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 9:30.
Mining stocks led Australian shares lower on Tuesday, with global investors cautious about slowing growth in China and nervous that volatility in emerging markets could spread to developed market.
The benchmark S&P/ASX 200 Index fell 65.8 points, or 1.3 per cent, on Tuesday to 5175.1, despite getting a boost from a survey that indicated domestic business conditions are at a two-and-a-half year high. The broader All Ordinaries Index also dropped 1.3 per cent.
Traders returned from the Australia Day holiday to follow a weak lead from offshore.
Moves by the central banks of Argentina and Turkey to intervene in currency markets have sparked fears that emerging market volatility could spread to developed markets.
“Because it is part of the Asia-Pacific region, Australia tends to get caught up in investor nervousness about emerging markets,” Fidelity Worldwide Investments Hong Kong-based investment director Catherine Yeung said.
“Negative sentiment about emerging markets could really push the Australian market around over the coming months so the most attractive companies are those with strong balance sheets and free cashflow,” Ms Yeung said. “Over-leveraging in this environment could be risky.”
Equity Trustees chief investment officer George Boubouras said that if worries about emerging markets caused a correction in developed market equities over the quarter “that would be an ideal buying opportunity”.
JB Hi-Fi shot the lights out today after an upbeat profit update sparked what must be called a relief rally in the stock, which finished up 4.9 per cent. The retailers shares were up as high as 11 per cent early.
Downer EDI was awarded two new contracts in Western Australia and was rewarded with a 2.5 per cent jump in its share price.
Arrium shares surged 3.3 per cent, while Myer and Pacific Brands both felt the retail sector love and closed higher.
Lynas was the worst performer on Tuesday, down 6.3 per cent. The Reject Shop suffered another nasty sell-off, while Virgin Australia also dropped like a stone.
Ten Network also featured in the day's poorest, falling 4.3 per cent.
The best and worst performers in the ASX200.
After a sharp fall at open and then a recovery, shares were on a slow march downwards this afternoon before a rush of sell orders finished the day on a down note.
The S&P/ASX 200 index fell 1.3 per cent or 66 points to close at 5175.1, and the All Ords dropped by a similar amount to 5188.
The pain was felt across all sectors in the top 200, with metals and mining names the hardest hit, down 1.7 per cent. The smaller subset of gold producers was the best performing, losing only 0.5 per cent as a group, along with industrials.
BHP was the biggest drag on the market, down 2 per cent to $36.31 a share. Rio was down 1.3 to $64.31. The banks were also big condtributors to the market pain, with ANZ the worst hit, losing 1.7 per cent to finish the day at $30.14.
Macquarie and QBE shareholders had a day to forget, with the stocks falling 2.7 per cent and 2.9 per cent, respectively.
Telstra had a relatively good performance, down only 0.6 per cent to $5.12 a share.
Square, the mobile payments company started by Twitter co-founder Jack Dorsey, has begun preparations to launch in Australia, according to sources with knowledge of the plans.
The move would mean a major new disruptive player in the local payments industry ahead of RBA plans to build a new inter-bank hub, aimed at making innovation in payments more feasible.
The company was recently rumoured to be valued at $US5 billion, having had significant success in the US where it has become well-known for offering businesses cheap and simple ways to process electronic payments.
It makes a free credit card reader, which business owners can attach to iPhones, iPads and Android devices, allowing them to accept credit card payments, and it also sells stands that turn iPads into point of sale systems.
In addition it has launched a Square Wallet product, which allows people to make payments at retailers like Starbucks from a debit account by just saying their name.
Late last year ASX-listed Mint Wireless said it was in talks with three of the four big banks to launch a Square-like smartphone accessory that allows small businesses to accept credit card payments.
Fund managers are scrambling to gain a reprieve from mandates that restrict them from owning companies without an Australian listing so they can retain their holdings in Rupert Murdoch's 21st Century Fox, which has said it will quit its Australian listing.
Many Australian funds are not able to hold offshore-only listed companies and are attempting to get permission from trustees to allow them to hold the US-based pay TV and film business for another year to 18 months. This would allow them to undertake an orderly sell-down rather than dump the stock over the next six months before delisting.
The decision to de-list 21st Century Fox in Australia is a big blow to the funds that have had enormous gains from the stock since its demerger from print operations. Local shareholders also have gained thanks to the devaluation of the dollar over the past year.
While there have been calls from smaller retail investors to have a selective buyback of 21st Century shares owned by Australians, it is likely to fall on deaf ears.
As the market recovers from this morning's sell-off, here's some words from Societe Generale on the turmoil in emerging markets on why investors should be alert, if not alarmed:
[Compared to the second half of the 1990s which were shaped by emerging market crises], fundamentals in emerging economies are in aggregate much improved, with overall more flexible currency regimes, stronger external balances, more developed domestic debt markets and larger FX reserves.
At the same time, several points are worth keeping in mind and risk should not be ignored.
Emerging economies today matter more: In 1994, emerging and developing economies made up 18 per cent of nominal World GDP. Today, that number is just short of 40 per cent! China's increase is the most notable, soaring from 4 per cent to 14 per cent. As a result, a broader emerging market crisis today would come with much greater ramifications for the global economy.
Large imbalances remain: A snapshot of emerging economies today, moreover, shows that several countries still suffer from the type of large imbalances and poor policy choices that drove past crises. Argentina, Venezuela, Chile, Peru, South Africa, Ukraine, Turkey and Thailand are amongst the weakest links.
Combined, these economies make up just over 4 per cent of World GDP. Each is very different [but] these countries are part of the same investment universe. As history teaches, this latter point can prove more important than specific differences. Contagion can spread like wildfire, driving a self fulfilling prophecy.
