often regarded as being quite similar to Australia’s.
Yet home values in Australia have risen 34 per cent further than their Canadian counterparts since the end of 1999.
The Australian dollar has fallen below 93 US cents, as the greenback beefs up. It's currently fetching 92.92 US cents, its lowest in more than a week.
The AUDUSD cross rate is closely following JPYUSD, as the yen drops to a 2014 low against the US dollar.
Former partners from Enron's auditor, Arthur Anderson, want to resurrect the name.
More than a decade after Enron Corp auditor Arthur Andersen cratered in the wake of a federal indictment, some of its former partners are resurrecting the name.
WTAS, a San Francisco-based tax consultancy founded out of Andersen’s ashes, will go by AndersenTax as of today. The new identity is designed to capitalise on the defunct firm’s reputation for quality work - before it was sullied in 2002 by charges of document shredding and obstructing a Justice Department investigation into book-cooking at Enron.
“Our issues with Enron were the mistake of a few,” said Mark Vorsatz, WTAS’s chief executive officer, who started the company 12 years ago with 22 other former Andersen partners. “Irrespective of Enron, we thought we were the benchmark in the industry.”
While the newly christened AndersenTax is counting on the name change to set the firm apart as it expands in the US, and overseas, the moniker may dredge up memories of the accounting scandals that drove Enron, WorldCom and other companies into bankruptcy. The corporate failures cost shareholders billions of dollars and spurred Congress to push through tougher oversight of auditors in the 2002 Sarbanes-Oxley Act.
Lynn Turner, a former chief accountant at the US Securities and Exchange Commission who helped write the law, said it’s “incredible” that a company would seek to revive the Andersen name.
“Unbelievable,” he said. “It’s like some people just live in their own world.”
Here’s an interesting excerpt from a mystery GMO publication, reportedly authored by Jeremy Grantham on the major issue with asset allocation right now: there’s no place to hide.
We have been writing quite a bit about why asset allocation today is in one of the toughest investing environments we’ve ever encountered. And it’s not just because we think equity markets are overvalued. No, we’ve seen that plenty of times before over the past decade or so. Remember the technology bubble of the late ’90s?
That was challenging, sure, but what got lost in the shuffle was that while US large-cap stocks were outrageously overpriced, it turned out that real estate investment trusts, emerging equities, and international small caps were deliciously priced. And it was perfectly clear to us what we had to do: avoid technology and own the cheap stuff, even though it might have looked a bit unconventional.
Then we entered the 2007–2008 credit bubble, and while, yes, virtually all equity markets were overpriced, it was perfectly clear to us what we had to do: hide and wait. And that was not a bad proposition because there were plenty of safe places to hide—Treasury inflation-protected securities, US treasuries, and a strategy we had developed called Alpha Only—and earn a decent, if not spectacular, return.
Today’s environment, however, is quite distinct, as seen in the chart below, where we lay out the GMO seven-year forecasts in a volatility (an imperfect shorthand for risk) versus return format for the traditional asset classes, or betas.
This beta desert is so challenging because not only are there no asset classes that we believe are priced to deliver 5% real return (the red line), there is also no safe place to hide and wait (the green circle).
This is the toughest environments for asset allocation ever, GMO's Jeremy Grantham reportedly said.
Analysts at Morgan Stanley have released a bullish note on Origin Energy, upgrading the stock to “overweight” and saying earnings and dividends per share will double between now and 2017, driven by the company’s liquefied natural gas business, APLNG.
“A renewed focus on upstream gas and LNG drive a turnaround from poorly performing electricity assets and create growth options unavailable in electricity,” write the analysts in their note.
The broker increased the 12-month share price to $18.50 from $15.50. The shares are up 2.7 per cent today to $16.06.
The “stable and predictable” LNG income will provide earnings diversity, offsetting the volatile electricity related income and reducing risks for shareholders.
“All of Origin’s growth options are in gas, and none in electricity, in our view,” write the analysts.
“Following lower 2014 profits, we expect significant recovery in 2015 in parts of the core business, but electricity industry dynamics remain poor and lack of management guidance does not help conviction levels.
“Beginning FY2016, APLNG drives a step-wise change.”
Australia's current account deficit widened sharply in the three months to June as export growth stalled and imports rebounded, a swing that was set to be the single biggest drag on economic growth in the quarter.
