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A weaker global growth outlook, another fall in the iron ore price, and soft local employment figures have all helped push the Australian sharemarket lower.
The benchmark S&P/ASX 200 Index and the broader All Ordinaries Index each fell 0.5 per cent on Thursday to 5428.8 points and 5407.9 points, respectively.
Local shares followed equity markets in the United States and Europe lower as investors digested a move by the World Bank to lower its global growth forecast for 2014 from 3.2 per cent to 2.8 per cent. Major markets around Asia traded lower in the afternoon.
In domestic economic news, Australian Bureau of Statistics data showed the unemployment rate in May was 5.8 per cent, in-line with forecasts. But economists said the labour market is softer than the headline unemployment rate suggests, with it hiding a falling participation rate as more job seekers give up looking for work.
"Employment tends to be a lagging indicator so it does not have a big influence on our equity strategy," Zurich Financial Services senior investment strategist Patrick Noble said.
Mining was the worst-performing sector, down 0.9 per cent, as the spot price for iron ore, landed in China, edged down another 0.1 per cent to $US93.50 a tonne. A steep fall in iron ore futures trading in China suggested the spot price would fall again tonight.
Resources giant BHP Billiton shed 0.6 per cent to $35.71, main rival Rio Tinto fell 1.1 per cent to $58.72 and iron ore miner Fortescue Metals Group lost 4.6 per cent to $4.33.
"BHP moved this week to cut more costs in response to softer commodity prices, so smaller miners with higher costs must be really feeling the pinch. Expect to see more profit forecast downgrades from the junior mining and mining services sector," Mr Noble said.
Junior iron ore miner Arrium was the worst-performing stock in the ASX 200, down 7.3 per cent at 83¢. BC Iron and Mount Gibson Iron also lost more than 5 per cent each.
And here are the best and worst among the top 200 stocks today.
Ten and Southern Cross enjoy the limelight after the government said it would consult on media ownership laws.
Treasury Wine Estates enjoyed reports that KKR was sounding out major institutional shareholders.
Iron ore producers were the worst hit, after Chinese iron ore futures trading suggested the benchmark iron ore price will fall tonight.
United States private equity firm Kohlberg Kravis Roberts is understood to have made fresh soundings to major institutional shareholders in Treasury Wine Estates as the wine company prepares to cut about 100 staff by June 30.
Treasury shares closed up 4.9 per cent today to $5.04 on the news, arresting a six-session slide.
New chief executive Mike Clarke is aggressively pushing to cut costs. The company is preparing for two large redundancies tranches in a restructure which may axe slightly more than the 5 per cent of the workforce target outlined by the company last month.
About 100 Treasury staff in middle management, administration, logistics and distribution, and some contractors, will be made redundant by the end of June – between 50 and 60 per cent of the broader restructuring.
In the next and final wave of the cost-cutting, up to 60 people will lose their jobs by the end of September. A small number of staff have already left after Mr Clarke outlined a $35 million cost-cutting program on May 20 when the wine group, whose brands include Penfolds and Rosemount, rejected an indicative buyout proposal from KKR pitched at $4.70 a share.
Most of the restructuring and thinning out of middle management layers is occurring in the United States and Australian operations. A substantial portion of the cuts is from the company’s head office in Queensbridge Street in the Melbourne suburb of Southbank .
It comes as some large institutional shareholders in Treasury have again been approached by KKR and its advisers who seek to outline the rationale for its proposal at $4.70 a share.
Mr Clarke explained on May 20 when the company first revealed the confidential proposal from KKR on April 16, that it decided to publicly reveal the approach because it had learned KKR had directly approached some of Treasury’s own shareholders.
Mr Clarke and his board were worried the “confidentiality” of the KKR proposal had therefore been lost.
Investors proved to be in a selling mood today, following the sour mood among global investors overnight and driving down the market, despite a reasonable local jobs report.
The ASX 200 and All Ords sunk 25 points, or 0.5 per cent, to 5428.8 and 5407.9, respectively.
Losses among miners accelerated through the day, with BHP closing 0.6 per cent down, while Rio fell 1.1 per cent and Fortescue 4.6 per cent.
The big banks all fell, with NAB the worst, down 0.9 per cent. Telstra dropped 0.8 per cent.
All sectors finished lower, aside from health care, up slightly after Ramsay Health Care gained 3.7 per cent.Back to top
Macquarie Group has cautioned against investing in Hong Kong companies which are exposed to the political winds of mainland China, following an official warning that the city's administrative "autonomy" is a privilege that can be removed at any time.
Hong Kong has retained its status as the financial hub of Asia since its handover from Great Britain in 1997, when Chinese leaders committed to retain a system of "one country two systems" for 50 years.