Brazil, Indonesia and India also suffer external imbalances and are in need of significant structural reforms. The events of recent days have also seen these currencies and respective financial markets come under pressure. These three economies alone make up 6 per cent of World GDP.
Add Russia to the mix with the recent decline of the rouble, albeit driven by a different fundamental story, and these four countries add up to 9 per cent of World GDP.
Investors in Treasury Wine Estates are bracing for yet another profit downgrade from the ailing wine group with soft sales and profit figures for December believed to be behind a trading halt requested by the company earlier today.
Treasury executives and the board are reviewing the latest set of figures for the company, which are thought to reflect continued tough times in both the United States market and in Asia, where austerity measures imposed by the Chinese Government have hit sales of higher-priced wines.
The latest set of profit figures have just come through to Treasury’s top executives and the company is thought to be preparing for a fresh downgrade. December is crucial for wine companies because of the large percentage of sales that happen in that month because of Christmas parties, gift-giving and seasonal celebrations.
Most households in Germany and Switzerland rent, which shows high levels of home ownership aren't a prerequisite for a successful economy.
In fact, you could even say a culture of home ownership can be counterproductive.
Take Fannie Mae and Freddie Mac. These two government sponsored lenders in the US instituted to drive up home ownership, played a crucial role in the subprime crisis and so the GFC.
And look at the top three countries by home ownership: Spain, Ireland and Greece. At this point you might start thinking it's time to discouraging people from buying homes.
At the other end of the scale, roughly four in 10 German and Swiss households own the place they live in.
Most Germans and Swiss rent.
Selected biotech stocks were among the market's top gainers in 2013.
And already, Prana Biotech is an early bolter, with its shares up around 60 per cent since the middle of the month, gaining another 9 per cent Tuesday to $1.09.
Its shares traded at around 50c through the first half of 2013, before speculation took off over the prospects for its Alzheimer's agent which it is hoping to develop.
The latest driver to the surge is planned US presentations ahead of phase 2 trials results in March.
The stabilisation seen in emerging market currencies is having a positive effect on sentiment in the equity market and while retail traders will rarely look at the CDS (credit default swaps) market, it’s interesting to see that corporate CDS spreads are starting to turn lower (a sign of confidence returning), IG's Chris Weston notes:
- It’s become apparent that HSBC CDS have become somewhat of a canary in the coal mine.
- If you have acted on the spike in HSBC’s CDS on January 7, you could have acted fairly aggressively and sold the S&P 500 or ASX 200 and profited from the subsequent move lower.
- Credit markets generally lead equities, so if we start seeing the HSBC CDS fall then this could put a bid into developed markets.
- Still, the question many in the market are asking is whether the moves in emerging markets were caused by developed market central bank policy, or have the recent negative moves in developed markets been a by-product of the recent EM rout?
HSBC: orange; JPMorgan CDS: white; S&P500: yellow. Chart by Bloomberg via IG.
Global smartphone shipments topped 1 billion units for first time in 2013, climbing 38.4 percent from the previous year to 1.004 billion units, research firm IDC said.
Smartphones made up 55.1 per cent of all mobile phone shipments last year from just over two-fifths in 2012, IDC said.
Samsung’s market share edged up one percentage point year-on-year to 31.3 per cent to keep its place as the world's biggest smartphone vendor, while second-placed Apple's fell from 18.7 per cent to 15.3 per cent, according to IDC.
Huawei Technologies Co, LG Electronics and Lenovo Group were third, fourth and fifth largest respectively, each with a market share of just under 5 per cent in 2013.
The news came after Apple announced sales that fell well short of analyst expectations, despite setting a new record for the company.
Apple sold 51 million iPhones in the first quarter of its 2014 fiscal year, which ended December 28, up from 47.8 million last holiday season.
(And just in case you're wondering Apple shares are now trading on a forward P/E of 12.5.)
If you think you're struggling with the rising cost of living, spare a thought for the Queen.
Her Majesty's finances are at a "historic low" with just £1 million ($1.9 million) left in reserve, British MPs have been told. Her courtiers have been advised to take money-saving tips from the Treasury.
A report by the Public Accounts Committee found that the Queen's advisers were failing to control her finances while the royal palaces were "crumbling".
MPs said her advisers had overspent to such an extent that her reserve fund had fallen from £35 million in 2001 to just £1 million today.
Buckingham Palace and Windsor Castle are reported to be in urgent need of repair. Staff must catch rain in buckets to protect art and antiquities, while the Queen's old boilers were contributing to bills of £774,000 a year.
The Queen was once thought of as one of the world's wealthiest women. But no longer. L'Oreal and Wal-Mart heiresses, Harry Potter author J.K. Rowling and Australia's own Gina Rinehart now top those lists with the Head of the Commonwealth nowhere in sight.
Queen 'down to her last million'
The Queen's reserve fund has fallen from £35 million to just £1 million over the last 12 years. British MPs have been told they are now at a "historic low".PT0M35S http://www.canberratimes.com.au/action/externalEmbeddedPlayer?id=d-31kbj 620 349 January 28, 2014
Improving credit growth, fueled by housing and business borrowing, should allow Australia’s major banks to continue to grow earnings, say Macquarie analysts.
Since the rate cutting cycle began in 2011, offshore volatility and domestic political uncertainty has weighed on borrowing, with household savings rates pushing much higher than in the previous decade.
But as low rates start to stimulate borrowing, credit growth could add anywhere between 1 per cent and 7 per cent in bank earnings.
In Macquarie’s bull scenario, big bank share prices could have an upside of 19.2 per cent, while the lowest upside scenario estimates 2 per cent growth.
"Rationality appears to be flowing through to deposit and wholesale funding markets, although this may be slightly offset by front book competition. We expect blossoming credit growth to also help impairment, which should be lower in FY14 versus FY13."
