Business

Markets Live: Fortescue at 1-year low

That’s it for Markets Live today and for the week.

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

Thanks for reading and your comments.

Have a great weekend and see you all again Monday morning from 9.

need2know

Falling iron ore prices have winded Australia’s share market, with the big miners dragging the local bourse to finish the week firmly in the red.

The benchmark S&P/ASX 200 Index fell 27.2 points, or 0.5 per cent, to 5598.7 for the week, as investors digested a sea of data and many companies traded ex-dividend.

But the iron ore producers had a particularly tough week, especially Andrew Forrest’s Fortescue Metals Group, which plunged 6 per cent to $3.92 – its lowest since June last year.

Fortescue has lost 32.7 per cent this year, or about $6 billion of its market cap, causing the value of Mr Forrest’s stake in the miner to shrink by $2 billion to $4 billion.

But it was not just Fortescue. BHP lost 2.8 per cent over the week to close at $35.65. It also traded ex-dividend on Tuesday. Rival Rio Tinto shed 2.1 per cent, to $61.30.

Patersons Securities strategists Tony Farnham blamed falling iron ore prices, with the metal measured out of Tianjin port, diving more than 4 per cent on the first four days of the week to a five-year low at $US84.30 a tonne on Thursday night.

“Certainly from a materials perspective the focus this week has been the slide in iron ore prices,” Mr Farnham said.

Two smaller miners of the bulk metal were among the week’s top 10 worst performing stocks on the ASX. BC Iron head headed the list, losing 19.7 per cent to $2.24, while Mount Gibson fell 8 per cent to 63.5 cents.

“The smaller ones are further up the cost curve,” Mr Farnham said. “It’s self evident that the BHPs and Rios of this world can handle lower iron prices more than smaller guys.”

Elsewhere, Mr Farnham said shares in energy companies had also been hit as geopolitical risks in the Ukraine and northern Iraq appeared to ease.

Woodside Petroleum lost 0.2 per cent to $42.96 on Friday, while Santos finished 0.3 per cent to $15.11 and respectively. But for the week both companies finished higher with Woodside up 0.6 per cent and Santos 1.9 per cent.

Read more.

 

housing

Standard & Poor's has cautioned against further stimulating the mortgage market, saying this would increase the risk of a housing bust and make Australia more vulnerable in a financial shock.

The global credit ratings agency also backed the big banks' opposition to "bail-in" rules for creditors, warning the major lenders could be stripped of their AA- credit ratings if Australia went down this path.

In a submission to the financial system inquiry led by former Commonwealth Bank chief David Murray, S&P argued against several policies floated by Mr Murray to help smaller lenders compete in home lending.

Regional banks have told the inquiry they face an unfair playing field under current rules that allow the big four banks and Macquarie about half as much capital for every dollar lent out, because of the larger banks' more advanced risk systems.

But in a blow to the regional banks' push, S&P said giving the smaller lenders capital breaks would create new risks in the banking system.

Read more.

Making allowances for smaller banks could help overheat the mortgage market, says S&P.
Making allowances for smaller banks could help overheat the mortgage market, says S&P. 
analysis

And here are the best and worst among the top 200 names.

It was a particularly tough day for gold miners, despite the ECB ramping up its plans for more monetary easing.

Best and worst performers in the ASX 200 today.
Best and worst performers in the ASX 200 today. 
market close

Shares end the week on a sour note as banks and miners drive a 0.6 per cent loss in the benchmark index to its lowest close in almost three weeks.

The ASX 200 and All Ords both finished Friday's session 33 points lower at 5598.7 and 5598.9, respectively.

BHP was the biggest single drag on the market, down 1 per cent, while Rio fell 1.4 per cent as the iron ore price continued to plunge. The Big Four all dropped, and CSL and Telstra added to the market's decline.

Challenger was the day's highlight, surging 4 per cent in a day when only 47 of the top 200 names advanced.

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money

Australia has a growing cash problem, say analysts at Morgan Stanley.

Since the GFC Aussies have added $613 billion to bank deposits, a 57 per cent increase, equivalent to a compound annual growth rate of 8 per cent a year. Bank deposits - as tracked by the ABS's "M3" measure - for the first time are larger than the country's GDP, and are worth more than the total market cap of the ASX to boot.

