Business

Markets Live: Investors sour on banks

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

Local shares slid as Australia's balance of trade posted a deficit and the most recent survey of activity in the Chinese services sector disappointed, with global investors holding their breath ahead of a keenly awaited European Central Bank meeting.

The benchmark S&P/ASX 200 Index fell 0.2 per cent, to 5436.9, while the broader All Ordinaries Index dipped 0.1 per cent to 5419.7 as falls in the biggest banks outweighed a pick-up in the biggest miners following a surprise rebound in the iron ore price. The ASX has declined in five out of the past six sessions.

Equity markets in the United States edged modestly higher on Wednesday while London's FTSE and the FTSE EuroTop 100 Index edged lower ahead of rates announcements from both the ECB and the Bank of England tonight Australian time.

The BoE is expected to leave rates unchanged but the ECB announcement may prove an important market catalyst.

"President Mario Draghi has made very clear the ECB will take some action to stimulate the eurozone economy, but the implication for global markets will depend on how big and broad the stimulus is," Contango Asset Management portfolio manger Shawn Burns said. "However, we expect the benefits to be largely contained to European markets," Mr Burns said.

"If the ECB fires both barrels in its arsenal and uses broader measures, in addition to cutting interest rates, then that could weaken the euro and create extra liquidity very quickly."

In China, the HSBC/Markit services purchasing managers index for May showed activity in the sector at a four-month low of 50.7, worse than recent official data had indicated.

In local economic news, ABS data showed April's trade balance unexpectedly swung into a small deficit.

However, many economists noted April's deficit will likely be temporary. "With the transition from mining investment to production still underway, the trade balance should swing back to surplus in coming months," St George Bank senior economist Janu Chansaid.

Losses among Telstra and the big four banks dragged the index lower.

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dollar

The Australian dollar briefly came under pressure today after data revealed that Australia's trade balance slipped into deficit in April, but the currency recovered in afternoon trade ahead of a key European Central Bank meeting.

The dollar fell to the day's low of US92.58¢ after the April trade balance showed a deficit of $122 million, well below consensus expectations of a $510 million surplus. In late trade the dollar was fetching $US92.81¢, not far off from where it had started the session.

The trade balance deteriorated into a mild deficit, after an upwardly revised surplus of $902 million in March. In April, however, exports fell 1.5 per cent, most likely nudged down by lower commodity prices.

"We were surprised by the result as we had been expecting the trade surplus to narrow quite significantly towards $300 million," said UBS Analyst George Tharenou. "Clearly there's a drag from lower commodity prices which have slumped over the last few months and that's starting to show up in the trade data now."

The dollar hardly reacted to a jump in the iron ore price, which rose 2.3 per cent to $US94.60 on Wednesday night, moving further away from a 20-month low of $US91.80 hit on Friday.

Read more.

money

Australians lose more than $100 million worth of coins down the back of sofas and car seats each year, the Royal Australian Mint says.

Mint chief executive Ross MacDiarmid told a government hearing that 255 million coins disappear annually and are replaced.

"Most of the coins that we provide are against coins that disappear down the back of chairs, down the back of car seats, into rubbish dumps and, in some cases, are taken overseas," he told a Senate committee.

MacDiarmid said some of the coins the Mint replaced each year were those "sitting in people's drawers for long periods of time or in jars".

There are about 5 billion coins - made from copper and nickel - in circulation in Australia.

The government is considering whether the Mint, in Canberra, should be one of several publicly owned assets sold under its plans to cut back spending.

analysis

And here they are - the best and worst for the day.

Best is Mermaid Marine - no announcements but the stock up 5 per cent.

Pacific Brands also gained strongly, with recent rumours the embattled retailer is a potential takeover target. It was revelaed Lazard Asset Management has crept further up the registry - now owning 12.9 per cent of the issued stock.

Worst was Village Roadshow after it revealed it would only be paying 15c of an expected 25c per share special dividend.

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

Banks and consumer staples stocks dragged the market lower, offset by miners, which made some gains for shares to finish only slightly lower for the day.

The ASX 200 and All Ords lost around 7 points, or 0.1 per cent, to 5436.9 and 5419.7, respectively.