Households are starting to save less and borrow more, and the banks should benefit.
Today's session may be all about macro factors, but the time for companies to open their books for the inquisitive eyes of investors is fast approaching.
Stocks that have outperformed the market in the past year have been largely driven by price-to-earnings expansion, with the expectation that growth will come. It’s now time for those companies to deliver, or face the music.
Macquarie has had a look at the companies that will post their results and put out a list of stocks likely to surprise on the upside, and the downside.
Among miners, BC Iron, Fortescue and Rio Tinto have the largest chance of an upside earnings surprise, Macquarie says. Gold miners face the biggest risk of downside earnings surprises.
‘‘Delivery of earnings will be critical to maintain and support future market returns,’’ Macquarie says:
- Splitting the ASX200 universe, the P/E expansion has mainly occurred in the industrial sector, while returns in the resource sector were less compelling.
- Recent quarterly production updates highlight a positive outlook for some resource stocks this reporting season.
UBS has warned clients Cochlear may be forced to axe its dividend in the wake of the loss of a US court case last week with a $131.2 million damages award against the company due to a patent dispute.
Weak earnings, which the company has forecast will be skewed to the second half means cashflows may be pressured following the court ruling, especially since Cochlear's dividend is debt funding, the bank warned clients.
"While Cochlear may use another instrument to provide funds for the court bond, if we classified this as an interest bearing liability it would take the 'debt' ratio above 85 per cent on UBS estimates," it said.
"Thus, the outcome of these court events adds to focus on the sustainability of Cochlear's dividend policy."
With the S&P indices to be rebalanced March 7, speculation of likely changes is doing the rounds.
This morning, UBS told clients of its predictions:
For the S&P/ASX100 index, potential additions are Dulux, JB Hi-Fi, Rea Group and IOOF, while potential deletions are OZ Minerals, UGL, Aurora Oil and Gas and Regis Resources.
UBS predicts Dulux and JB Hi-Fi will replace OZ Minerals and UGL.
For the S&P/ASX200 index, it reckons inclusions will be Nine Entertainment, Aveo Group (the renamed FKP Property), Ozforex, Pact Group, Veda and Steadfast.
Stocks that it reckons will be dumped are Forge Group, Alacer, Ausdrill, Silver Lake, Decmil and SMS.
Merger and acquisition activity is expected to pick up this year as interest rates remain low, companies struggle for top-line growth and governments look to lighten their debt loads, the AFR writes.
But the spread of deals will not be even across the sectors. Sectors to watch are infrastructure and property.
Bankers also expect that offshore buyers will continue to look for assets in Australia that will give them a foothold in Asia, the AFR writes.
The trend has been evident in recent months with Canadian company Saputo’s takeover of Warrnambool Cheese and Butter and some say it could even accelerate as the fall in the Australian dollar makes local companies cheaper.
Sectors expected to stay quiet are manufacturing and building materials, as well as media and telcos.
And here's Markets Live blogger Patrick Commins explaining why investors shouldn't fret too much about the market volatility:
No signs of crisis despite sharp market falls: AFR
AFR's deputy markets editor Patrick Commins says there are no signs of a crisis that would slow economic growth yet, despite sharp market falls due to emerging market currency problems and slowing China.PT2M6S http://www.canberratimes.com.au/action/externalEmbeddedPlayer?id=d-31k3l 620 349 January 28, 2014
Should we worry about the recent market turmoil? UBS asks in a research note. Not too much just yet, is the analysts' answer:
- Market tumult, above all in emerging currencies, reminds investors that risks remain present. That’s no bad thing following a period of uninterrupted gains in global equity markets.
- Nevertheless, we believe the underpinnings of the global economic recovery remain in place and are unlikely to be dislodged by emerging vulnerabilities. The Fed will ultimately matter more.
- Global economic momentum remains positive, as evidenced by our growth surprise indices. Receding fiscal drag this year bodes well for the recoveries in the US and the Eurozone. Despite credit jitters of its own, China’s growth is more broadly based.
- Ultimately, we think a re-pricing of US short rates remains the biggest potential challenge for markets and global capital flows in 2014, though there is little evidence that Fed concerns are in play at the moment.
- In light of recent events markets may pause, but the outperformance of risk assets is likely to reassert itself.
Here are some economist reactions to this morning's strong results from NAB's business conditions survey:
Against the tide of sub-trend growth, a pick-up in consumer demand into year-end in Australia delivers some respite to the long suffering NAB survey.
The improvement synchs with the more positive anecdotes around the Christmas sales period, relative to recent years.
Lack of follow-through to other indicators though (forward orders, employment, pricing power etc) leave us sceptical that anything has fundamentally changed.
Given the lift in overall sales activity, the natural question is whether this could be the start of a turn in the cycle. On this front, the detail of the survey is not convincing.
Business conditions were improving in Australia in the fourth quarter, which provides more evidence that growth was rebalancing [from mining to non-mining].
Low interest rates, a lower AUD, loose fiscal policy and a bit more political certainty in the post-election period seem to have helped support a lift in business conditions. History suggests that the business conditions indicator is positively correlated with domestic demand, so the recent rise may mean domestic demand was picking up at the tail end of last year.
We continue to expect that the RBA's easing phase is done.
Qantas Airways may consider selling its freight division as part of its wide-ranging strategic review, although a weak air cargo market and the loss of operational flexibility could make that a less likely option than a float of its frequent flyer program.
Qantas is considering asset sales as part of a strategic review that was announced last month alongside plans to cut 1000 jobs and $2 billion in spending as it faces tougher competition from Virgin Australia in the domestic market.
Qantas will provide an update on the strategic review when its half-year results are unveiled on February 27, and no options have been ruled out.