The city is home to more than 80,000 Australians while 550 Australian businesses have a "major presence" there, according to the Department of Foreign Affairs and Trade, but many are growing uneasy at the growing reach of Beijing.
On Tuesday, however, China's State Council released an unprecedented White Paper that said Hong Kong is just "one of the local administrative regions" and warns against "outside forces" using the city to interfere in China's domestic affairs.
"The high degree of autonomy enjoyed by Hong Kong is subject to the central government's authorisation," says the paper.
Macquarie Bank analyst David Ng said the 22,000 word document was "more serious" than a mere warning to pro-democracy protestors.
Rather, it carried an implied threat of economic coercion to compel political "compliance".
"It appears to us that Beijing is threatening a removal of favourable policies from HK if opinion leaders are perceived as continuing to defy central government's authority," said Mr Ng in a research note. The note advised clients to cope with a likely five year period of political and economic instability by favouring "companies that have diversified overseas".
Investors are underestimating the value of the three mammoth liquefied natural gas projects nearing completion in Queensland and the magnitude of the cash they will generate for companies like Santos and Origin over the next two to three decades, say Morgan Stanley analysts.
Three LNG projects currently under construction near Gladstone are expected to move into production by 2015, they include the Santos-Total GLNG project, Origin Energy's APLNG and British giant BG Group's project.
Oil Search's PNG LNG project is also tipped to launch its third train of LNG production in 2015, and Morgan Stanley believes this will bring about a substantial jump in its annual production to 80-90 million barrels of oil equivalent.
"In our view, the market underestimates the magnitude and value of the free cash-flow set to flow to these businesses over the next 20 to 30 years," wrote Morgan Stanley analyst, Malcolm Wood, in a note to clients.
Santos' LNG project in Gladstone, Northern Queensland, is 80 per cent complete and expected to come on stream in 2015 with a capacity of 7.2 million metric tons per year. It also has a significant stake in Oil Search's Papua New Guinea LNG project.
Macquarie analyst Adrian Wood believes the PNG project has the right conditions to gain a competitive advantage.
"There are three main advantages to being in PNG, they have a high liquid yield, onshore developments and access to cheaper labour," Mr Wood said. "But the biggest difference between PNG and Australia is the fiscal terms."
PNG, like Australia, charges a 30 per cent corporate tax rate, along with a very small royalty tax.
Australia charges a 40 per cent petroleum resource rent tax on top of the corporate tax.
The growing discount of lower grade ores to the benchmark iron ore price will hurt producers of lower quality iron ore such as Fortescue and Atlas Iron, Credit Suisse analysts report.
While the benchmark iron ore price is for 62% iron ore, the reality is that some miners - such as BHP -produce higher grade ores, while others sell a lower quality product.
IN recent years, the gap between the benchmark 62% iron ore price and the 58% ore price has hovered around $US10/tonne.
But as the chart below shows, that discount has been creeping up of late.
After recent discussions with a Chinese iron ore trader, the Credit Suisse analysts report: "The falling iron ore price has had the effect of reducing China's domestic production, as Australian producers hoped, but also reduced demand for 56-58% Fe ore because the high-grade concentrate is needed for blending with lower grade ores to produce the right quality".
Chinese premier Li Keqiang appears to have inadvertently signalled that crucial industrial production data, due to be released by the government tomorrow, will come in below where most experts are predicting.
During a June 10 talk with academics from the Chinese Academy of Sciences and the Chinese Academy of Engineering, the premier revealed that electricity production rose 1.6 per cent month-on-month in May, which implies the closely watched data point slowed to 5.2 per cent annually from 6.4 per cent in April, reports Nomura economist Zhiwei Zhang.
Nomura calculates that the correlation between electricity production and IP growth is 0.79 over the period January 2005 to April 2014.
“This suggests that industrial production growth may also have slowed in May,” reports Zhang, which contrasts with the market consensus forecast that industrial production expanded to 8.8 per cent over the year to May.
Only two of 49 economists surveyed by Bloomberg forecast a drop in the rate of IP growth.
“With the government most likely reviewing electricity production data on a daily basis, we believe the slowdown would explain why policy easing has recently accelerated,” continues Zhang. “Premier Li recently said that the 7.5% GDP growth target for 2014 is ‘legally binding’ and that officials should show ‘a sense of urgency’.”
“We maintain our view that policy easing will accelerate over the next several months and continue to expect a reserve requirement ratio cut in Q3.”
Nomura predict full-year GDP growth of 7.5 per cent this year.