The big banks lost between 0.2 and 0.5 per cent, while Wesfarmers dropped 0.8 per cent after reports emerged of a potential bidder for its Vintage Cellars business. Coca-Cola added to the losses in consumer staple stocks, dropping 2.51 per cent. Metcash was the exception, up 2.1 per cent.

Telstra dropped 0.4 per cent.

Fortescue Metals was the biggest individual booster, up 4.3 per cent after iron ore jumped overnight.

Oil Search advanced 1.8 per cent on upgraded production guidance from its PNG LNG project, while Woodside dropped 0.9 per cent.

Challenger jumped 4.1 per cent.

BHP and Rio both advanced, by 0.1 and 0.4 per cent, respectively.

euro

It might seem strange that investors will be closely watching the European Central Bank’s monthly rate decision overnight.

But this meeting will be anything but normal, with ECB president Mario Draghi widely topped to launch quantitative easing measures of some description.

So if the ECB follows the US, how will this affect global asset markets? French bank Societe Generale has a few thoughts, including how Australian investors might benefit.

CARRY TRADE REJUVENATED

If the ECB adopts a quantitative easing policy and enters a negative deposit rate scenario, high carry trade currencies that react positively to risk appetite, like the Aussie, are expected to react strongly. The Aussie and Norwegian Krone are key pairs to benefit.

RENEW GOLD’S SHINE

Mr Legland said as eurozone rates drop relative the US, the US dollar strengthens and makes US-dollar denominated commodities more expensive.

“This seems to have the greatest impact on gold as its increase is significantly lower that the other commodities in this environment”.

LIFT EMERGING MARKETS

Although Mr Legland says emerging market investors are focused mainly on the US monetary policy outlook, particularly the risk of early Fed rate hike, “bold” ECB easing is likely to trigger a “major risk sentiment boost” for high yielding assets in emerging markets.

“Our top picks … include Romania, South Africa and Mexico.”

CONFIDENCE BOOST

If the ECB were to buy government bonds directly this would cause government credit default risk to disappear and reassure markets, Mr Legland said.

“We believe eurozone periphery country spreads will continue to tighten, pushing domestic equity markets and overall eurozone bank valuations higher.”

Mr Legland said QE could also end volatility in eurozone equities.

cars

UBS has initiated coverage of automotive parts distributor Burson Group Limited with a “buy” recommendation.

Burson sells about 85 per cent of its products to trade customers and do-it-yourself vehicle owners and has grown its number of stores to 114 from 81 in May, 2011.

UBS says the company operates in a “relatively defensive” industry, where its trade customers value delivery speed and parts knowledge above pricing.

Burson plans to expand to 175 stores over the next five years, which UBS says is a realistic target, given the company is not represented in a number of regions and has significantly more productive stores than its major rivals.

UBS forecasts the company’s revenue to grow 11.2 per cent to $340.8 million in fiscal year 2014 and net profit to grow 21.3 per cent to $19.4 million over the same period.

Shares in Burson started trading on the ASX boards at 1.82¢ on April 24 and last traded at $1.95.

Beverages

The Wesfarmers-owned Coles supermarket and liquor group has received approaches from private equity buyers wanting to buy the Vintage Cellars liquor chain for up to $300 million.

It is understood that the approaches have been made in the past few days and involve splitting off the Vintage Cellars chain in a clean sale out of the larger Coles liquor division.

Vintage Cellars operates 77 stores around Australia and has been battling to make headway with its smaller footprint stores in a highly-competitive market being increasingly dominated by superstores like rival Dan Murphy’s, owned by Woolworths.

Coles does not separate out the financial performance of its individual liquor retailing brands. Industry sources suggested that annual sales at Vintage Cellars are currently around $250 million and that it makes profits of between $15 million to $20 million. It has been weighed down by onerous head office costs that have crimped its performance.

The approaches have been made by at least two different parties as part of deals involving Coles’ underperforming liquor division and are centred on a spin-off of Vintage Cellars.

A Coles spokesman said on Thursday: “We don’t comment on media or market speculation around mergers, acquisitions or divestments.”