The freight division includes the former Australian Air Express after Qantas cut a deal with Australia Post in 2012 to sell its 50 per cent stake in road freight operator StarTrack in return for buying 50 per cent of AAE.
A Deutsche Bank analyst said it was possible the freight division could be sold as part of the strategic review. He values the division at around $360 million based on its $36 million of earning before interest and tax in the 2012-13 financial year.
Read more ($).
Broker Moelis has adopted a bullish view of Challenger Financial Group as it initiates coverage on the diversified financial services group, pinning a buy recommendation on the stock which it describes as a “unique investment proposition”.
Moelis says that Challenger is trading at a significant discount to its financial peers, and argues this gap will narrow and stems from a misconception about both the risks faced by the group as well as the way in which it generates profits.
Moelis’s optimism centres on the exponential growth forecast for the retirement market. Challenger’s business revolves around annuities and while these products currently account for about 6 per cent of all retirement-based income products, analyst Scott Fitzgerald predicts the sector is in for a massive expansion.
Retirement assets will represent close to one third of all managed assets within a decade with $66 billion worth of savings moving from the accumulation phase to the retirement phase.
Currently retirement assets account for 20 per cent of all managed assets.
Borrowing in self-managed super funds have grown by a blockbuster 88 per cent a year between 2008 and 2012, much faster than even the sector's harshest critics have estimated, according to a brief reseacrh note by consultants Tria Investment Partners, available on their website.
The brief report reads:
Most of the analysis to date has looked at the increase in borrowing incidence from 1.1 per cent to 3.7 per cent, and concluded that SMSF borrowing has roughly tripled over the period. This is wrong. The numbers are far higher:
The numbers of SMSFs with borrowing has more than quadrupled (a growth rate of 44 per cent p.a.)
The dollar amount of SMSF borrowings has risen by a factor greater than 12 (a growth rate of 88 per cent p.a.)
They point to the poor quality of the ATO data and surmise that, at these growth rates, that SMSF borrowings could now easily be over $10 billion, given the latest figures are 18 months old.
How much of that growth has been borrowing to buy residential, rather than commercial, property is unclear; which means the true extent of the effect of SMSF borrowing on the residential market also remains murky.
SMSF borrowing has grown at a faster pace than even the critics think.
A profit warning from McPhersons saw the shares dumped, slumping a heavy 11.4 per cent to $1.36, revisiting its lows of last November.
At that time, Investors Mutual doubled its holding in the company to 10 per cent, which pushed the shares sharply higher.
McPhersons warned Tuesday of heightened margin pressures which with restructuring charges will push the December half net profit down 18 per cent to $9.0 million.
Looking around the region, major Asian markets are stable after most sold off heavily yesterday.
- Japan's Nikkei is down 0.1 per cent.
- Hong Kong's Hang Seng index is up 0.2 per cent.
- Korea's KOSPI has added 0.3 per cent.
However Indonesia's Jakarta Composite Index is down 2.6 per cent so far today, after losing 1.3 per cent yesterday. The Thai sharemarket has shed 2 per cent.
As for us, the ASX 200 is 0.6 per cent lower.
Shares in AJ Lucas are higher following the surprise resignation of the chief executive Allan Campbell.
Campbell was CEO since he acquired the company in 1995 and listed it on the ASX in 1999. He remains one of the company’s largest shareholders.
He opted to quit the company soon after he surrendered the chairmanship of the group, and his departure marks the end of a tumultuous period as it struggled with cost blow outs on difficult contracts and opposition to developing its extensive shale gas prospects in the UK.
Shares are up 1.8 per cent at $1.15, after earlier rising about 5 per cent.
AJ Lucas since listing in 1999.
A small Canadian aluminum producer is in talks to take over Rio Tinto Alcan's aluminium casthouse in Shawinigan, Quebec, rescuing the plant from closure at the end of this year, the fund's project leader has told Reuters.
Sotrem, a company based in Saguenay, Quebec, that makes aluminium foundry alloys and deox, a type of aluminium used to remove oxygen in steel production, is leading the deal to buy the plant, said Yvon D'Anjou, who is in charge of the project.
"We expect to come to a consensus in the next few months," said D'Anjou. He was familiar with the plant, having worked as head of business development at Alcan until 2008.
A spokesman for Rio Tinto confirmed in an email that the company has entered exclusive negotiations for the sale of the casthouse, but did not give any further details.
The rout playing out in some economies right now does not point to a repeat of the 1997 crisis, emerging markets experts have told us - but they do concede that frontier economies face a difficult few months ahead.
Central banks in Argentina and Turkey have intervened in foreign exchange markets to try and stem the slide of the peso and the lira, just as political unrest causes investors to lose faith in Ukraine and South Africa where yields are rising.
HSBC’s Hong Kong-based co-head of Asian economic research Fred Neumann expects the sell-off to be more discriminating as the “bad apples” with large current account deficits and unstable political rule distinguish themselves from economies in better shape:
- Emerging markets investors tell to sell everything at the first sign of bad news and then they search for the rubble and buy back in where things aren’t as bad as they thought.
- One thing that might happen over the next few months is we’ll get more differentiation between emerging markets because the sell-off has been quite broad.
TD Securities Singapore-based head of Asia-Pacific research Annette Beacher says there’s no avoiding the fact that emerging markets will come under pressure this year with the Fed’s unwinding of quantitative easing locked in:
- When we were all putting together our 2014 outlook, everyone baked US tapering into our base case. But unfortunately the sector that was always going to underperform was going to be the emerging markets because they’ve benefited from trillions and trillions of more-or-less free money looking for a home.
- Obviously China is now on everyone’s radar screen. I cover china at a very, very high level and unfortunately the problem with China is everyone takes every data point as being significant.
- At some stage the market will be a little bit more selective around which markets they punish.