Time for a trip around the region's bourses where, aside from Singapore and our Kiwi cousins, it's a see of red:
- Japan's Nikkei -0.7%
- Hong Kong's Hang Seng -0.1%
- Shanghai Composite -0.2%
- Taiwan's TAIEX -0.4%
- Korea's KOSPI -0.4%
- Singapore's Straits Times +0.1%
- Jakarta Composite -0.6%
- Kiwi NZX 50 +0.2%
Shares in utilities contractor Service Stream have shot up 15.6 per cent to 18.5 cents after the company announced that it will continue to build the National Broadband Network for the next two years after its contract for home and business premises connections was renewed.
The new contract, which Service Stream has the option of extending by another two years, is worth $140 million revenue during the initial two-year term.
“We are pleased that NBN Co has renewed our contract as the roll out of the National Broadband Network gains momentum,” Service Stream managing director Leigh Mackender said.
Dozens of unhappy Nexus Energy shareholders have turned up a meeting in Melbourne to vote on a 2¢-a-share takeover offer from Seven Group Holdings, with one accusing the media group of "standover tactics" in the way it has sought to persuade investors to accept the offer.
Proxy votes cast ahead of the meeting today have already doomed the takeover deal to failure unless enough shareholders turn up and change their vote, Nexus has advised.
Shareholders risk receiving nothing if the deal collapses, as the oil and gas junior is likely to be placed in administration, Nexus managing director Lucio Della Martina reminded shareholders at the meeting.
Mr Della Martina reiterated that the board had carried out an "extensive" review of potential options for asset sales and funding but had not been able to secure an alternative proposal to Seven's offer, which has been deemed "fair and reasonable" by an independent expert.
But many investors are angry at the low price of the offer for the equity of the debt-laden company, and at the role played by their former chairman Don Voelte, who is chief executive of Seven Group.
"I'd rather get nothing. The longer you think about it, it's the principal of the thing. I'm hoping this gets enough interest that things change," Nexus shareholder Sean Dooley told Fairfax Media just before the meeting got under way. "It's standover tactics."
"I got here and they asked me if I wanted to change my vote. I told them no," Mr Dooley said, adding he had been a shareholder for 30 years but never bothered turning up to a meeting until this one.
The comments were echoed by another Nexus shareholder Graham Garlick: "I reckon it smells," he said.
Some thoughts from RBC Capital's Adam Turner on this morning's jobs figures:
"The weakness in employment growth has pushed the employment to population ratio back to 60.8%, which were the lows recorded late last year. The steady rate of unemployment (5.8%) reflects another fall in participation, which at 64.6% is also back to last year’s lows.
"There is, therefore, still a significant degree of slack in the labour market, even allowing for structural shifts which bias some metrics (particularly participation rates) lower.
"What seems clear enough is that, given tepid growth in domestic demand, hiring intentions remain modest and growth in employment only keeps up with growth in the labour force.
"The unemployment rate seems likely to gyrate around its current level for the remainder of the year.
"Policy normalisation, or even hints in this direction, seems highly unlikely in this environment with a 2.5% cash rate and firmly neutral bias to persist for several months to come."
South Korea's central bank has held interest rates steady for a 13th straight month as markets brace for a hike as soon as next quarter, but softening domestic demand and a spike in the won could still affect future policy prospects.
The Bank of Korea's monetary policy committee held its base rate at 2.50 percent, as was broadly expected.
Although the consensus for the central bank's next policy move is a hike in interest rates, analysts are split over whether the first hike will occur this year or next.
Some analysts have pushed back the timing for the first rate increase into next year on some signs of weakening in domestic demand and the rising won.
"We still hold the view that the BOK will raise the policy rate early next year," said Moon Hong-cheol, fixed-income analyst at Dongbu Securities.
"The won's appreciation is certainly a factor, but considering that the won's strength has limited effect on exporters compared to the past, it is unlikely that the BOK will change its policy based on the currency movements."
Local markets showed a muted reaction to the widely-expected decision.
Asia's fourth-largest economy posted the worst fall in exports in eight months last month on cooling demand from its top market, China, although the annual rate of change was also affected by longer holidays this year than last year.
The won has strengthened by more than 10 per cent over the past one-year period against the dollar and looked set to breach the symbolically important 1000-per-dollar mark for the first time in six years.
Government officials have showed a more tolerant stance than before toward the rising won, acknowledging it was driven mostly by huge current account surpluses and upbeat economic outlook rather than by short-term speculation.
A UBS analyst has downgraded Downer EDI to “neutral” from “buy” after Australia’s largest coal producer, the BHP Mitsubishi Alliance, unexpectedly ended an earthworks contract at one of its Queensland coking coal mines.
“The termination reflects ongoing cost pressures for coal producers in Australia on the back of ongoing commodity price weakness,” Theodore wrote in a research note to clients today. “We estimate that coal mining operations represents about 20 per cent of Downer group earnings before interest and tax.”