Higher savings rates and de-leveraging among households explains the big run-up in cash piles, all hallmarks of a more conservative approach to finances among Australians.

But the analyst at Morgan Stanley think this is likely to "gradually" change, for three reasons:

First, the official cash rate is likely to languish at a record low 2.5%, or move lower, for an extended period. That should reduce the appeal of deposits.

Second, banks are now in a much stronger funding position allowing them to whittle away the premium offered to depositors.

Third, with lower global risks the logic for a high exposure to low-returning cash reserves is much weaker.

So where will that cash go? Shares? Bonds? Property?

The value of cash deposits is greater than the market capitalisation of the ASX.
The value of cash deposits is greater than the market capitalisation of the ASX. 
legal

A parliamentary inquiry has grilled the corporate regulator's top brass over why a financial planner who caused widespread misery by tipping people into forestry schemes that failed was banned from the industry for just three years.

During a Parliamentary Joint Committee hearing this morning, Labor Senator Deborah O'Neill said victims of Peter Holt, whose company Holt, Norman, Ashman, Baker was the biggest seller of investments in Timbercorp, had told her his behaviour was more in line with "ten year or permanent banning than the three years that's been applied".

"They've lost everything, one of the things they want is to prevent this happening to anyone else," she said.

Liberal MP Tony Smith asked: "What do you have to do to get life?"

Ms O'Neill also asked why the Australian Securities and Investments Commission was planning to return a $20,000 security bond, lodged under an old regulatory regime, to Mr Holt's firm.

ASIC chairman Greg Medcraft said ASIC delegates who decide penalties had to operate within case law set by the Administrative Appeals Tribunal, which currently treats holding a financial services license as "a right, not a privilege".

"That's part of the issue they have to think about," he said.

ASIC executive Louise Macaulay told the hearing Mr Holt had been banned in 2012 for giving inappropriate advice "influenced by very high commissions paid on certain agribusiness products".

Speaking after the morning session, Nationals Senator John Williams, who is also on the committee, said the ban handed out to Mr Holt was "disgusting".

Read more.

ASIC Chairman Greg Medcraft.
ASIC Chairman Greg Medcraft. Photo: Nic Walker
asian markets

Asian markets are mostly lower, in a case of 'sell the fact' after the ECB's rate cut:

  • Japan (nikkei): -0.1%
  • Hong Kong: -0.3%
  • Shanghai: +0.3%
  • Taiwan: -0.6%
  • Korea: -0.4%
  • ASX200: -0.55%
  • Singapore: -0.6%
  • New Zealand: +0.4%

 

‘‘We’re seeing a bit of profit-taking today following the recent rally,’’ says IG market strategist Ryan Huang. ‘‘Investors are looking out for the US jobs data due tonight and the Chinese exports data next week.’’

world news

We asked a number of investors for their take on the ECB's decision to ease monetary policy even further and what it means for global liquidity and our market.

Here are their responses:

1. How important is the move for global liquidity?

Platinum Asset Management managing director Kerr Neilson

Significant, as it enhances the existing easing mode taking place in China and Japan - versus a move towards tightening in the United States and United Kingdom. There are interesting implications for currencies and national competitiveness.

BlackRock Australia head of fixed income Stephen Miller

It is an important step and, by European standards a timely response to the region’s predicament. It could stimulate lending, improve confidence and potentially encourage exports via a lower euro. Along with the Bank of Japan, the ECB could potentially become an alternative source of global liquidity as the US Fed’s balance sheet expansion comes to an end. However, as Draghi said at Jackson Hole, the ECB needs to be supported by structural reform and “smart” fiscal easing.

Magellan Asset Management portfolio manager Domenico Giuliano

It is difficult at this stage to gauge by how much, but it is clear the initiatives announced at the ECB’s September meeting will mean an increase global liquidity. Lower interest rates should encourage the private sector to increase borrowing, as well as encouraging banks to deploy their excess funds away from deposits with the ECB. The central bank’s plans to purchase asset-backed securities and covered bonds is actually quantitative easing, as it will be financed by money creation.