Online betting company Sportingbet has replaced its stablemate Centrebet as the sponsor of rugby league team the Penrith Panthers’ home stadium, in a sign that the betting operators’ British owner William Hill is still finessing its Australian brand strategy.
William Hill’s Australian chief executive, and Sportingbet CEO, Michael Sullivan said that Sportingbet was a stronger rugby league brand than Centrebet.
“We wish to utilise that by placing additional focus on it,” Sullivan said. “The switch to Sportingbet Stadium re-enforces our commitment to supporting and sponsoring rugby league in Australia.”
Sportingbet is also a jersey sponsor for the Brisbane Broncos rugby league team. The company said Sportingbet and Centrebet will both offer a range of rugby league betting products.
GPT Group has opted to re-activate its share buyback after deciding not to proceed with its offer for the Commonwealth Property Office Fund.
In doing so the group confirmed its realised operating income for the full year to December 31, 2013 will be about $471.8 million; the realised operating income per ordinary security is 25.7¢ for the full year, EPS growth of 6.1 per cent which is in line with previous guidance of at least 6per cent.
Analysts said the share buyback was ‘‘sensible capital management’’. Under the current buyback, the group is only allowed to buy back up to a further about 100 million securities or 10 per cent over 12 months) up to May 2014.
Macquarie Equities analysts said with GPT’s gearing at December 31 of 22.3 per cent, they estimate the group has about $1 billion in debt capacity assuming gearing moves to about 30 per cent.
‘‘Consistent with our recent research on GPT, we estimate a buyback of this magnitude would be about 5 per cent accretive to GPT's 2014 funds from operations,’’ the brokers said.
Shares are up 1.1 per cent at $3.61.
NAB has used the business conditions survey to push back its forecast for the Reserve Bank's next interest rate cut from May to November after last week's surprise jump in fourth-quarter inflation and improving business conditions over the next few months.
The bank's economists say they don't expect the RBA to raise the cash rate until late 2015. They forecast the Australian dollar to fall to US84¢ by the end of the year to to US80¢ by end-2015.
"Our GDP forecasts are broadly unchanged," the economists say. "In through-the-year terms, we expect growth to edge up from 2.3 per cent in the third-quarter [of the 2013-14 financial year] to 2.6 per cent by mid-2014."
As a potential new crisis in emerging markets gathers, we should remember that the old one in Europe continues to bubble away, particularly in the epicentre of the sovereign debt crisis, the banking sector.
Yesterday Italy's fourth-biggest bank, Banco Popolare, dropped almost 15 per cent, the most since December 2008, after it announced unexpected losses and plans to raise 1.5 billion euros in additional capital.
With investors holding fears that other Italian banks’ assets may see further write-downs, Banca Popolare dell’Emilia Romagna was off 9 per cent and Banca Popolare di Milano dropped 8 per cent.
It highlights the dangers of investing in European financial stocks, such as the lenders. But there are clearly opportunities: billionaire fund manager Kerr Neilson, for one, has repeatedly highlighted he likes select banks from the region.
And not to get too gloomy, but unemployment rates in countries at the centre of the European debt crisis remain scarily elevated, such as France (11 per cent – a 16-year high), Italy (12.7 per cent – highest since records began in 1977) and Spain (26.7 per cent, an all-time high, with youth unemployment of 57.7 per cent).
The improved reading for business conditions in December has lifted the Australian dollar. The currency rose from about US87.26¢ to US87.63¢ after the results of the survey was released.
But not everyone is convinced:
Some local economic data out today: business conditions have soared to a 2½-year high as sales and profits in some industries are rising sharply amid low interest rates, higher share and house prices and a weaker exchange rate.
The jump in conditions for December to 4 points from minus 3 in November brought it in line with the recent elevated levels of business confidence, the National Australia Bank says in its monthly survey.
Business confidence for December was unchanged at 6 points, "and could possibly remain at these levels for longer than previously thought given that the conditions index has begun to respond".
NAB's chief economist Alan Oster says it's not clear if the lift in business conditions could be sustained given that forward orders remained subdued, stocks are being run down and capacity utilisation remained low:
- Unsurprisingly, employment conditions remain soft, consistent with the recent weak labour market reports from the ABS and our outlook for ongoing deterioration of the labour market.
- Manufacturers are yet to see any material benefit from falls in the Australian dollar, while many are facing higher purchasing costs as a result.
- The construction and mining industries showed little to no improvement in the month, despite healthy activity in residential property markets and robust commodity demand from China.
Of course bitcoin made it onto the agenda at Davos, but it didn't win many new fans. In a panel on digital trends, Nobel Laureate economist Robert Shiller, an expert in financial bubbles, said that as a currency, bitcoin is a return to the dark ages, and a classic bubble.
“It is a bubble,” Shiller said, according to Business Insider. “There is no question about it. It’s just an amazing example of a bubble.”
Shiller added that the computer science behind the virtual currency is an “inspiration,” it is not an economic advance. “It’s not such a great idea,” he said he tells his students, but he’s blown away by how much fascination the virtual currency has engendered.
US Treasury secretary Jack Lew, and JPMorgan Chase chief executive Jamie Dimon also added their 2 cents, speaking on the regulations and possible abuses surrounding the virtual currency.
The elite talkfest that is Davos ended on the weekend, with billionaires bemoaning rising inequality the theme de jour.
It's a nice place in the Swiss Alps and no doubt there were plenty of interesting other topics, but was it really worth going?
If you use sharemarket performance as a guide, then the answer has to be 'no'. The Economist has done some numbers crunching and comes to the conclusion that companies that regularly attend Davos’ have underperformed the broad market:
Macquarie is looking to expand its portfolio of power assets, one of its executives told Reuters, and may even invest in continental Europe, where utilities are closing thousands of megawatts worth of gas and coal plants.