Theodore’s forecasts had already assumed some risk/impact from loss of mining contracts/miner insourcing/scope reductions. However, he lowered his net profit after tax and earnings-per-share forecasts by 4.9 per cent in financial 2015 and and 7.7 per cent in financial 2016, respectively, to incorporate the loss of Goonyella Riverside.
“Whilst we see the strengthening balance sheet and the opportunities this brings as a positive (EPS-accretive buybacks and/or value-accretive acquisitions), we are seeing evidence of increasing pressure in contract mining from insourcing and scope reductions from some of Downer’s largest customers,” Theodore says.
He believes this is a trend that will continue, bringing further revenue and margin pressures.Back to top
A couple of quick reactions from the Twitter-sphere to this morning's jobs data..
..no impact on interest rates from todays jobs data as fall in employment is offset by news of rise in full time jobs and flat unemployment— Shane Oliver (@ShaneOliverAMP) June 12, 2014
AUD/USD trades 0.9387 to 0.9351 and then realised FT was good and numbers wont alter RBA thinking..now 0.9370. AUD/NZD smashed today— Chris Weston (@ChrisWeston_IG) June 12, 2014
Mineral Resources has confirmed that is has taken a 12.78 per cent stake in iron ore takeover target Aquila Resources and will now work with the company and other stakeholders to deliver the West Pilbara Iron Ore Project.
As first revealed in The Australian Financial Review, Mineral Resources, run by mining veteran and Rich List member Chris Ellison, swooped on the stake previously owned by fund manager M&G Investments.
The share raid comes as Aquila’s board mulls a $1.4 billion takeover bid from Chinese steel giant Baosteeel and Brisbane-based rail group, Aurizon.
Mineral Resources, which is a mining services and processing group, in a statement said that it has already “invested considerable time developing a business case to deliver a fit for purpose solution” for the West Pilbara project, including a “total mine to port development plan”.
“MRL considers that a meaningful shareholder in Aquila was appropriate to ensure MRL was well positioned to be actively involved with the other key project stakeholders, and now intends to fully engage in collaborative discussions to ensure the project is brought into production as soon as possible,” the company said in a statement.
Mr Ellison, who was valued at $525 million on the 2013 Rich 200 list, said: “We have the financial capacity to make a meaningful capital contribution towards the development of the project and will now proceed to engage with all major shareholders, including Aquila and Baosteel, to facilitate the best outcome possible.”
Mineral Resources said the share purchase was funded from existing cash reserves.
Unemployment for May has come in at 5.8 per cent, in-line with expectations.
The economy lost 4,800 jobs, according to the ABS, against the consensus forecast among economists of 10,000.
The Aussie dollar was down slightly on the news at 93.75 US cents.
If there were any doubts about the intent of Graeme Wheeler, governor of the Reserve Bank of New Zealand, to keep raising interest rates, they were put to bed this morning when it was made clear there's more hikes to come.
The latest move, one quarter of a percentage point, to 3.25 per cent was not a surprise. But the tone in the accompanying statement was.
No fears of a rising New Zealand dollar for this central bank as the governor made it clear that he thinks eventually the kiwi will adjust to lower commodity prices.
Problem is it hasn't just yet. The kiwi jumped to US86.30 cents from US85.29 cents after the move on Thursday and is up from US77.5 cents a year ago.
The key message from the RBNZ is any strength in the New Zealand dollar is not going to stop another rate hike. This will add to the bid tone for the kiwi and will also help support the Australian dollar.
Wheeler made headlines earlier this year when he became the first central banker from a developed economy to hike rates, adding to the appeal of the New Zealand dollar where the cash rate is now at its highest level since 2009. The third consecutive hike from the RBNZ also comes as the Prime Minister is looking to be elected for a third term in office in September.
It also adds to the contradicting policy of other major central banks right now with the US Federal Reserve looking to exit their easy monetary policy, while the European Central Bank and Bank of Japan keep adding to theirs.
In Australia rates are expected to be on hold for quite some time. Some experts had tipped the New Zealand dollar to fall to US 80 cents by the end of this year, mainly thanks to a rise in the US dollar, but this latest hawkish tone puts those sorts of forecasts in jeopardy.
Leighton Holdings has confirmed it is considering selling its John Holland property and services business as chief executive Marcelino Fernandez Verdes announced plans to create four core businesses.
Leighton will establish dedicated businesses focused on construction, mining, public private partnerships and engineering, similar to the model Mr Fernandez Verdes has implemented at its controlling shareholder, Hochtief.
As part of its "strategic blueprint," Leighton is considering options for its John Holland, property and services businesses, including their potential sale or introducing new partners.
"As part of this process we have engaged external advisors and will be having discussions with potential investors," said Mr Fernandez Verdes, who stepped into the top job in March.Back to top