PM Capital global equities portfolio manager Ashley Pittard

It is a continuation of the trend we have seen from other central banks over the past five years. The US Federal Reserve was the first and most aggressive, then the BoJ, and now the ECB. As a result of all this “cheap” money, investors are encouraged to increase their risk. Without this unprecedented global liquidity injection the equity markets would not be making new highs globally, as the risk of owning safer assets would be higher.

The ECB's move is significant for global liquidity, Platinum Asset Management's Kerr Neilson says.
The ECB's move is significant for global liquidity, Platinum Asset Management's Kerr Neilson says. Photo: Patrick Cummins
quote

And 2. What do you expect it will mean for Australian investors?

Kerr Neilson

Despite this news I think the outlook is probably neutral for the local currency. While extra stimulus in Europe will be supportive of the Australian dollar a slower China is hurting it.

Stephen Miller

At the margins it will be supportive for global equity markets, any by extension Australian shares. A weaker euro is means the impact on global currency market is likely to be much bigger. I do expect some depreciation of the Aussie dollar, but only when the Fed communicates a definite intention to raise rates in the US.

Domenico Giuliano

Markets now project lower interest rates in Europe, along with more liquidity, which could encourage global investors to seek out higher yielding investments including Australia assets. That might have consequences for an appreciating Aussie dollar against the euro, along with possible further compression in Australian bond yields and higher valuation multiples on Australian stocks.

Ashley Pittard

Short term the upward trend in markets will continue as people are encouraged to take on more risk, but ultimately longer term interest rates will go higher, and people that are highly levered at the wrong time will be in trouble.

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shares down

And while we're looking at the iron ore miners, Fortescue shares have just plumbed a one-year low at $3.86.

Shares are down 4 per cent for the day, 7 per cent for the week and more than 33 per cent since the beginning of the year.

The plunge has shaved about $6 billion off the iron ore miner's market capitalisation, taking it to just above $12 billion.

Spare a thought for Fortescue founder and chairman Andrew 'Twiggy' Forrest, whose net worth has shrunk by a tidy $2 billion, with his stake in the company now valued at $4 billion.

Apols: an earlier version of this post said Fortescue shares hit a two-year low. We got a bit ahead of ourselves.

Sinking fortune: this year's fall in the price of iron ore has shaved $2 billion off Andrew 'Twiggy' Forrest's Fortescue ...
Sinking fortune: this year's fall in the price of iron ore has shaved $2 billion off Andrew 'Twiggy' Forrest's Fortescue stake. Photo: Erin Jonasson
iron

Iron ore prices may be up for another dive as Chinese steel mills take a breather after the summer production peak, analysts say.

The benchmark iron ore price plunged 1.6 per cent to a fresh five-year low to $US84.30 a tonne on Thursday night, and is down 37 per cent since January 2014.

But the worst is yet to come, according to UBS analysts, who forecast a further fall in the iron ore spot price in September and October.

Historically, crude steel production rates in China have declined around September and November as the steel mills take a breather after the summer peak in steel deployment, according to the analysts.

"Lower production reduces steel mills ore requirements and may prompt a buyers' strike," UBS analysts said in a note.

The commodity price is likely to pick up again in November and December as China begins restocking in preparation for the northern winter, UBS said and, forecasts the iron ore price to recover to the $US100 mark by December 2014.

Goldman Sachs analysts were more bearish for the bulk commodity, predicting iron ore to sell at $US80 a tonne in 2015.

The analysts said iron ore miners were facing a bumpy road in the short term as the negative impact of falling property prices on new housing kicks in in the 2014 second half and 2015.