This morning's data from the Australian Bureau of Statistics also showed government spending stayed subdued in the second quarter amid much talk of fiscal belt-tightening, pointing to a sub-par performance for the economy as a whole.
But there was better news on the current quarter, with approvals to build new homes surprisingly strong in July as record-low mortgage rates and rising house prices pumped up supply.
The latest rush of data comes just before the Reserve Bank of Australia (RBA) releases the outcome of its September policy meeting at 2:30 AEST.
ABS data has been showing a revival in home building as low rates and double-digit gains in house prices drive new supply after several fallow years for the sector.
That expansion looked to have a lot further to run, with approvals to build new homes climbing 2.5 per cent in July, handily topping market forecasts of a 1.5 per cent increase.
That left approvals 9.4 per cent higher than in July last year, while growth in houses was even stronger at 14 per cent.
Such activity will be very much needed as mining spending is set to fall steeply over the next few years as a decade-long investment boom comes to maturity.
How this handover from mining proceeds is the single biggest uncertainty for policy makers, and a major reason rates are likely to stay low for many months to come.
"The fall-off in investment spending by resources companies has a long way to go yet and will probably accelerate in the coming year," RBA Governor Glenn Stevens said last month.
"This impending further fall is captivating most of the commentators."
A merger between Bank of Queensland and Suncorp would make sense, the AFR's Chanticleer columnist Mike Smith says:
The loss of Stuart Grimshaw from the Australian banking industry is the direct result of a conservatism in the boardroom that is stifling deal-making and growth opportunities.
The former Bank of Queensland chief has never been a fan of the big four’s dominance of the Australian banking industry, so it should not be surprising he harboured ambitions to lead a fifth force in the industry through a tie-up with Suncorp Group.
The AFR revealed this morning that Grimshaw met Suncorp boss Patrick Snowball earlier this year for preliminary talks around creating a merger of equals. The chairmen of both companies also met.
While a tie-up has long made strategic sense, Snowball was not keen.
It was Grimshaw’s frustration with his own board that reportedly led to Grimshaw accepting a job overseas where he saw more opportunity.
There has not been a major banking merger in Australia since 2008, when Westpac acquired St George for $19 billion and CBA bid $2 billion for BankWest.
The regional banks, which are dwarfed by the majors, offer the only remaining consolidation opportunity, and it makes a lot of strategic sense. Both BoQ’s and Suncorp’s banking businesses are Queensland-focused, with hundreds of overlapping branches and automatic teller machines.
Shares in Origin Energy and oil and gas explorer AWE are up strongly following the announcement of a "significant" gas discovery in a West Australian gas field.
The Senecio-3 field in the onshore Perth Basin is 50/50 joint venture between the two companies, with AWE the operator.
Origin Energy shares are 2.6 per cent higher at $16.05 and AWE's are 3.2 per cent higher at $1.78.
So the reason for the sudden drop in the Australian dollar in the minutes ahead of the economic data release at 11.30am wasn't insiders trading on leaked information but rather currency traders just reacting to a sharp rise in the US dollar against the yen, which affected other cross rates.
The greenback hit a seven-month high against the Japanese currency this morning, rising as high as 104.71, which has sparked a bit of a rally on the Tokyo sharemarket, where the Nikkei is up more than 1 per cent.
‘‘The risks favour additional US dollar appreciation,’’ says Todd Elmer, a strategist in Singapore at Citigroup, the world’s largest currency trader. ‘‘There’s going to be greater sensitivity to the pickup in data flow given that there’s the perception that the Fed is changing its stance.’’
AUDUSD (white line) following JPYUSD (yellow line) lead.
Most investors are gravitating towards the fat dividend cheques being issued by listed Australian companies, but the chief investment officer at Dalton Nicol Reid, Jamie Nicol, says he is swimming against the tide and going for growth.
“We are actively seeking quality companies where boards are prepared to reinvest in the business to generate future returns rather than taking the short term ‘sugar hit’ of returning capital – such as Aurizon and Origin Energy,” the Brisbane-based Nicol said this morning in a statement.
“With top line revenue growth remaining scarce, companies with strong business models that demonstrated sustainable growth are being justifiably rewarded - such as Veda Advantage, Iress and Domino’s Pizza."
Nicol also said he was optimistic about the continued expansion of domestic housing activity.
