Markets Live: Party over for 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.


A sharp sell-off in the big banks and mining heavyweights weighed on the local sharemarket TODAY, ending a seven-day winning streak.

The benchmark S&P/ASX200 dropped 49.5 points, or 0.9 per cent, to 5486.6. The broader All Ordinaries slipped 49.2 points, or 0.9 per cent, to 5466.9.

The Australian market was by far the worst performer in the region, with Chinese and South Korean markets trading relatively flat, while the Japanese stockmarket was closed.

Resources and financials suffered heavy losses, down 1.1 per cent and 0.8 per cent respectively.

Iron ore slipped a further 2.2 per cent to $US108.40 per tonne overnight on Monday, adding to the 4.7 per cent fall last week. The metal fell on concerns of a crackdown on financing deals using iron ore as collateral.

Australian miners were hit by the news, as Rio Tinto fell 1.2 per cent to $61.30, BHP lost 0.7 per cent to $37.61 and Fortescue finished 2.3 per cent lower at $5.

After flirting with record highs, the big banks, which had been propping up the market in recent days, took a u-turn and finished down heavily. Some analysts believe that financials are fully priced, making it hard to justify levels above where they currently stand.

National Australia Bank and Westpac both fell 1.3 per cent, to $35.51 and $35.39 respectively. ANZ dropped 1 per cent to $34.60, while Commonwealth Bank of Australia slipped 0.6 per cent to $78.94.

Citi downgraded its recommendation for Westpac to 'neutral' and NAB to a 'sell'. Morgan Stanley said in a note to clients it sees a 70-80 per cent chance that NAB will fall in the next 60 days.

However, a generally improving economy and momentum slowly returning to corporate earnings growth will ultimately be beneficial to the banks, Macquarie Bank division director Martin Lakos said.

"You've got to take the banks, to some extent, as a proxy for the economy. If you're reasonably comfortable with the economy slowly turning up, then the banks will benefit from that," Mr Lakos said.

Read more.

shares up

And here are the best and worst for the day.

Goodman Fielder continued its run from yesterday - if at a slightly more sedate pace, up 5.5 per cent. The stock is at 67c per share - above yesterday's 65c takeover offer - suggesting investors expect a sweetened bid for the company. Trading volumes today were heavier than yesterday.

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

Banks turned from heroes to villains today, joining miners and leading a broad-based sell-off in the market that saw the benchmark index dip back below the hard-earned 5500 level.

The ASX 200 lost 50 points, or 0.9 per cent, to 5486.6 after starting the day in positive territory, while the All Ords fell by a similar amount to 5466.9.

Westpac and NAB both closed 1.3 per cent lower, while ANZ fell 1 per cent and CBA 0.6 per cent. The exception to the rule (as ever) was Macquarie, which jumped 1.2 per cent.

Wesfarmers also acted as an anchor on the market, sinking 2 per cent following an ill-received quarterly update. Woolies also dropped 1.2 per cent.

BHP finished 0.7 per cent lower, while Rio was down 1.2 per cent.

There was some good news in the energy space, as Oil Search closed 1 per cent higher, and Santos 0.2 per cent up, on news the PNG LNG project was to start production early.


Mistakes were made, earnings guidance was missed, but the past is the past and next financial year should be a good one for Treasury Wine Estates, reckon analysts at Bank of America/Merrill Lynch.

They expect a “V” shaped earnings recovery next financial year, and believe the market is significantly underestimating Treasury's EBIT for FY15.

As a result, the broker has a “buy” rating on the stock – only one of two such ratings among the 16 brokers surveyed by Bloomberg – with a 12-month price target of $5.50, against a price of $3.78 now.

Treasury shareholders have been put through the ringer. Take January 30: the stock dropped 20 per cent in a single day as the company downgraded earnings estimates.

At the end of the last June financial year, Treasury’s guidance was that its 2013-14 EBIT would be between $230m and $250m with an AUD/USD at 0.93 – “despite FY14 being a supply restricted year”, write the analysts.

Management errors led to a downgrade of that guidance to an EBIT of between $190m to $210m, even with the help of a a better than expected currency. (A 0.01 fall in the exchange rate increases EBIT by around $5 million, reckon the analysts.)

And the UBS team believes there is a high risk of the company not achieving that lower guidance for this financial year.

But the broker believes management won’t repeat the mistakes of last year, and that in fiscal 2015 the company has a “number of strong tailwinds to its earnings that were not present in FY14”:

“There is a material increase in the availability of high quality wine to be sold in FY15 – including (reportedly) some of the best wines TWE has ever made (of note the 2010 Grange); and TWE has some excellent wines (and relatively high quantities) of US luxury wines available in FY15 from the 2012 and 2013 US vintages.”

The upshot is the analysts expect EBIT of $280 million in the next financial year, more than 25 per cent higher than the consensus forecast of $220 million.

Back to top

China’s economic growth may be slowing, but Changyong Rhee, director of the International Monetary Fund’s Asia and Pacific Department, believes the odds of China suffering a full-blown financial crisis remain low.

