Business

Markets Live: Dollar hit by data

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

Gains in the big four banks helped propel the market higher despite some disappointing local housing sector data and a slump in the iron ore price. A rally in Japanese equities and some stronger than expected economic data boosted investor confidence.

The benchmark S&P/ASX 200 Index and the broader All Ordinaries Index added each 0.5 per cent, on Monday to 5518.5 and 5499.2 respectively, with economists and investors tipping the Reserve Bank of Australia will hold rates at the current record low of 2.5 per cent when it meets on Tuesday.

Optimism around Asia helped support the ASX in the afternoon after China's official manufacturing purchasing managers index released on Sunday rose to 50.8 for May from 50.4 in April, in line with forecasts.

Japan's Nikkei rallied more than 2 per cent to an eight-week high. Japanese stocks got a boost after official data showed March quarter capital spending increased 7.4 per cent, beating predictions for a 5.8 per cent rise.

Global investors expect the European Central Bank to announce more stimulus when it meets on Thursday, which could improve global liquidity.

On the local bourse, some mining stocks fell after the spot price for iron ore, landed in China, lost 4.1 per cent over the weekend to a 20-month low of $US91.80 a tonne.

Resources giant BHP Billiton dropped 1.1 per cent to $36.59, while main rival Rio Tinto shed 0.1 per cent to a near nine-month low of $59.23. However, Fortescue Metals Group added 1.8 per cent to $4.49.

Gains in the big four banks, despite building approvals unexpectedly falling by the most in 10 months, helped buoy the index. Australian Bureau of Statistics data showed the number of approvals for new dwellings dropped 5.6 per cent in April when economists had forecast a 2 per cent rise.

Read more.

US news

Private equity group KKR has decided to terminate a hedge fund that invested in stocks which the firm launched in 2011 after poaching a team of proprietary traders from Goldman Sachs.

The move shows some of the challenges that alternative asset managers still face in capitalising on the retrenchment of banks from some investment activities that regulators and lawmakers cracked down on in the aftermath of the 2008 financial crisis.

In 2010, KKR co-founders Henry Kravis and George Roberts had described the hiring of nine members of Goldman Sachs' proprietary trading group, led by Bob Howard, as an ideal fit with their objective of strengthening KKR's product offering.

The co-ordinated exodus of an entire team from Goldman Sachs remains to this day one of the most striking examples of the impact of the "Volcker rule," which limits the extent to which banks can bet on some investments with their own capital.

Attributing the latest move to a lack of scale and a focus on other hedge fund products, a KKR spokeswoman said the New York-based firm had decided to close its KKR Equity Strategies fund and return its capital to investors.

As a result, the former Goldman Sachs traders will be part of about a dozen people to leave KKR, a person familiar with the matter told Reuters. Howard will now serve as senior adviser to KKR, the person added.

japan

Japan’s Nikkei rallied more than 2 per cent to an eight-week high.

Japanese stocks got a boost after official data showed March quarter capital spending increased 7.4 per cent, beating predictions for a 5.8 per cent rise.

On a six to 12 month view UBS is quite bullish on the Nikkei because, notwithstanding the temporary effects of an increase in the consumption tax, Prime Minister Abe’s “second arrow” of reforms seems to be working and we also expect the Bank of Japan to institute some additional stimulus later this year,” UBS Global Asset Management head of strategy Tracey McNaughton said.

On a longer term view UBS is bearish on the Nikkei.

“Abe’s “third arrow” of reforms will be difficult to implement while cultural factors make it unlikely to country will increase immigration to help combat the demographic challenges of its ageing population,” McNaughton said.

analysis

And here they are, the beauties and the beasts.

Karoon Gas is the clear standout, returning from a couple of weeks of no trading to pop on news Origin would pay the energy junior at least $600 million for its share in two exploration permits off the coast of Western Australian in the Browse Basin. (Origin was among the worst.)

UGL jumped on reports it was about to sell off its property services business to private equity for $1.2 billion.

Best and worst performing stocks in the ASX 200 today.
Best and worst performing stocks in the ASX 200 today. 
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market close

After a soft start, shares recorded some solid gains for the day as mining pared back some of its early losses and most other sectors rose.

The ASX 200 added 26 points, or 0.5 per cent, to 5518.5, while the All Ords gained 25 points to 5499.2.

The best performing corners of the market were the defensive sectors of healthcare, telcos, consumer staples and listed property. Banks were the prime drivers of the gains - CBA was 0.8 per cent up, NAB 1.2 per cent, ANZ 0.7 per cent, and Westpac $34.60.

Telstra gained 0.9 per cent to 5.39.