“We have a solid exposure to this area and expect underlying demographics and historical underbuilding to drive returns for quality companies exposed to this sector,” he said, citing the likes of Dulux, Stockland and GWA as potential beneficiaries of this cyclical upswing.
Nicol said that “the focus has turned to non-residential construction activity to fill the void” left by the passing of the mining investment boom.
“But despite much talk at both federal and state government levels, the long lead times and political nature of these projects means real activity is still some way off,” he said.
“We remain optimistic that the activity levels will eventually pick up in the area and see opportunities for companies such as Lend Lease to participate.”
Australia's current account deficit widened out to $13.7 billion in the June quarter, from $7.8 billion at the end of March, as exports of goods and services fell 7 per cent and imports rose 1 per cent.
The headline figures, which were slightly better than expectations, confirm the negative contribution of trade to June-quarter gross domestic product, after a surprisingly robust March quarter.
The ABS said net exports were "expected to detract 0.9 percentage points from growth in the June quarter 2014 volume measure of GDP".
This is 0.1 or 0.2 percentage points below expectations. The Australian dollar slumped just ahead of the official release, losing around 0.2 per cent to US93.10 cents at one stage.
At the same time, the net foreign debt liability rose by $17.2 billion to a net liability position of $865.5 billion.
Australia's net foreign equity position increased $700 million to a net asset position of $1.2 billion.
Exports fell 7 per cent in the June quarter. Photo: Bloomberg
It was only a matter of time before the big banks would be forced to address the structural flaw that has driven the financial planning scandal: vertical integration, writes BusinessDay columnist Adele Ferguson:
In their latest submissions to the Murray inquiry into the financial services system the banks and AMP came out in full force to defend a model that is riddled with conflicts.
It is a high-stakes game as the banks and AMP make billions of dollars a year from the vertically integrated model. With superannuation expected to outstrip the amount of money in the banking system by 2030, the race is on to stop the Murray inquiry considering anything radical such as ring-fencing their advisers.
On page five of an 82-page submission, AMP argued "There is no evidence that 'independent' advice is of any greater quality than advice from other business models; indeed advice from 'independents' has proved to be the most damaging to consumers and was the driver of the original Ripoll Inquiry."
AMP was no doubt talking about Storm Financial, Astarra and Westpoint, which collapsed, leaving a trail of financial ruin for the retail investors who invested in the various products.
What it didn't say was in the case of Storm, it was only able to wreak such havoc because it was backed by some of the country's biggest financial institutions. They funded Storm and supported it through the many branch networks. "To claim that an independent licensee can somehow cut a swathe of financial ruin through Australian society without institutional help is ridiculous," argues one adviser.
Gina Rinehart has hinted that her Roy Hill iron ore project could begin exporting earlier than expected.
In a statement published on the Roy Hill website over the past 24 hours, Mrs Rinehart suggested the September 2015 target for first exports could yet be beaten.
"Roy Hill's staff morale is high, and the hardworking team hope to be able to bring the first shipment due September 2015, ahead of time", Mrs Rinehart said.
The optimistic comments come despite the main engineering and construction contractor, Samsung C&T, winning a 46-day extension to its contract earlier this year.
That change saw the "practical completion" date for the project pushed back from November 15, 2014 to December 30, 2015.
The Roy Hill team has always denied that the contract extension would delay the first exports from the project, and insisted the September target would be met.
Roy Hill is expected to export a maximum of 55 million tonnes of iron ore per year at its peak, but will initially export less.
Apple plans to turn its next iPhone into a mobile wallet through a partnership with major payment networks, banks and retailers, according a person familiar with the situation.
The agreement includes Visa, MasterCard and American Express and will be unveiled on Sept. 9 along with the next iPhone, said the person, who asked not to be identified because the talks are private.
The new iPhone will make mobile payment easier by including a near-field communication chip for the first time, the person said. That advancement along with Touch ID, a fingerprint recognition reader that debuted on the most recent iPhone, will allow consumers to securely pay for items in a store with the touch of a finger.
While companies such as Google have invested in creating ways for phones to make payments in a physical store, US retailers have been slow to adopt the technology, thus limiting the use by shoppers, according to Ben Bajarin, an analyst for Creative Strategies in San Jose, California. That could change with Apple entering the market because iPhones have the largest market share in the US, he said.