Read more ($).

shares down

Village Roadshow has announced a 15c per share fully-franked special dividend, below the previous guidance of 25c after a “generally disappointing” box office performance of the movie Transcendence.

Aa a result of that disappointment, the film division of the business will write off $2 million and fall short of full-year earnings forecasts, says the company in a statement to the ASX.

That flows through to a revised profit guidance for the overall business, with fiscal 2014 expected to be equal to or slightly below the prior year, rather than “slightly exceed” those results.

The company said it will “consider a further 10 cents per share special dividend (potentially franked) later in FY15 or FY16, subject to circumstances and available franking credits at that time”.

The shares have plunged more than 9 per cent on the news to $7.17.

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iron

Chinese iron ore futures have slipped for a fifth session in six, dragged down by plentiful supply and a crackdown on commodity financing deals in China.

China's Qingdao port said yesterday it is investigating whether warehouse receipts for iron ore were fraudulently used multiple times to raise financing from different banks.

About 40 million tonnes of iron ore stocked at Chinese ports are linked to financing deals, a trader in Singapore estimated. Iron ore at Chinese ports stood at a record high 113.6 million tonnes last week, according to industry consultancy Steelhome.

A crackdown risks the potential sale of iron ore from those stocks sitting at the ports, raising the prospect of a renewed price slump.

"The market remains oversupplied and the probe is putting further pressure on iron ore," said the Singapore trader.

Iron ore for September delivery on the Dalian Commodity Exchange was off 0.6 per cent at 683 yuan ($US110) a tonne by midday. It climbed more than 1 per cent on Wednesday after hitting a contract low of 675 yuan in the prior session. Also adding pressure, the most-traded October rebar contract on the Shanghai Futures Exchange fell 0.8 per cent to 3038 yuan a tonne.

Spot iron ore prices rose 2.3 per cent on Wednesday after a slide to 20-month lows drew buyers back into the market. But traders say purchases by Chinese mills remained small amid plentiful supply in the spot market.

"I'm not sure demand is strong enough to push prices higher in a big way. No mills would buy in very large volumes at the moment because prices are most likely to fall again," said a trader in Shanghai.

 

Breakeven price for Australian iron ore miners, according to UBS estimates.
Breakeven price for Australian iron ore miners, according to UBS estimates. 
US news

American dream? More like a pipe dream, according to a research report released overnight.

The fresh poll from CNN/ORC International, reported by MarketWatch shows 59 per cent of US adults think the American dream has become impossible for most to achieve, up from 54per cent in a poll conducted in 2006.

What’s more, 63 per cent of those surveyed believe most children in the US will grow up to be worse off than their parents.

Older Americans were even more pessimistic, with 70 per cent agreeing that kids won’t do as well as their parents, as opposed to 59 per cent who agreed in the 18-34 and 35-49 brackets. A total of 1,003 adults were surveyed by telephone. Women were more downbeat than men.

Just a day earlier, new research showed that more than half of Americans (52 per cent) have had to make at least one big sacrifice over the last three years, just to be able to pay the rent or mortgage.

That study also found that many don’t associate the American dream with home ownership anymore. Some say that attitude is linked to still-fresh memories and problems from the housing bust.

Still, the CNN poll showed that 54 per cent of those surveyed believe they are better off financially than their parents were at their ages, with 41per cent saying the opposite.

Commenting to CNN on the findings, Erin Currier, director of the Economic Mobility Project at Pew Charitable Trusts, said the gloomy response reflects the hardships facing families.

“They are treading water, but their income is not translating into solid financial security,” said Currier, adding that only half have more wealth than their parents.”

eco news

There may be some disappointment that Australia recorded a trade deficit in April. But the blues would have been quickly washed away with the upward revision to surpluses for February and March, CommSec chief eocnomist Craig James notes:

  • One reason that Australia recorded a trade deficit in April was a surge in imports of phones (“telecommunication equipment”). Australia is now importing a record $8.4 billion of phones (presumably largely mobile phones), ahead of imports of toys & sporting goods and household electrical goods. Being connected is clearly important for the average Aussie.
  • Australia’s exports to China hit fresh record highs in April and there are no signs that the record-breaking run is coming to an end. Over the past year Australia exported just over $101 million goods and services to China while imports from China were only slightly below $50 million. China is dominating Australia’s trade like no country, apart from the UK which held sway many decades ago.
china

China is set to export deflation to the West via the devaluation of its currency, “likely crushing US and eurozone profits in the process,” writes Societe Generale’s resident bear, Albert Edwards.