BHP fell 1.1 per cent, while Rio only slipped 0.1 per cent. Origin Energy dropped 3.6 per cent on news it would buy Karoon Gas's stakes in two Browse basin exploration permits, which put a rocket under the latter's share price.

world news

If the insatiable demand for bonds has upended the models you use to value them, you’re not alone, Bloomberg writes:

Just last month, researchers at the Federal Reserve Bank of New York retooled a gauge of relative yields on Treasuries, casting aside three decades of data that incorporated estimates for market rates from professional forecasters.

Priya Misra, the head of US rates strategy at Bank of America, says a risk metric she’s relied on hasn’t worked since March.

After unprecedented stimulus by the Fed and other central banks made many traditional models useless, investors and analysts alike are having to reshape their understanding of cheap and expensive as the global market for bonds balloons to $US100 trillion.

With the world’s biggest economies struggling to grow and inflation nowhere in sight, catchphrases such as “new neutral” and “no normal” are gaining currency to describe a reality where bonds are rallying the most in a decade.

“The world’s gotten more complicated and it’s a little different,” says James Evans, a New York-based money manager at Brown Brothers Harriman & Co. “As far as predicting direction up and down, I don’t think they have much value,” referring to bond-market models used by forecasters.

With the Fed paring its $US85 billion-a-month bond buying program this year and economists calling for the five-year-long US expansion to finally take off, Wall Street prognosticators said at the start of the year that yields were bound to rise as central banks began employing tighter monetary policies.

Instead, investors have poured into bonds of all types as global growth weakened, disinflation emerged in Europe and tensions between Ukraine and Russia intensified.

Read more

legal

Energy company Metgasco says it has been told by the Independent Commission Against Corruption that it will not be launching an inquiry into its shareholders following a referral by NSW resources minister Anthony Roberts.

Mr Roberts announced last month 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 minister also said he had referred the licence to the 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.

In a statement to the stock exchange on Monday, Metgasco chairman Len Gill said Mr Roberts' announcement of the referral “had caused major damage to the company's reputation”.

“We were shocked and extremely disappointed that the Minister chose to publicly name Metgasco,” Mr Gill said.

“We are pleased to clear the company's name so quickly”.

Read more.

iron
Dalrymple Bay Coal Terminal mascot, Hector the Lump of Coal.
Dalrymple Bay Coal Terminal mascot, Hector the Lump of Coal. 

Hey kids! Don't believe what those nasty Greenies say - Coal is cool! And fun!

Yes, miners are fighting to bolster their image - this from the FT:

The coal industry has stepped up lobbying and advertising activities in response to a rise in local activism against resource projects and concerns that campaigners are beginning to exert influence over politicians.

It has set up a website Australians for Coal, which urges mine workers and their families to contact their politicians to show their support for the industry. It is running TV adverts supporting the expansion of Abbot Point port and a children’s character Hector the Lump of Coal is urging children to enter a writing competition.

The charm offensive is the biggest since the mining industry spent an estimated $22 million in 2010 in a nationwide lobbying and advertising campaign aimed at defeating the mining tax.

Read more at the FT.

euro

The European Central Bank is betting that negative deposit rates could spur Europe’s banks into lending as it readies for its biggest policy action since the sovereign debt crisis.

The ECB is thought to be the first major central bank to deploy negative deposit rates as part of a package of policy responses to combat the threat of deflation when it meets this week.

“It’s a step that the Fed never did,” says Westpac currency strategist Sean Callow, referring to the US Federal Reserve’s own stimulus program. Westpac’s analysis suggests at least €135 billion and up to €238 billion in cash could be subjected to negative annual rates of around 0.1 per cent.

“The central bank is saying ‘go forth and spend’. They’re not happy with how much money has been dropped on them by the banks,” Callow theorises, citing poor credit growth.

“Demand for sure has to be muted in an economy that’s not growing very quickly,” he added, saying that while the large corporations are likely to be fine, not enough [lending] is reaching the small business sectors.

Among smaller central banks, Danmarks Nationalbank removed negative rates only this year after installing them in 2012 to discourage the surge in capital inflows that followed the crisis. The ECB also faces a high value euro and in deterring banks from parking money in the euro zone it should succeed in lowering the foreign exchange rate.

In real money terms, a negative 0.1 per cent rate translates to 10 euro cents for every €100 on deposit.

“The incentive to avoid that charge means you are more likely to do something else with it – one of those things is you may lend it to another bank,” says UBS interest rate strategist Matthew Johnson. “The problem is that there is an imbalance in the distribution of funds in the European banking system; depositors prefer to deposit their money with strong banks and this increases the cost of funds for weak banks.”