Long established as a buyer of European infrastructure assets, including gas networks offering fixed annual returns, Macquarie has also started to buy power plants, which European utilities are shedding as a result of high gas prices and low power contracts.
"Macquarie has acquired several conventional power plants in Britain. But we're also considering investing in generation outside the UK," Hilko Schomerus, managing director at Macquarie Infrastructure and Real Assets, said. "Therefore, we're looking for opportunities in the whole of Europe, including Germany, even though the situation there is more challenging."
And then there's the US earnings season, which has so far offered a mixed bag of results and not really contributed to justifying the high valuations of many stocks after last year's market rally.
After the close on Wall Street, Apple posted its numbers, missing Wall Street's lofty target for iPhone sales over the crucial holiday shopping season and offering a weaker-than-expected forecast for this quarter, which sent its shares down 8 per cent in after-hours trade.
The world's most valuable technology company sold a record 51 million iPhones in the quarter, but that was shy of the 55 million or so analysts had expected, reflecting intense competition from arch-foe Samsung Electronics during the crucial period.
The company forecast sales of $US42 billion to $US44 billion this quarter, which investors anticipate will be brisker than usual because of its recently sealed deal to sell iPhones through China Mobile Ltd, the country's No. 1 carrier. Wall Street was expecting $US46 billion, on average.
Apple recorded sales of $US57.6 billion in its December or fiscal first quarter, versus expectations for about $US57.5 billion. First fiscal quarter earnings were $US14.50 a share, higher than estimates of $US14.07.
"The report for the December quarter was fine, but the real problem is the forecast for the March quarter," said Brian Colello, an analyst at Morningstar. "The revenue certainly appears to be a shortfall."
"After showing modest signs of improvement, we're back to a no-growth outlook," said JMP Securities' Alex Gauna. "It's something Apple needs to find an answer to... If it can't prove that it's going to be a growth story again, the valuation is too high."
It's not only the emerging markets rout weighing on global investor sentiment, there's also fear the US Federal Reserve will accelerate the speed of "tapering", or reducing, its stimulus when it meets over the next two days.
Most analysts don't think the global turbulences will prevent the Federal Open Market Committee from announcing that it will further reduce its $US75-billion-a-month monthly bond-buying program by about $US10 billion.
A reduction of the same size was announced in December. (Note that this week's meeting will also be Ben Bernanke's last as Fed chair before Janet Yellen takes over)
"The Fed is likely to attribute the recent uptick in emerging markets volatility to local developments rather than to US monetary policy normalisation, and therefore is unlikely to pause its tapering in response," Nomura rates strategist Martin Whetton says:
- Rather, it is the continued signs of economic momentum in the data that are expected to drive the Fed’s decision not to pause tapering its asset purchases.
- Indeed, after last week’s pause in US data supply, a flurry of releases this week, beginning with new home sales today if demonstrative of a continued acceleration in the US recovery, may help dampen overall market concerns over emerging markets.
A pullback of the Fed's easy money has been named as one of the reasons global stocks are sinking, and the US dollar is recovering.
Some more on JB Hi-Fi: shares have posted their biggest gains for almost a year, rising 11 per cent after the consumer electronics retailer maintained its full year sales guidance and confirmed that December-half net profit was expected to rise 10 per cent.
JB Hi-Fi chief executive Terry Smart released the trading update following a series of profit downgrades from retailers such as The Reject Shop, Super Retail and consumer products company McPherson’s.
Smart said JB Hi-Fi’s net profit rose 10 per cent to $90.3 million in the six months ended December 31, compared with $82.1 million in the year-earlier period. The result was slightly ahead of market consensus forecasts of about $90.25 million.
Earnings before interest and tax had risen 7.5 per cent to $132.9 million, slightly below consensus forecasts around $133.5 million.
Shares are currently up 7.5 per cent.
And now the best and worst performers among the top 200 stocks.
As mentioned, JB Hi-Fi has surged thanks to an upbeat trading update, presumably to scotch investor concerns that it was going to fallow the lead of some other retailers and disappoint with their interim results due out February 3.
That looks to have sparked some like in the retail sector, with Myer up a bit in a down market, while The Reject Shop still has a long way to regain its share price losses of last week.
Oil Search is an early mover after a quarterly report was received well by the market.
Alacer Gold has had a poor start, as have fund manager Henderson, James Hardie and Breville Group.
This mornings best and worst performers on the ASX200.
Here's the price action of some of the companies making news this morning:
- Boral up 3c to $4.75, or 0.6 per cent.
- JB Hi-Fi up $1.96 to $20.25, or 10.7 per cent.
- GPT down 3.5c to $3.54, or 1 per cent.
- AJ Lucas down 5c to $1.08, or 4.4 per cent.
And here we go: the sharemarket is getting hammered at the open, wiping more than $22 billion off the market's value.
The benchmark S&P/ASX200 is down 79.6 points, or 1.5 per cent, to 5161.3, while the broader All Ords has lost 77.8 points, or 1.5 per cent, to 5176.5.
All sectors are in the red, with materials slumping 2.1 per cent, financials down 1.7 per cent and industrials off 1.2 per cent.
Investors are once again betting big time the Aussie dollar will fall.
Global hedges funds are increasingly betting our local currency will fall.
There was a further build-up in Australian and Canadian dollar shorts in the week ending 21 Jan, taking both to multi-month highs, report analysts at RBC Capital Markets.
Net short AUD positioning went up by 13,000, reaching levels last seen in early September - as the chart shows.
Both Canada and Australia are large commodity exporting economies that are perceived as vulnerable to a slowdown in Chinese demand for natural resources.
Net long euro positioning also dropped by 13,000 and notably turned short for the first time since late November.
"Long" positions are bets by traders that the value of the currency will go up, while "short" positions are the opposite.