“Love it or hate, Apple drives a lot of standards in the industry,” Bajarin said. “When they do something, the industry seems to follow.”
For Apple, the push into creating a mobile wallet is to keep users within its ecosystem, thus creating more loyalty to its brand and demand for its products, Bajarin said.
Apple’s move is also about generating more revenue from the roughly 800 million global iTunes accounts, which include payment information, that have already been created, said Richard Crone, chief executive officer of Crone Consulting, which advises retailers and banks on mobile-payment solutions.
“There’s huge potential with Apple having a market-defining opportunity,” Crone said. However, “there’s lots of moving parts in payment that make the deals they did with artists and Hollywood for iTunes look like child’s play.”
Preparing for launch: Apple CEO Tim Cook.
The economic data is in and it's a bit of a mixed bag:
Building approvals rose 2.5 per cent in July, more than the predicted 1.9 per cent gain and up from a 3.8 per cent drop in June. Over the year, approvals are up 9.4 per cent.
Meanwhile, the current account hit a deficit of $13.7 billion in the second quarter, after a $7.8 billion shortfall in Q1, but slightly below expectations of a $14 billion deficit.
Still, net exports will subtract 0.9 per cent from second-quarter GDP growth, slightly more than the expected 0.7 per cent.
Does anyone know something we don't yet?
A couple of minutes ahead of a data dump by the ABS, including the second-quarter current account balance and monthly building approvals the dollar has taken a sudden dive.
The dollar has taken a tumble ahead of ABS current account and net exports data due out 11:30am.
Australia's largest asset manager, Colonial First State, says global markets could be set for a period of instability as a major policy divide emerges between the world's major central banks.
Stephen Halmarick, the head of economic and market research at Colonial First State, believes the US Federal Reserve will raise interest rates for the first time in nearly seven years next June, at around the he expects the RBA to tighten. In contrast, he says, the European Central Bank and the Bank of Japan have little choice but to opt for even more monetary stimulus.
The divergence in monetary policy between the world's major central banks will have major implications for global markets.
"Global volatility risks will rise substantially", he predicts. "The US dollar will strengthen quite significantly, particularly against the euro and the yen.
"And the Australian dollar should also come down against the US dollar – it's more likely to be in the US85 cents to US90 cents range than between US90 cents to US95 cents range."
Halmarick believes there's some potential for the US share market, which is already trading at a record high, to move higher in coming months.
"Usually the US equity market peaks about four months before the first interest rate hike. Now the first rate hike is likely to be mid-2015, which suggests that the market will peak in early 2015.
But, he says, markets could become more vulnerable as the US rate hike looms closer, and the US central bank makes it clear that it intends to start tightening monetary policy.
"Global volatility risks will rise substantially": Stephen Halmarick, the head of economic and market research at Colonial First State. Photo: Nic Walker
The Reserve Bank of Australia board holds its monthly policy meeting today, and is universally expected to leave the cash rate where it has been since August last year, at 2.5 per cent.
With inflation around the mid-range of the RBA's 2 per cent to 3 per cent target band, bank lending healthy but not overextended and economic growth just below what is needed to generate employment, the RBA statement accompanying the rate decision is likely to focus on global conditions, the slow rate of non-mining investment and perhaps the strength of the Australian dollar.
It may also note the surprisingly high contribution of business inventories to June-quarter gross domestic product.
The 0.8 per cent quarter-on-quarter rise in inventories beat consensus forecasts of 0.3 per cent. Analysts say the stock build-up could be due to soft consumer and producer demand, or expectations of a pick-up. In any case, it will add about 1 percentage point to GDP figures, released tomorrow, and help offset a drop in contribution from other elements.
Around the globe, continued weakness in Europe and a surprising drop in Chinese manufacturing are also expected to weigh on the board's deliberations.
The former could prove a double-edged sword: the easing of credit conditions aimed at lifting the eurozone out if its current torpor has helped Australian banks refinance their own lending at ever-lower rates.
RBA governor Glenn Stevens. Photo: Robert Shakespeare / Fairfax Media via Getty Images
The new free credit rating website we mentioned earlier (see post at 9.34am) has crashed following a spike in traffic from "hundreds of thousands" of borrowers hungry for transparent credit rating data.
The credit score website GetCreditScore.com.au has been live since yesterday evening but has been unavailable for access since earlier this morning.