Will ECB chief Mario Draghi introduce negative rates in the eurozone?
Will ECB chief Mario Draghi introduce negative rates in the eurozone? Photo: Bloomberg
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banks

The Automatic Teller Machine was described as “the peak of financial innovation” by Federal Reserve chairman Paul Volcker who decried the complex financial instruments that brought about the financial crisis.

Today the innovation that is bringing about an increasingly cashless society is posing a mortal threat to the ATM.

That could spell trouble for ATM operators around the world, which New York based hedge fund Kerrisdale Capital has described as a “levered bet on paper currency and foot traffic”.

Kerrisdale in compiling its short case on Cardtronics - the world’s largest non-bank owner of ATMs with operations in the US and the UK - as ATM withdrawals continue to fall throughout the developed world.

Australians are shunning ATMs at a faster rate than most developed countries. While monthly withdrawals roughly doubled to $72.9 million from 1998 in 2008, they never went any higher than that level.

In 2013, the monthly volumes of ATM withdrawals fell about 5 per cent to $67.7 million, according to the Australian Payments Clearing Association. That is in contrast to a 7 per cent growth in credit card transactions and a 14 per cent growth in debit card transactions over 2013.

In the US, Europe and Canada, Kerrisdale’s research citing official statistics and surveys shows declines of between 0.3 per cent and 5 per cent per annum even as economies, populations and consumption have increased.

However it is Sweden where the shift to a cashless economy has been most profound. Withdrawals in Sweden have fallen by 30 per cent from 2004 to 2011 and are expected to fall by 6 to 8 per cent a year.

Kerrisdale, a $300 million hedge fund that describes itself “value oriented and special situations” has honed in on NASDAQ listed Cardtronics, with a market capitalisation of $1.3 billion to bet on the decline of the ATM.

Read more at the AFR ($).

forecast

Today's soft economic data - especially the slump in building approvals - have led to Citi to revise down its GDP forecast for the first quarter.

“After today’s numbers we have lowered our Q1 GDP estimate from 0.9 per cent to 0.6 per cent,” Citi economist Josh Williamson says.

“If delivered, such a growth rate won’t cause alarm bells to ring at the RBA. It equates to a year-on-year growth rate of 2.9 per cent, exactly in-between the actual Q4 2013 result of 2.8 per cent and June 2014 year-on-year RBA forecast of 3 per cent."

First-quarter GDP numbers are out on Wednesday.

analysis
Earnings growth will flatline in FY15 say analysts at Bank of America-Merrill Lynch.
Earnings growth will flatline in FY15 say analysts at Bank of America-Merrill Lynch. 

Consensus forecasts for earnings growth for the next financial year are too optimistic, reckon strategists at Bank of America-Merrill Lynch.

While "The Street" predicts around 10 per cent earnings per share expansion in FY15, the broker's models suggests no EPS growth for the market (ASX 200) at all (see chart).

Consumer sentiment is a key input into BoA-ML's model and "unless we see a rebound in sentiment there could be material downgrades ahead", the analysts write.

Indeed, we've already seen some evidence of this just this morning, including footwear retailer RCG Corp and Funtastic this morning releasing profit warnings (the former explicitly blamed the budget), as well as Southern Cross Media on Friday.

The strategists "biggest concern" is the implicit margin expansion for many companies, given sales growth lags EPS growth estimates in many cases.

And they add the iron ore price to the list of worries.

So which company's earnings forecasts are too optimistic? The analysts are most worried about companies operating in challenging industries. These include retailers (Myer, JB Hi-Fi, Woolworths), contractors (Leighton, Worley Parsons), as well as Aristocrat, Qantas and Primary Healthcare ("where the volume impact from the co-pay introduction will not be known for more than a year").

"We have little confidence about these companies’ margin forecasts," they write.

Domestic cyclical earners are in for "a challenging period", and they see "no compelling reason" to pile into miners, given the weak and weakening iron ore price.

So "where do you hide?" ask the strategists.

So for now the analysts favour yield plays - Telstra, Westfield and Transurban.

"Our highest conviction is that some US earners like QBE, ResMed and Bluescope will outperform for top-down and bottom-up reasons," they write.

agriculture

It might be time to get ready to pay more for your morning fix.

The outlook is for coffee prices to continue to rise, according to the latest Rabobank forecast, with the coffee market yet to fully price in the likelihood of an El Nino weather event hitting output in key markets.

Market prices for coffee have recently rallied to $US150 a pound from around $US130, and Rabobank reckons they could continue rising, to closer to $US190 by the third quarter.

Even though prices could ease a touch heading into 2015, they will remain elevated, at around $US170 a pound.

need2know

Private equity giant TPG is poised to buy UGL’s property services unit DTZ for about $1.2 billion, sources have told the AFR's Street Talk column.

It is understood the two parties are locked in final negotiations around terms and conditions, and a deal will be announced as early as Tuesday.

