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Australian shares had their worst session in a month as investors rushed to offload mining stocks after the iron ore price fell to its lowest since June. Adding to that, disappointing Chinese export data released over the weekend sparked renewed fears about ongoing demand growth from Australia’s largest trading partner.
The benchmark ASX 200 Index dropped 50.8 points, or 0.9 per cent, on Monday to 5411.5, while the broader All Ordinaries lost 0.8 per cent to 5430.8.
Local resources stocks were pummeled as commodity prices dropped on worries about the Chinese economy. The spot price for iron ore, landed in China, lost 2.3 per cent to an eight-month low of $US114.20 a tonne, while Shanghai copper futures plunged to the lowest level since September 2009.
In China on Monday afternoon the currency lost 0.5 per cent. The People’s Bank of China lowered the daily reference rate for the renminbi by 0.18 per cent, the most since July 2012. In Chinese equities the Shanghai Composite Index and Hong Kong’s Hang Seng were both trading more than 1.5 per cent lower.
Resources giant BHP shed 4.1 per cent to $36.16. Rio Tinto, Australia’s biggest iron ore miner, lost 5.8 per cent to $61.20, while the third force in iron ore, Fortescue Metals, fell 9.4 per cent to $4.92.
Junior iron ore miners, notably Arrium, Atlas Iron and BC Iron, were among the hardest hit.
Chinese stock may have taken their biggest whack in eight months today, with the Shanghai Composite plunging 2.1 per cent, but Goldman Sachs is sticking with its buy recommendation for the country's equities.
“Given how share prices have corrected and given where the valuations are, from a risk-reward standpoint we still think we can make a positive case on Chinese equities,” Goldman strategist Kinger Lau says.
He predicts the Hang Seng China Enterprises Index will climb 24 per cent to 12,000 in the next 12 months, versus the brokerage’s December forecast for the measure to reach 13,600 by the end of 2014.
The index of Chinese shares in Hong Kong lost 10 per cent this year through last week, the most among 93 global benchmark indexes tracked by Bloomberg.
“Any clear and concrete policy measures in terms of dealing with shadow banking loans and local government debt would likely be positive catalysts for banks,” Lau said. “Valuations for Chinese banks have already priced in a very significant crisis scenario.”
The Hang Seng China gauge has tumbled 16 per cent since Noah Weisberger, a New York-based analyst at Goldman Sachs, predicted on December 2 that the H-share measure would rally 18 per cent by the end of 2014.
Goldman Sachs’s forecast formed part of a trade recommendation in which the bank told investors to buy Chinese stocks while selling copper as a bet that commodities would lag the rally in equities. Goldman Sachs called the trade its fourth top recommendation for 2014.
The copper part of the prediction is on track, with the metal down more than 10 per cent since the beginning of the year.
Turning to the best and worst, and it's no surprise to see Leighton ending the day where it started, as the hardest running stock in the ASX 200 today, after its majority shareholder lobbed an offer for more of the construction company's shares.
Pacific Brands is up 8.7 per cent after Bloomberg reported a block trade of 10 million shares rumbled through this morning at a price of 53 cents apiece.
Iron ore miners dominated "the worst" list, but were pipped by a particularly ugly day for shareholders in Silver Lake Resources.
The ASX 200 has slumped 51 points, or by 0.9 per cent, to close at 5411.5, wiping out the hard-fought gains of the past two weeks.
Falls in the share prices of BHP (-4.1 per cent), Rio (-5.8 per cent) and Fortescue (-9.4 per cent) accounted for more than half of the benchmark index's fall.
The broader All Ordinaries index fell 46 points to 5430.8.
The big banks all lost ground, with ANZ the worst hit, dropping 0.8 per cent. Telstra fell by the same proportion.
Defensive names like Woolworths, CSL, Wesfarmers and Ramsay Health Care all gained, and health care, IT, and consumer staples sectors were all higher.Back to top
The People’s Bank of China lowered the Yuan’s daily reference rate by 0.18 percent to 6.1312 per dollar today, the weakest level since early December, which combined with weak trade data, helped push the currency lower today (see post at 3:14).
The cut in the yuan fixing “is significant, coming on the heels of poor trade data, and suggests a possible policy push to weaken the yuan to help exporters,” Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole, told Bloomberg. “This would mean rising risks to more downside.”
Hochtief's bid for a bigger share of Leighton could pave the way for a fresh round of mergers and acquisitions activity in the Australian market and put the S&P/ASX 200 on track for further gains.
Morgan Stanley strategist Chris Nicol predicts a change in focus for local companies towards "growth via acquisition" which would also bring with it a shift in attitudes towards capital management and share price appreciation for takeover targets "from 'market' multiples to 'corporate' multiples":
- As corporate confidence improves, we would expect the number/value of deals to increase as companies consider non-organic sources of growth.
- With the prospect of weak organic earnings growth given consensus forecasts for below-trend domestic demand, we sense a greater investor appetite for capital to be applied to inorganic growth opportunities.