The new website backed by peer-to-peer-lender SocietyOne uses data from credit bureaus such as Veda Group to provide a credit score on a scale of 0 and 1200 without having to pay a fee.
"The site is currently experiencing overwhelming popularity - into the hundreds of thousands of visitors in fact - and the GetCreditScore team is working hard to rectify it," GetCreditScore's PR manager said in a statement.
False start: The website has been unable to cope with the overwhelming demand on day one.
Emerging markets are making a comeback following a bumpy ride in 2013 and at the beginning of this year, as investors search for new shoots of growth.
Corporate earnings in the developed world have been fairly solid, but the story has been one of cost-cutting rather than revenue growth.
Developed markets have performed reasonably well in 2014 – not as strongly as last year but good enough to provide hope that companies will eventually begin to increase revenue streams.
Last week on Wall Street, the S&P 500 closed above 2000 for the first time, and it has added 8.4 per cent for the year. Locally, the S&P/ASX 200 has added 5.1 per cent in the year to date, but corporate earnings season, which was acceptable, did not get rewarded by investors. The ASX200 slipped 0.1 per cent during August.
Investors in the developed markets will need a bit more convincing to take shares through their current valuations, which are looking a little stretched.
Instead, investors are once again turning their attention to emerging markets, as volatility lowers following last year's sell-off.
"Emerging markets had a rough time last year on the back of improving developed markets, decreased risked within Europe and the US recovery," Wingate Asset Management chief investment officer Chad Padowitz said.
"I think money flowed to developed markets as the growth rates in emerging markets were slowing. Potentially that gap opened up a bit wide. You had valuations in core-Europe, UK, US significantly higher than emerging markets and I think to some extent some of that is moving back again," Mr Padowitz said.
Emerging markets are back in vogue as volatility lowers following last year's sell-off. Photo: Bloomberg
First-home buying has plunged to a four-year low, according to mortgage broker AFG.
Only 9.5 per cent of all new mortgages processed last month were for first home buyers, the lowest level since June 2010, AFG says.
Of the total $3.9 billion of home loans processed by the company, $324 million were for first home buyers. This contrasts sharply with the $1.5 billion arranged for investors.
First home buying patterns varied across the country with NSW the worst affected (only 3.5 per cent of all new mortgages were for first home buyers) and WA the least (21.0 per cent), according to the broker.
The long-term average for first home buyer loans was around 12 to 15 per cent of the total, AFG’s Mark Hewitt, general manager sales and Operations says.
‘‘We saw overnight slumps from those levels when NSW and QLD withdrew first home buyer grants two years ago,’’ he says. ‘‘Since then, property prices in Sydney in particular, have been steadily increasing. This represents a double-whammy for first home buyers.
‘‘It also has important socio-economic implications when, even with interest rates at historic lows, people can’t afford to get on the property ladder.’’
The proportion of borrowers choosing to lock in fixed rates increased slightly from 24.0 per cent in July to 24.9 per cent in August, the broker said.
Loan to value ratios (LVRs), loans expressed as a proportion of property values, continued to nudge upwards in August to 69.5 per cent, from 68.2 per cent in July and 66.6 per cent in June.
With no support from the banks and the big miners easing on a falling iron ore price, local shares have opened marginally lower, with the ASX 200 and All Ords down 4 points at 5625.9 and 5625.7, respectively.
A lack of a lead from Wall St left the local market wallowing. Among the biggest individual drags are Amcor, down 2.1 per cent, and AGL, trading 2.8 per cent, as both trade ex-dividend.
The big banks are broadly flat, while BHP is down 0.2 per cent, Rio has dropped 0.5 per cent and Fortescue 0.7 per cent.
Counterbalancing those falls is Telstra, up 0.4 per cent, and CSL, which has jumped 1 per cent.
The early bolter is Mesoblast, up 3 per cent.
While a number of names are trading at year-long highs, there are none at lows over the equivalent timeframe.
There were 14 stocks hitting 52-week highs yesterday, while none were at lows over the same period, supporting a buoyant mood for the sharemarket and reinforcing the challenges for value investors in the current environment.
There's a bit of a real estate and consumption feel to the list, with BWP Trust and Abacus Property Group representing the listed property trusts - which as a group have had a blockbuster year so far.