The main beneficiary has been the US dollar, with net longs building up by a further 27,000.
The chief executive of struggling mining services group AJ Lucas, Allan Campbell, has resigned just two months after the company delivered a profit warning and launched a business-wide review.
Campbell, who was previously CEO and chairman of the group will be replaced on an interim basis by Phil Arnall. Arnall had been appointed non-executive chair in November.
AJ Lucas was forced to raise equity in September last year due to its high debt load and problems in its drilling division, which has been hit by the wider mining sector downturn.
Campbell said in a statement that after “19 years of sustained pressure” it was time to step down “now the company has a significantly strengthened balance sheet”.
Campbell was CEO since he acquired the company in 1995 and listed it on the ASX in 1999. He remains one of the company’s largest shareholders.
Treasury Wine Estates is in a trading halt pending an announcement. Shares are to resume trading by market open on Thursday at the latest:
"The company requests this halt whilst management reviews its preliminary financial results for the 6 month period ending 31 December 2013 and any implications for the company’s full year forecast."
Boral expects its first-half net profit to total about $90 million, a result buoyed by good sales of its building products and a favourable construction environment in Australia thanks to good weather.
The building materials company, which is scheduled to report its first-half earnings on February 12, said it expects a “significant skew of earnings to the first half of the year” compared with the second half because of the timing of major projects and a “reduced contribution” from Boral Gypsum as its share in the venture drops to 50 per cent when the half-stake sale to USG is completed.
It also said it expects lower profits from property sales in the financial year ending June 30, compared with previous years when such sales “traditionally benefited the second half”.
Are we going to see a major sell-off today? Here's the poll:
Poll: Where do you expect the ASX200 to stand at the end of the session?
- Shares will be heavily sold off, with the ASX200 slumping below 5200.
- Shares will be sold off early, but an intra-day turnaround will see the ASX200 close flat.
- Bargain hunters will jump in and push the ASX200 higher for a slightly positive close.
- We're going to see stocks rally back above 5300 points.
Total votes: 670.
You will need Cookies enabled to use our Voting Feature.
These polls are not scientific and reflect the opinion only of visitors who have chosen to participate.
Turning to what's happening locally this morning, Andrew Forrest's Poseidon Nickel has asked for an extension of its trading halt, after the company was not able to complete its long-awaited capital raising as hoped.
Poseidon has spent the past four days trying to secure a funding deal that with allow the junior to develop its Windarra project in Western Australia, plus repay an $8 million loan from its biggest shareholder Mr Forrest.
Poseidon is believed to need about $197 million to develop its project, while the loan to Forrest would need just over $9 million to satisfy given it is accruing interest at 13 per cent.
The company has told the ASX this morning that it needs more time to progress discussions and sign term sheets on the deals, and it hopes to be able to do so by next Friday, February 7.
Poseidon shares last traded on January 22 at 10.5 cents
And here's how key emerging market bourses have fared so far this year. Interesting that Argentina is up despite the currency getting walloped:
- Brazil: -7.4%
- Turkey: -4.8%
- India: -2.7%
- Argentina: +4%
- Russia: -7.4%
- MSCI emerging markets index: -5.3%
Those are mostly fairly significant falls but perhaps not quite as dramatic as some of the media reports make you think. Developed nation markets are also down but so far it's altogether not a major correction:
- S&P500: -3.6%
- FTSE100: -2.9%
- Dax: -2.1%
- Nikkei: -7.9%
- Hang Seng: -5.7%
- Shanghai: -3.9%
The mood has turned distinctly sour in emerging markets in 2014, echoing the large sell-offs that accompanied the "taper terror" of mid last year. This time around its again uncertainty around US Fed policy and the speed of QE tapering, concerns about China's economy, and global investors scaling back their EM exposures as developing markets pick up.
Here's a quick round up of EM hotspots:
- The value of the Argentine peso is collapsing, suffering its worst one-day fall in more than a decade - it fell 15 per cent last week. The central bank is scaling back its efforts to support the peso as their foreign exchange reserves are dwindling.
- Brazil's sharemarket has plunged, and its currency stooped to a 5-month low.
- The South African rand dropped to its lowest level in 5 years
- Venezuela's government has devalued its currency by 45 per cent.
- The Turkish lira plunged to a record low. Authorities there spent $US3.5 to $US4.5 billion to shore up the lira, but have only $US33 billion left in reserves.
- There is political turmoil and violent demonstrations in Thailand and the Ukraine, set against the deep rumblings of antagonism between China and Japan.
- Ongoing fears of a "hard landing" in China have been exacerbated by a very weak early indicator of manufacturing, the HSBC/Market Flash PMI.
US stocks extended recent losses overnight, with the S&P500 falling for a third straight session as concern grew about the Federal Reserve's plans for withdrawing stimulus.
The losses, which picked up late in the session after the S&P 500 briefly traded in positive territory, followed a steep sell-off late last week tied to emerging market concerns. The slide gave the S&P 500 its worst weekly percentage loss since June 2012.
Limiting losses in the Dow and S&P 500, however, was Caterpillar. The stock jumped 5.9 per cent to $US91.29 after the maker of mining and construction equipment reported a stronger-than-expected quarterly profit.
The S&P 500 dropped 8.73 points or 0.5 per cent, to finish at 1781.56. The Nasdaq Composite slid 44.56 points or 1.1 per cent, to close at 4083.61. The Dow Jones fell 41.23 points, or 0.3 per cent, to end at 15,837.88. For the Dow, Monday marked a fifth session of losses.
"There's still a lot of nervous money hanging around," Bucky Hellwig, senior vice president at BB&T Wealth Management told Reuters. "The Fed is meeting this week, and the consensus is they're going to proceed with the taper."