Meanwhile, local iron ore miners are taking another beating:

  • Rio Tinto: -1.3% at $61.30
  • BHP Billiton: -1.3% at $35.55
  • Fortescue: -3.7% at $3.90
  • Gindalbie: -2.1% at 4.6 cents
  • Atlas Iron: flat at 57.5 cents
  • Arrium: +0.3% at 64.75 cents

 

Iron ore price dived to five-year low. <i>Graphics: Les Hewitt</i>
Iron ore price dived to five-year low. Graphics: Les Hewitt 
analysis

With acquisition-hungry G8 Education one of the best performers, up 3.4 per cent so far to $5.61, here's an article by from Montgomery Investment Management analyst Andrew Macken in last week's Cuffelinks newsletter, in which he warns that not all revenue growth can be considered equal:

One of the first numbers examined by investors and analysts when a company reports its results is revenue. And more specifically, most are interested in the growth in revenue from, say, one year prior. A company that is growing revenues strongly is more likely to be growing earnings strongly, and therefore more likely to be growing its dividends to shareholders strongly. Furthermore, revenue growth is considered to be a relatively clean metric in that it is independent of the company’s cost structure and is typically untainted by management’s accounting policies.

But not all revenue growth is created equal. And investors and analysts need to carefully dissect the nature of the revenue growth.

Consider a retailer that owns a number of stores. While revenue growth in each store might be weak, the company can boost its headline revenue growth number by opening new stores. We observed this at JB Hi-Fi which reported full-year 2014 revenue growth of 5.3% per annum. Yet on a store like-for-like basis, revenue only grew by 2.0% per annum over the same period.

Similar to the idea of opening new stores is the idea of acquiring new businesses to boost headline revenue growth. This is the strategy of childcare and education provider G8 Education. The company recently reported revenue growth of a whopping 59% per annum for the half-year ending 30 June 2014. Most of this has stemmed from the acquisition of additional learning centres. This can be clearly observed in G8’s cash flow statement: payments for the purchase of businesses were $218 million in the six-month period to 30 June 2014. These are significant cash investments given reported revenues in the same period were $187 million.

Read more at Cuffelinks.

US news

Hard on the heels of the ECB's rate cut, a top US Federal Reserve official says US interest rates, which the Fed has kept near zero since December 2008, are too high, citing subdued inflation and "unacceptably high" unemployment as evidence.

"Interest rates are not low enough," Minneapolis Federal Reserve President Narayana Kocherlakota said at a Town Hall here. The fact that the Fed has not been able to achieve its twin objectives of maximum employment and 2-per cent inflation shows that rates are higher than they should be, he said.

Asked why then is the Fed reducing its bond-buying program, which is aimed at pushing down borrowing costs, Kocherlakota said he had no good answer.

"Given where we are with inflation, I think that it's challenging to know why we are removing stimulus from the economy at the rate that we are," he said.

iron

Nickel is poised to advance for a fifth week on concern ore supply will decline as the Philippines considers banning exports of unprocessed minerals.

The metal in London is set to rise 3.2 per cent this week. Nickel for delivery in three months was up 0.2 per cent at $US19,425 a metric tonne in Tokyo. It closed at $US19,395 yesterday, the highest since July 9.

The government should move toward a ban on mineral-ore exports, Ramon Paje, the environment secretary, said yesterday from Manila, backing a proposed bill in the Philippines calling for restrictions aimed at boosting domestic the country’s downstream metals industry.

‘‘Nickel was the best performer this week following ore supply concern from the Philippines,’’ said Kazuhiko Saito, an analyst at Fujitomi, a commodities broker in Tokyo.

Prices surged 40 per cent this year, the most among the six main metals on the LME, after Indonesia banned ore exports in January.

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Rates

Lenders and credit bureaus say the huge interest in website Getcreditscore when it launched on Tuesday marks a turning point for borrowers in Australia as they wake up to their ability to use their credit score to bargain on interest rates.

Backed by peer-to-peer lender Society One, Getcreditscore.com.au crashed due to the amount of traffic on its first day on Tuesday. By Thursday morning it had received 299,000 unique visits and 403,000 hits. The site gives people their a credit score for free calculated by credit bureau Veda Group based on their borrowing history.

Site spokesman Christopher Zinn said everyone was surprised at the response. “I thought I would have to do a lot more work training and educating people so they understand what a credit score is."

The credit scores are based on the credit files of Australians that Veda – the country’s biggest consumer credit bureau – keeps and which lenders contribute to and check for borrower credit worthiness.