If Chinese policy makers do choose to pursue a competitive devaluation to boost their export performance to offset a slowing economy, then they wouldn’t be the first.

It’s an explicit policy of Japan to weaken the yen, while the US Fed has undermined the greenback thanks to its quantitative easing actions.

A little over a week ago, amid the cheers around easing measures by China’s central bank and an improvement in May’s PMI figure, the market overlooked the US dollar reaching its strongest against the renminbi since October 2012, says Edwards.

The SG strategist goes on to quote the FT’s John Authers: “Questions are already being asked in Washington as to whether this is in fact a stealth operation to boost competitiveness.

"After all, China has a history.”

The competitive devaluation of China's currency will export deflation to the rest of the world. Source: Societe Generale
The competitive devaluation of China's currency will export deflation to the rest of the world. Source: Societe Generale 
housing

Sydney apartment prices are expected to soar by a further 15 per cent over the next two years as low vacancy rates, low interest rates and relatively attractive yields continue to attract investors and younger owner-occupiers

“It is Generation X and Y – who are increasingly seeing apartments as a more permanent living option – that have been supporting this rise in owner-occupier demand,” said the author of a new report, Angie Zigomanis, of researcher analysts BIS Shrapnel.

Mr Zigomanis says in the report, Apartments in Sydney Suburbs 2014 to 2019, that recent concerns over a potential downturn in Sydney property prices may be premature

BIS Shrapnel predicts Sydney’s high-density apartment market will remain strong over 2014/15 and 2015/16. 

The report says it is unlikely an oversupply of apartments will emerge in the Sydney market as – despite record numbers of new apartments being built – the market is still playing catch-up from almost 10 years of subdued building activity.

“This level of activity [would] need to be sustained for a number of years to counter the underlying undersupply that has emerged after the best part of a decade of underbuilding,” says Mr Zigomanis

He adds the proportion of owner-occupiers living in apartments has begun to creep up, jumping from 39 per cent to 42 per cent in the five years to 2011. 

Read more.

“It is Generation X and Y – who are increasingly seeing apartments as a more permanent living option – that have been ...
“It is Generation X and Y – who are increasingly seeing apartments as a more permanent living option – that have been supporting this rise in owner-occupier demand,” said the author of a new report, Angie Zigomanis, of researcher analysts BIS Shrapnel. Photo: Anna Kucera
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agriculture

Eastern Australia's largest grains handler, GrainCorp, will cut 80 jobs and shut unprofitable storage sites as part of a $200 million plan to revitalise the company's country grain network.

GrainCorpwill spend $200 million over three years, the single biggest capital investment in its country network ever, as it attempts to shift 1 million tonnes of grain from road to rail transport.

The company will cut its storage network to 180 sites. It will close more than 72 sites across the network where less than 10 per cent of the east coast crop is received.

GrainCorp is overhauling its network, focusing on localised "clusters", offering end-to-end export logistics and spending money to improve rail loading times.

GrainCorp believes its investment will deliver a benefit to growers of $5 per tonne of grain.

However, it wants state governments to also invest in rail infrastructure, which could deliver an additional $5 per tonne to growers.

The investment program, called Project Regeneration, will create a $4 million one-off restructuring cost for fiscal 2014.

The new country network model would be "largely" in place by the time winter crops are harvested later in the year.

The investment is aimed at securing more grain in to its network as competition from offshore rivals including Cargill intensifies.

Read more.

shares up

Shares in Australia's dominant media monitoring company, iSentia Group, have surged on debut, delivering a $4 million paper profit for its chief executive.

iSentia shares were up 43 cents, or 21 per cent, just after midday in the company's first day of trade. iSentia had raised money at $2.04 a share in its initial public offering.

Formerly known as Media Monitors, iSentia tracks editorial content across social media, broadcast, print and online for clients seeking to stay abreast of how they, their peers and their industry are being talked about.