GUD Holdings - which manufactures and sells a diverse range of consumer and industrial products, from lawn mowers to water pressure pumps - is up 55 per cent in little over three months. Harvey Norman is on a charge after a solid result last week, while 4WD accessories maker ARB Corp is a perennial outperformer.
Cockatoo Coal sank to a $182 million loss in the 2014 financial year, as the process of recapitalisation and growth planning proved costly.
Despite revenues rising 23 per cent to $81.5 million the company was weighed down by $152 million worth of impairments on exploration and evaluation costs in the Surat Basin.
The poor results have raised doubts over Cockatoo's ability to survive, but the miner is confident its growth plans will prove viable despite the depressed prices for coking coal.
Cockatoo wants to grow coking coal sales from 1 million tonnes to 3.5 million tonnes, assuming it can obtain the necessary funding.
The company has other development plans for its acreage, which ranks among some of the biggest in Queensland. In a busy year of recapitalisation and reorganisation, Cockatoo acquired Blackwood Corporation earlier this year.
Shares closed yesterday at 2.4 cents and are down 40 per cent since the beginning of the year.
Qantas is poised to return to a profit before rival Virgin, but the result will be driven more by cost cutting than an improvement in market conditions, analysts say.
Qantas has forecast it will be profitable in the first half of the financial year, while Virgin has declined to provide any guidance to the market.
Analysts now expect Qantas will report a slim full-year underlying pre-tax profit of around $66 million, but Virgin will report a $7 million pre-tax loss before returning to profit the following financial year.
Both airlines will benefit from the repeal of the carbon tax, but Qantas has also cut its annual depreciation charge by $200 million as a result of write-downs to its international fleet, and expects $600 million in annual cost savings from its transformation program this year.
"While we view the outlook as encouraging, we also view these savings as not very high quality [because] the poor yield environment [is set] to continue in the domestic market, as it is still loaded with too much capacity," Citi analyst Anthony Moulder said.
He said the demand environment remained weak and there was unlikely to be any significant improvement in yields, or returns from fares, until late in the second half of the financial year.
Borrowers will be able to access their credit scores free from today on a new website backed by peer-to-peer lender SocietyOne, putting banks on the backfoot by encouraging high-credit-quality customers to negotiate lower interest rates on their loans.
The comprehensive credit reporting regime has increased the quality of information held by credit bureaus such as Veda Group, which charges for credit scores that are typically sought by borrowers who have been rejected for credit. The launch of GetCreditScore.com.au will now allow borrowers to access their credit score at a point in time (after providing identity information) without having to pay a fee.
"There is a carrot here, in that becoming more aware about your credit score gives you more information, which is power," said Matt Symons, chief executive of SocietyOne. The peer-to-peer [P2P] lender has been looking to attract high-quality borrowers onto its internet-based matching platform, which reduces the risk for investors in the loans.
"The score arms a borrower to go and discover the price for a debt consolidation loan from SocietyOne or others using a risk-based pricing approach," he said. "They could also go to their bank and say 'Why am I paying this egregious interest rate when other lenders are offering me a better price?' "
With risk-based pricing of credit lying at the heart of the P2P lending business model, banks are fretting about the potential for P2P to cherry pick the highest quality risks out of their lending books. Increased transparency about credit scores is also an uncomfortable development for banks, which have not embraced comprehensive credit reporting given the threat of disintermediation.
Banks have been refusing to provide detailed customer data into the comprehensive reporting regime (the legislation does not force them to do so), undermining its effectiveness.
SocietyOne chief executive Mike Symons is taking on the banks. Photo: MIchel O'Sullivan
Spain has taken the opportunity of record low yields to launch its first ever 50-year bond, tapping into strong investor appetite for longer-maturity debt.
The Treasury sold 1 billion euros of the 4 per cent securities due in October 2064 in a private placement, capitalising on a bond-market rally this year that sent yields on its 10-year debt to a record low of 2.083 per cent late last month. Just two years ago, at the height of the eurozone debt crisis, the same bonds were peaking at 7.5 per cent.
The yield on the 50-year securities is just a bit more than the 3.3 per cent Australia has to pay for 10-year bonds - despite having a AAA rating, while Spain’s is just BBB, or two notches above junk.
But there's likely to have been decent demand for the issue, specifically from yield-hungry institutional investors who are obliged to shun currency risk.