Alphinity Investment Management portfolio manager Johan Carlberg isn’t quite as optimistic:
- You're seeing a little bit of a pick-up at this point but it certainly doesn't feel like there's a wave of it coming.
- There is a bit more activity but I think when revenue growth is a bit harder to come by - as it has been for a couple of years or so - it's natural for companies to look at how they can grow by acquisitions instead.
- If companies start to feel better about the domestic economy they might feel this is the time to do something.
Completed mergers and acquisitions in 2011 totalled $US144.9 billion but in 2012 and 2013 it was $US95.5 billion and $US65.6 billion respectively. So far this year, M&A transactions are valued at $US20.3 billion according to Dealogic data, while Morgan Stanley put the number just north of $16 billion.
Their rugby team is better than ours, their airlines more profitable, and now this: New Zealand is set to be the first developed economy to lift interest rates, from 2.5 per cent to 2.75 per cent, when its central bank meets on Thursday.
That's the unanimous view among economists surveyed by Bloomberg.
Nomura's Martin Whetton explains what the Kiwi economy has going for it:
- The economy has consistently seen strong growth in the terms of trade and falling unemployment, and has posted 20-year highs in business confidence and activity.
- The economy has also seen rising inflation and a buoyant housing sector.
- Tourism has increased over the last year, despite the higher NZD, and immigration is at a 10-year high.
- Moreover, with strong exports and a rise in the payout to the dairy industry from Fonterra, the potential for continued strength in consumption remains high.
In the battle between "iron man" Australia and "milk man" New Zealand, it's clear who has the upper hand.
One of the big winners today is Pacific Brands, which has surged 9.7 per cent to 56.5¢.
Bloomberg reports a block trade of 10 million shares went through this morning at 53¢ apiece.
There's been another notable drop in the renminbi today - perhaps in response to the shockingly weak Chinese export numbers.
The renminbi is down 0.5 per cent to 6.1564 per US dollar. The currency has weakened about 1.4 per cent in 2014. The People’s Bank of China lowered the daily reference rate by 0.18 per cent, the most since July 2012, to 6.1312 per US dollar today.
The cut in the currency's fixing ‘‘is significant, coming on the heels of poor trade data, and suggests a possible policy push to weaken the yuan to help exporters,’’ said Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole CIB. ‘‘This would mean rising risks to more downside.’’
Meanwhile, the Shanghai Composite Index has slid 1.7 per cent to 2023.22, set for the lowest close since January 21.
The 'jawbone' effect on the dollar may be wearing thin, as RBA boss Glenn Stevens himself suggested on Friday. But Morgan Stanley has put together a nice chart jotting down the recent attempts by the central bank's officials to talk down the currency:
Hochtief's bid for Leighton is being overshadowed by the fact that the offer at $22.15 a share appears to have been leaked last week, the AFR's Chanticleer columnist Tony Boyd writes:
Leighton shares soared 15 per cent between close of trading on Wednesday and Friday’s close on turnover that was much higher than normal. Leighton usually trades about 1 million shares a day but 8 million shares were traded on Thursday and Friday.
The inevitable investigation by ASIC will focus on the identity of those who bought and sold shares. The situation is made more interesting because about 24 million Leighton shares were sold short. That is about 7 per cent of the issued capital but about 17 per cent of the free float.
Hochtief made clear on Monday that it was not buying stock in Leighton last week. It has not bought stock since January.
At the same time as making a proportional bid, which is an offer to buy 3 out of 8 shares held, Hochtief is formally abandoning the “informal and non-binding governance principles” that have been in place between Hochtief and Leighton for many years.
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It appears that the recent yuan depreciation engineered by the People’s Bank of China is partly responsible for the sizable month‑on‑month contraction in February exports of 34% (MoM), CBA economist Any Ji notes:
- More specifically, since 12 February, the PBoC has aggressively lifted USD/CNY through both higher than expected fixings and intraday buying
- The resultant fall in CNY appreciation expectation may have led exporters to defer export invoicing due to rising uncertainties in the otherwise stable domestic currency.
- By contrast, import data normally are free of such distortions, notwithstanding the Chinese Lunar New Year effect. In January – February, imports rose by 10% from a year ago, above its average of 7.6% (YoY) and 4% (YoY) in 2013 and 2012 respectively.
The market is “finely balanced”, write strategists at Pattersons, and the broker will turn bullish if the All Ordinaries has a clear break above 5,475.
“The market ﬁnds itself at one of those typical balancing points, if the daily range tightens up the probability of a sharp move, either bullish or bearish, will increase,” they write.
Until today a bullish break in the All Ords looked imminent, with the index closing at 5477 last week. But the weakness in miners has slashed 44 points off the broad index today, which currently sits at 5433.
A move below 5,400 and the view will “likely move to neutral/bearish,” say the analysts.
Until such time that either target is decisively broken, they remain “neutral” on a 12-month horizon, adding that “discretion continues to be the better part of valour”.
“At the time of writing credit indicators are not showing alarm and globally bond markets appear reasonably content,” the analysts write.