Veda spokeswoman Belinda Diprose said there was an “overwhelming” response well beyond expectations, but would not say how many people actually requested credit scores.

politics

One of the dumbest policy solutions to emerge out of the ashes of the global financial crisis is non-recourse “bail-in” bonds, which David Murray’s financial system inquiry is thinking about recommending, Christopher Joye writes in the AFR:

This proposal, which has for self-interested reasons been embraced by banks everywhere, requires a bare-bones explanation to understand the strife it could cause down the track.

Imagine if all residential borrowers convinced the government to adopt the following brilliant way to avoid future housing crises. If you look like you will not meet your monthly mortgage repayments – so there’s a chance you might default – the government has the ability to step in and disappear your debts. (This is precisely what the banks are advocating.)

More specifically, the government has the unilateral right to swap your lender’s once-safe loan into highly risky and perpetual equity in your home. All your repayment obligations conveniently vanish. It is, therefore, impossible for you to default and lenders can never take possession of your property and effect a distressed sale at a fire-sale price.

Genius, right? If you fail to save enough, spend too much money, or just take on excessive debt, the government can bail you out. Borrowers never default and asset prices always go up.

The plan is not marketed this way, of course. Working together, borrowers and governments tell lenders that their loans are now “loss-absorbing” capital that – wait for it – actually avoid public bailouts. You see, taxpayer money is not being burned. Only lenders wear the pain.

But who is deciding whether these borrowers are good or bad credits? Who unilaterally converts their debts into equity in a manner that no other industry can avail itself of? Who is subsidising shareholders? Certainly not the private sector or free markets.

Read more

housing

A boom in new housing and pick up in apartment building pushed construction activity in August to its fastest pace of growth since November, the latest Performance of Construction Index shows.

The index rose 2.4 points to 55 last month, its third straight month above the 50 level that indicates growth and the highest level since November, when it was 55.2.

A separate sub-index of housing work rose 7.7 points to 60.9, its highest level in eight months, while apartment building rose 13 points to 64.9, regaining ground lost since May.

Commercial construction rose for a second month, although at a slower pace than in July.

The figures reflect signs earlier this week that detached homes are returning as the main driver of construction. Official figures this week showed stand-alone house approvals jumped almost 14 per cent in NSW in July. They also rose in SA and WA.

Engineering construction is still declining with that sub-index falling 3.5 points to 43.7.

Construction is picking up.
Construction is picking up. Photo: Erin Jonasson
exec

Investors will think they are seeing double when meeting the new leadership team of OZ Minerals, after Rio Tinto executive Andrew Cole was appointed managing director today.

Cole will run the copper miner alongside its current chief financial officer, Andrew Coles, joining OZ on December 3 to replace outgoing managing director Terry Burgess.

Cole most recently served at Rio's Canadian iron ore business, which many believe is bound for divestment.

He will earn a $750,000 base salary each year and has the opportunity to raise that closer to $2 million each year if certain performance hurdles are achieved.

china

Is China's economy ''unravelling"? Quentin Grafton, the former chief economist and head of the Australian Bureau of Resources and Energy Economics (ABARE) seems to think so, and it could hit Australia hard.

Speaking at a conference on Thursday, Grafton said the iron ore price was unlikely to recover quickly as the Chinese economy begins "unravelling", leading to a painful downturn in the Australian economy in 2015.

He said falling prices for coal and iron ore, a slump in business investment, an overpriced housing market and high dollar had placed the Reserve Bank of Australia “between a rock and a hard place”.

“Put all those things together and it could be a difficult ride for us,” he said. “This isn’t about doom and gloom – it’s about looking at the risks and numbers. There’s a clear and present danger.”

He said the Reserve Bank of Australia should prepare for a difficult ride as the overpriced property market and high dollar created a challenging economic environment as coal and iron ore prices dropped.

Grafton's comments join an increasingly vociferous choir of concern about the Chinese economy, with investor fears stoked by a Chinese residential property market that is experiencing its worst slump on record.

Meanwhile, the benchmark price for iron ore – which accounts for more than $1 out of every $5 of export income – has fallen 35 per cent this year to less than half its 2011 high of $US190.

Read more

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