The 4 per cent coupon on the 50-year debt “is exactly what life-insurance companies in Germany have to beat in terms of nominal yields for some legacy life insurance contracts, so both the maturity and the coupon appear tailor-made for them,” Commerzbank interest rate strategist David Schnautz says. “Similar restrictions are in place for other asset-liability-driven investors too.”
Meanwhile, the bond market rally has led to investors supplying money to France for two years for free, and are paying Germany for the privilege of lending to it for a couple of years.
Yields gone crazy: Spain's 10-year bond (white line) is yielding much less than Australian securities of the same length (purple line), and also less than US 10-year Treasuries (green light). Meanwhile, 10-year Bunds are heading towards 0 per cent yield.
European stocks advanced in the final minutes of trading, after remaining little changed for much of the day, as European Union governments weighed further sanctions on Russia and as investors awaited this week’s European Central Bank meeting.
The Stoxx Europe 600 Index added 0.3 per cent to 342.9 at the close. The gauge rose 1.8 per cent in August as ECB President Mario Draghi signalled policy makers are considering bond purchases to combat persistent low inflation.
“Markets are choosing to wait and see what happens at this week’s ECB meeting,” Jacques Porta at Ofi Gestion Privee in Paris said. “Investors are expecting a strong move from the ECB because Draghi said he will do something to help growth. The continued conflict in Ukraine, with the EU considering more sanctions, does not help markets.”
US markets were closed today for Labor Day holiday.
National benchmark indexes rose in 10 of the 18 western European markets. The UK’s FTSE 100 and Germany’s DAX gained less than 0.1 per cent, while France’s CAC 40 slipped less than 0.1 percent.
French Prime Minister Manuel Valls yesterday urged the ECB to take more action to weaken the euro. Banks including Nomura International and UniCredit say the odds of the central bank introducing bond-buying have increased since Draghi’s Aug. 22 speech. The ECB will keep its interest rates unchanged at the next meeting on Sept. 4, according to the median of economist estimates in a Bloomberg News survey.
EU leaders gave the European Commission a week to deliver proposals for sanctions that may target Russia’s energy and finance industries. Pro-Russian separatists attacked two Ukrainian coast-guard vessels for the first time, Ukraine’s military said. The US and EU have already imposed measures to curb Russia’s access to bank financing and advanced technology.
Local shares appear set for a flat open with Wall St closed overnight and Euro shares lower, as the iron ore price heads towards five-year lows and ahead of the RBA’s cash rate decision.
Here’s what you need2know:
• SPI futures down 5 pts at 5604
• AUD at 93.30 US cents, 97.33 Japanese yen, 71.07 Euro cents and 56.19 British pence.
• Wall St closed for the Labor Day holiday
• In Europe, Euro Stoxx 50 +0.1%, FTSE +0.1%, CAC -0.03%, DAX +0.1%
• Iron ore slips 0.9% to $US87.10 per metric tonne
• Spot gold flat at $US1287.44 an ounce
• Brent oil down 0.4% to $US102.79 per barrel
What’s on today
• Australia: RBA cash rate decision and statement at 2:30 AEST; current account balance, net exports at 11:30; building approvals.
• US: ISM manufacturing index, construction spending.
Stocks to watch
• Trading ex-dividend today: AGL, Amcor, Boral, Cochlear, PanAust, Treasury Wine
• Alumina: aluminium prices seen by Macquarie as “far ahead of fundamentals”/
• Dept of Environment says BHP’s Olympic Dam trial won’t require approvals
• CBA plans $500m float of NZ real estate assets: AFR
• Flight Centre names Gary Smith as chairman.
• Macquarie leads for $1.5b ING loan book: AFR
• Oil Search maintains 2014 output forecast of 18-20 mmboe
• OzForex rated a new buy at Deutsche Bank; price target $2.95.
• Inpex to sell a 25% stake in offshore Malaysian oil block to Santos
• Scentre in talks to sell 50% of its NZ portfolio: The Australian
• Tap Oil says received writ from Apache Oil for claim of $US4.2m.
• Deutsche Bank has kept its “buy” rating on UGL, with a 12-month target price of $8.21 a share given its current cheap valuation, low gearing, pending capital return and potential for large contracts wins.
• Morningstar has a “reduce” recommendation on Cabcharge and a $3.90 fair value share price expectation.