It has been sold by private equity firm Quadrant, which has retained a 21.6 per cent stake worth $106.7 million - up from $88 million.

Earlier today, iSentia chief executive and major shareholder John Croll said he was pleased with investor support for plans to boost revenue per customer and rev up its social media business in Australia. iSentia was also seeking to build client numbers in Asia, he said, where it has 600 employees after a series of acquisitions over the past decade.

"In Asia, it's all about client acquisition," Mr Croll told Fairfax Media.

Mr Croll is the company's seventh-biggest shareholder, with 7.8 million shares or 3.9 per cent of the company. His stake was worth almost $16 million in early trade.

Read more.

retail

Australia's love affair with Spanish fast-fashion chain Zara appears to be moderating, with the retailer's latest financial results show slowing sales momentum and rising costs.

When Zara, whose Australian offshoot is 20 per cent owned by billionaire retail mogul Solomon Lew's family, first opened in Australia three years ago it caused huge excitement among shoppers with lines out the front of its first stores in Melbourne and Sydney common.

Indeed, it was rumoured that at Zara's first Australian store in Sydney 80 per cent of its stock, - $1.2 million worth of fashion - sold out on its opening day.

But while the buzz may have died down, Zara is still a magnet for some shoppers. It's Australian revenue was up 32.1 per cent to $141.16 million for the 12 months to January 31.

Sales were supported by store openings in Canberra and Victoria, taking Zara's Australian store total to nine.

However, the double-digit revenue leap for 2014, which other Australian retailers would love to emulate, was down substantially from the 56 per cent revenue increase recorded in 2013.

Results lodged by the international retailer with the ASIC, and reported on by Macquarie Private Wealth, also indicate average sales per store have continued to fall since Zara's local debut in 2011, down from $42.8 million in 2012 and $25.8 million in 2013 to $18.2 million in 2014.

Full-year profit for 2014 was down 8.5 per cent to $16.46 million.

Read more.

A Zara store in Sydney.
A Zara store in Sydney. 
Online sales

A Hong Kong venture capital firm, Deep Knowledge Ventures, has crossed the final frontier by appointing a computer algorithm to its board of directors.

According to the developer of the program, UK-based Aging Analytics, the program - called Vital - ‘‘can make investment recommendations about life sciences firms by poring over large amounts of data’’.

Deep Knowledge Venture’s Charles Groome said in a recent interview that it is not what you would call artificial intelligence at this stage ‘‘but that is the long-term goal”. He says the plan is to develop it ‘‘as an independent decision maker.”

There was no word on what sort of director’s fee Vital has managed to negotiate for itself, but DKV obviously did not rely on its new board member to write the introduction on its website.

‘‘One of (sic) such partners is Aging Analytics in the UK, which provides analytical services pertaining to regenerative medicine and biogerontology,’’ the site reads.

"On first sight, it looks like a futuristic idea but on reflection it is really a little bit of publicity hype," Prof Noel Sharkey of the University of Sheffield told the BBC.

"With financial markets, algorithms are delegated with decisions. The idea of the algorithm voting is a gimmick. It is not different from the algorithm making a suggestion and the board voting on it."

analysis

Amcor’s Asian acquisition strategy has won over JPMorgan analysts, who upgraded their rating based on the packaging company’s prospects for bolt-on acquisitions in the region.

JPMorgan said any one individual acquisition was unlikely to be material for the wider Amcor, but it was confident the company could deliver on the identified acquisition pipeline.

“Following the investor tour, we are more confident in AMC’s reinvestment profile due to greater clarity in the path to share and organic growth in SE Asia, as well as comments indicating reduced vendor expectations for asset valuations,” the analysts told clients this morning.

JPMorgan said the Indonesian flexible packaging market was highly fragmented, and Amcor was likely to grow from through bolt-on deals of $10 million to $30 million over time.

The broker said the Indian flexibles market was likely to provider larger opportunities.

JPMorgan upgraded Amcor to “neutral” from “underweight” and boosted its price target to $10.60, from $10. The analysts expect Amcor will have $300 million a year surplus capital to put into bolt-on acquisitions.

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