Sources said the deal could see UGL return $5 to $5.50 a share to investors.

The final talks come after UGL ran a sale process for the business, attracting offers from TPG and rival private equity firm Warburg Pincus. Warburg Pincus is understood to have taken a back seat and stopped working on the deal.

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asian markets

Time for a look around the region, showing most bourses are slightly higher (or closed, due to the Chinese Dargon Boat festival) but the Nikkei is rallying big time:

  • Japan (Nikkei): +2%
  • Hong Kong: closed
  • Shanghai: closed
  • Taiwan: closed
  • Korea: +0.3%
  • ASX200: +0.35%
  • Singapore: +0.1%
  • New Zealand: -0.1%

‘‘A lot of the past uncertainty is starting to clear up,’’ says Masaru Hamasaki, senior strategist at Sumitomo Mitsui Asset Management, of the Japanese rally. ‘‘The market started moving from the middle of last month based on the improved outlook for the global economy.’’

shares up

Try as it might, Telstra just doesn’t seem to be able to break that $5.40 level, a 10-year high which it has flirted with three times now since the second half of May.

It is holding at $5.39 again this afternoon, up 1 per cent, but doesn’t have the momentum to break that level and move higher.

Underpinning the shares is optimism of a higher payout following asset sales, against the backdrop of continued low interest rates.

forecast

In 2008, the consensus from forecasters was that not a single economy would fall into recession in 2009, writes the FT’s Tim Harford:

In the 2001 issue of the International Journal of Forecasting, an economist from the IMF, Prakash Loungani, published a survey of the accuracy of economic forecasts throughout the 1990s. He reached two conclusions. The first was that forecasts are all much the same. There was little to choose between those produced by the IMF and the World Bank, and those from private sector forecasters. The second conclusion was that the predictive record of economists was terrible. Loungani wrote: “The record of failure to predict recessions is virtually unblemished.”

Now Loungani, with a colleague, Hites Ahir, has returned to the topic in the wake of the economic crisis. The record of failure remains impressive.

There were 77 countries under consideration, and 49 of them were in recession in 2009. Economists – as reflected in the averages published in a report called Consensus Forecasts – had not called a single one of these recessions by April 2008.

This is extraordinary. Bear in mind that this is not the famous complaint from the Queen that nobody saw the financial crisis coming. The crisis was firmly established when these forecasts were made.

Read more at the FT.

japan

A senior executive at PIMCO, one of the world’s largest bond funds, says Japan’s extreme monetary experiments could lead to a major crisis in the next few years.

Scott Mather, PIMCO’s deputy-chief investment officer, said Japan can’t keep buying bonds without losing control of inflation expectation or the currency and cannot afford higher interest rates.

“They are in a bind. It’s hard to see any scenario where the exit is a smooth one,” Mr Mather told The Australian Financial Review.

“We are expecting some sort of crisis in Japan over the secular horizon that comes about from authorities losing sustained control over markets. There are many ways it could play out, but all with substantially more market volatility.”

The Bank of Japan under governor Haruhiko Kuroda has undertaken one of the largest monetary stimulus programs in history, pledging $1.4 trillion to double the nation’s money supply in an attempt to reach a 2 per cent inflation rate.

The monetary policy measures are one of Prime Minister Shinzo Abe’s “three-arrows” to regenerate the nation’s stagnant economy but, after early success, investors are questioning whether Japan can revive its fortunes.

Mr Mather said that in the short term, Japanese monetary policy may be sustainable, but the risks of a “Minsky moment” – when markets turn suddenly and sharply – is building. He is watching the Bank of Japan’s balance sheet as it buys more bonds to keep control of currency and interest rate markets.

“They are a long way from owning half of the Japanese Government Bonds outstanding, but we could see some currency instability or inflation expectations rise that will result in more volatile markets,” he said.

Read more at the AFR ($).

housing

The housing market appears to be the victim of the sharp negative reaction to the federal budget with prices falling in line with a collapse in consumer sentiment, ANZ says:

  • Household sentiment has fallen sharply in the wake of the federal budget and appears to have hit home buyer confidence. Despite strong auction listings in the past week, home buyer demand has eased in the past month with auction clearance rates falling toward long term averages following a period of significant out-performance.
  • Prior gains in house prices had effectively closed the ‘affordability gap’ in Sydney, Melbourne and Perth and soft wages growth and deteriorating sentiment will increasingly constrain further price gains, particularly in 2015 when the RBA begins the task of returning monetary policy towards a more ‘neutral’ setting.
  • Housing market momentum has eased with clearance rates falling particularly in Melbourne. Nonetheless housing market fundamentals remain supportive and prices are likely to consolidate in H2 2014.

 

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