“We will continue to watch Chinese SHIBOR closely for forward indicators of credit stress in that country, and the Japanese indicators, particularly bond yields, for signs of stress.”
Markets around the region are trading lower, but the sell-off hasn't accelerated:
- Japan (Nikkei): -0.9%
- Hong Kong: -1.4%
- Shanghai: -1.35%
- Taiwan: -0.6%
- Korea: -0.85%
- ASX200: -0.9%
- Singapore: -0.5%
- New Zealand: -0.3%
‘‘Investors are concerned growth might disappoint following China’s exports and Japan’s GDP data,’’ says Daphne Roth, head of Asian equity research at ABN Amro Private Banking. ‘‘Following the recent rally, we’ve taken some money off the table. We’re still positive on Japan as the government is likely to stimulate the economy after the consumer tax hike next month.’’Back to top
Influential deal-makers Simon Mordant and Ron Malek have announced they will retire from boutique investment bank Greenhill in April.
The two stepped back last year to non-executive chairman roles so their exit was largely expected.
Mordant and Malek were co founders of the Caliburn M&A advisory boutique, which was acquired by Greenhill four years ago. Peter Hunt was the other founder, he remains as chairman of Greenhill Australia.
The two have advised on some of the biggest deals over the years, for example Graincorp on the Archer Daniels Midland bid last year, with Mordant the lead adviser.
The leadership team will be comprised of three co-heads of Greenhill Australia; Roger Feletto, Kevin Costantino and Michelle Jablko.
And in a related note, Lend Lease shares were a quick beneficiary of the Hochtief bid for dominance of the Leighton share register this morning, rallying a handy 1.8 per cent to $11.72 against the backdrop of broad market weakness.
Leighton and Lend Lease dominate major construction and infrastructure projects in Australia.
By taking advantage of weakness in the Leighton share price, the partial offer by Hochtief has helped to put the spotlight on Lend Lease shares, analysts said.
Additionally, if the Hochfief offer succeeds, it will result in more institutional investors turning to Lend Lease as a home for future investment funds, given the lack of big cap alternative investments.
Shareholders in the Spanish controlled Leighton Holdings are finally being given the liquidity opportunity that should have occurred two years ago when Madrid-based ACS took control of Leighton’s German based controlling shareholder Hochtief.
That liquidity opportunity is being overshadowed by the fact that the offer at $21.15 a share appears to have been leaked last week.
Leighton shares soared 15 per cent between close of trading on Wednesday and Friday’s close on turnover that was much higher than normal. Leighton usually trades about one million shares a day but 8 million shares were traded on Thursday and Friday.
An ASIC spokesman confirmed to Bloomberg that the corporate cop will be reviewing the company's share price moves, but added that "this is something that falls within our day-to-day market surveillance activity and it is nothing out of the ordinary".
The inevitable investigation by the ASIC will focus on the identity of those who bought and sold shares. The situation is made more interesting because about 24 million Leighton shares were sold short. That is about 7 per cent of the issued capital but about 17 per cent of the free float.
Hochtief made clear on Monday that it was not buying stock in Leighton last week. It has not bought stock since January.
And Hochtief's to take control of Leighton have run into immediate problems with sharemarket investors over-bidding its intended offer price.
Leighton shares last traded at $23.03, 4 per cent above the offer price.
The number of net business creations per month is at its highest level since late 2007, suggesting that activity in the Australian economy is improving, write ANZ economists in a recent note:
Over the past six months, the pace of new business registrations per month has picked up, while the number of business failures has declined.
Reflective of true business conditions, these data are a timely indicator of the underlying strength of the economy and business’ capacity to hire. Right now ASIC’s business registrations and bankruptcies data suggest:
- Employment should begin to pick up (see chart);
- Underlying activity in the economy is improving; and
- Business conditions have improved, corroborating the recent pick up in surveyed business indicators.
Shanghai copper has dropped by its 5 per cent daily limit to its lowest in more than four years after weak Chinese trade data fanned concerns over its metals industry following the country's first domestic bond default last week.
The most-traded May copper contract on the Shanghai Futures Exchange has plunged 5 per cent to 46,670 yuan ($US7600) a tonne, its lowest since September 2009.
On the Comex in New York, copper futures for delivery in May slid as much as 2.8 per cent to $US2.9955 a pound, the lowest intraday level since June 25, and last traded at $US3.0205 in Tokyo. The metal fell 4.2 per cent on Friday, the biggest drop since December 2011, and dropped 3.3 per cent last week.
'‘It’s a bit of panic selling on concern that China’s demand is slowing,’’ said Kazuhiko Saito, a Tokyo-based analyst at commodities broker Fujitomi. ‘‘China is driving industrial metals lower.’’
Copper stockpiles monitored by the Shanghai Futures Exchange climbed for eight straight weeks, the longest streak in two years, adding to signs of slowing use. The inventories rose by 9,034 tons to 207,320 tonnes, according to data from the bourse on March 7.
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