Many market participants are bracing for the market to sell if the Fed decides to keep withdrawing stimulus. In December, the US central bank announced plans to begin scaling back its massive bond-buying program.
Last week's heavy selling raised some concerns that the market may be in for a major correction, especially since the S&P 500 closed on Friday below its 50-day moving average for the first time since October 9. On Monday, the Nasdaq ended below its 50-day moving average.
Others did not consider the recent selling as cause for concern.
"The slowdown in emerging markets isn't prevalent enough to derail the deepening economic recovery that we're seeing across developed markets," said Steven Rees, US head of equity strategy at JP Morgan Private Bank in New York. "We're not expecting a major correction in the market this year."
The Australian dollar has shaken off the recent global wobbles and even retraced its losses in the wake of RBA board member Heather Ridout's comments on Friday, which sent the currency tumbling below US87¢ late last week.
The local currency, which fell as low as US86.78¢ yesterday, soared by about three-quarters of a cent overnight to trade as high as US87.59¢ this morning. It's currently fetching US87.42¢.
Despite the short lift, negative global risk sentiment is still weighing on the Australian dollar, Westpac senior market strategist Imre Speizer says:
- The break below major support around US88¢ has been sustained, and that level should now cap any near term bounces.
- Over the next few months, concerns about slowing local and Chinese economic data could also see the currency decline further.
And following on from the last post, here's how emerging markets currencies have performed so far this year (against the US dollar):
- Indian rupee: -2.6%
- Turkish lira: -5.9%
- Brazilian real: -2.5%
- Argentinian peso: -18.5%
- Russian ruble: -5.4%
The Australian dollar over the past three trading days.
We'll be spending a bit of time this morning taking a look at just what's given global markets the spooks.
Rivkin CEO Scott Schuberg points to weakness in emerging markets, which have seen heavy sell-offs in both equities and currencies over the past week:
- Presently the world is relying pretty heavily on emerging markets to help the prospects of global growth, with Asia accounting for about 60% of the expected global GDP growth based on current forecasts.
- While during the years when US quantitative easing (QE) either had no end in sight or was being added to, opportunists (chiefly investment banks and hedge funds) borrowed cheap money from the US and invested in countries where bond yields were high and growth was emerging, which lent great liquidity to emerging market economies throughout Asia, Latin America and other hot spots like Turkey and Mexico.
- As the rallies in those equity, currency and bond markets topped out and the US Federal Reserve signalled the beginning of the end of QE, things started to go a bit pear-shaped for emerging markets and liquidity began to dry up.
- So this end to the fuelling of the 'no-brainer' emerging market carry trade (borrow cheap money, buy high yielding money) is taking with it some of this sharp GDP growth in smaller economies that has been made to look so significant on a global scale, thanks to such anaemic growth in North America and Europe.
Here's a good wrap of global action overnight, courtesy of ANZ:
- There was little in the way of data, with weaker than expected US house sales contrasting with upbeat German business confidence. The USD was relatively stable, with headlines that the Turkish central bank is to hold an emergency meeting on Tuesday helping to settle the Turkish lira.
- Overall, market moves were contained overnight with equities typically trading in tight ranges, while US Treasuries sold off marginally. In currency markets, AUD/USD was slightly higher and is currently trading around 0.8755.
- Following sharp falls in the lira, the Turkish Central Bank was quick to act, with its Monetary Policy Committee announcing it will be holding an interim meeting to "discuss recent developments and take the necessary policy measures for price stability." With the decision due midnight on Tuesday Turkish time, expectations are that the Central Bank will aggressively raise interest rates (a minimum of 100bps is expected) to help stabilise currency markets.
- ECB policymakers have also downplayed concerns over contagion, with ECB governing council member Noyer noting he did not expect tensions in emerging markets to spread through euro area markets. Indeed, Noyer stated that, “generally speaking, the IMF has just revised upward its global growth forecast, so there’s no particular reason that Europe should be affected by the problems encountered by a small number of countries.”
- Encouragingly, bond spreads to bunds have narrowed for most of the Eurozone peripherals – even for Spain – whose banks have large exposures to Argentine banks.
- The German IFO survey rose to 110.6 in December from 109.5 in the previous month - its highest level since July 2011. The current conditions and expectations components both increased solidly. Encouragingly, these data point to further strengthening in the German recovery and reasonable momentum in Europe’s largest economy.
- In the US, new home sales were weaker than expected declining to 414k (mkt:+455k) in December from 445k in November. We would note, however, that sales activity was likely hampered by poor weather conditions.
Local stocks are poised to open sharply lower as Australian investors play catch-up with a global sell-off.
Emerging market equities hit a five-month low overnight to lead a global stocks sell-off, while Wall Street failed to hold slight gains as sentiment soured.
Concerns about China's economic slowdown and its shadow banking sector, combined with expectations that the US Federal Reserve will scale back its bond buying further, have put pressure on emerging markets dependent on external financing.
Here's how some of the main markets performed overnight:
- SPI futures down 39 points at 5118
- AUD at 87.40 US cents, 63.92 euro cents
- On Wall St, S&P500 -0.4%, Dow Jones -0.26%, Nasdaq -1.06%
- In Europe, FTSE100 -1.7%, CAC -0.41%, DAX -0.46%
- Spot gold down $US10.57 to $US1259.51 an ounce
- Brent oil down $US1.10 to $US106.78 per barrel
- Iron ore is flat $US124.30 per tonne
Read more on how global market performed overnight in this morning's need2know
Good morning and welcome to the Markets Live blog for Tuesday. A special welcome for everyone returning from summer holidays.As requested by our readers last week, we've decided to trial an earlier start and will be aiming to get the blog up and running by 9am.
Your editors today are Jens Meyer and Patrick Commins.
This blog is not intended as investment advice.
BusinessDay with wires.