In an interview with the WSJ, Rhee outlines a number of reason not to sound the alarm bells:

  1. China’s owes most of its debt to itself. True, China’s debt – some tallies put the sum of private and government debt at double China’s gross domestic product – is scary. How companies and local governments will manage to service that debt as growth cools and interest rates rise is a puzzler. Rhee says China is bound to see a rising number of credit defaults. But unlike Thailand or South Korea before the Asian financial crisis erupted in 1997, China hasn’t borrowed heavily abroad in foreign currencies. That means that if China’s currency falls further (it has dropped roughly 3 per cent so far this year), it won’t necessarily cause a dramatic increase in borrowers’ debts in local-currency terms that then causes bankruptcies to snowball.
  2. China’s government debt is low. Like many governments in advanced economies, Beijing runs a budget deficit. But that deficit is relatively small – about 2.1 per cent of GDP. And total government debt, both those owed by the national government and China’s much more heavily indebted provinces, still add up to only about 53 per cent of GDP, according to Bank of America Merrill Lynch. That means China can afford to spend more to offset the economic slowdown if it becomes too painful to borrowers. It can even afford to bail out banks or borrowers it deems too big to fail.
  3. China’s slowdown, like its economy, is central planned. China’s economic mandarins have much wider latitude to implement policy without the say-so of China’s National People’s Congress. Most of the country’s banks are state-controlled and state-run companies still dominate the economy. China can instruct banks how to lend and to whom, and can even tell big companies how and where to invest. That’s a solution China’s leaders seem eager to avoid, but it remains an option.

Does that mean China can sit back and do nothing? Absolutely not, says Rhee. China needs to stay the course of overhauling its economy to reduce its reliance on exports and investment in property and heavy industry. China also needs to keep withdrawing cash from its economy to gradually push up interest rates and deflate its credit bubble, he says.

Defaults are inevitable. But rather than unleash a wave of new credit as China did in 2008 to offset a global slowdown, China should rely on small remedies – “micro-surgery” as Rhee puts it – to stem financial contagion.

Here's the full yarn


Almost all Chinese provinces failed to meet their growth targets in the first quarter even after scaling back their ambitions as the government instructs officials to focus on reining in debt and curbing pollution.

Thirty of 31 provinces and municipalities reported missing their goals, with the biggest shortfall in north-eastern Heilongjiang, where an expansion of 4.1 per cent compared with an 8.5 per cent target for the year. Most localities’ targets are lower than in 2013. The latest data were released by government websites and newspapers.

Premier Li Keqiang risks the nation sliding into a deeper slowdown as the government cracks down on overcapacity in the steel industry, wrestles with shadow banking risks and rolls out economic restructuring measures. While the government has supported expansion with steps such as reserve-ratio cuts for rural banks, it has so far avoided broader stimulus as Li chases a national growth target of about 7.5 per cent.

“The central government will continue to refrain from all-out stimulus and the slowdown pressure may continue to rise,” says Zhu Haibin, the chief China economist with JPMorgan Chase in Hong Kong. After a 7.4 per cent expansion in the first quarter, growth may sink closer to 7 per cent during the second half of this year, Zhu says.

He adds provincial goals remain “too high” and that all provinces except Beijing and Shanghai have targeted growth above 7.5 per cent.

“The GDP target is no longer the only thing that matters,” says Zhu. “But missing the targets too much will certainly put heavy pressure on local governments to stabilise growth.”

The latest numbers indicate that a divergence between local and national data is narrowing. The total of local numbers for nominal first-quarter gross domestic product was 3.7 per cent higher than the national figure. That compares with an excess of almost 11 per cent in 2013.


Investors have flocked to companies with the promise of some decent degree of earnings uplift, but despite their popularity, there’s no broad overvaluation in so-called “growth” stocks, according to UBS equity strategists.

A popular philosophy among investors is “growth at a reasonable price”, or GARP.

And stocks that look attractive on that basis, say the analysts, are Resmed, Crown and CSL.

Aristocrat Leisure, SAI Global, Super Retail Group, Henderson Group and Fleixigroup also look good, although the analysts “note higher earnings volatility” in this last group.

The chart below plots the “growth universe” and plots estimated P/Es against forecast annual compond EPS growth in the next three financial years.

The UBS team make the following points:

  • Cochlear, Ramsay Health Care, and Invocare look to be on challenging multiples for good but not remarkable growth. Cochlear in particular has been “growth challenged” of late and is in danger of slipping from their growth universe.
  • Companies such as James Hardie Industries, Seek Limited, Navitas, Sirtex Medical, REA Group and Domino's Pizza Enterprises are not clearly overvalued on their price-for-growth analysis, though they note that 1) P/Es have re-rated very significantly in the past year; and 2) maintaining P/Es of this magnitude has been empirically difficult.

“Growth stock” is not a well-defined term, but the UBS researchers say there needs to be some combination of sustainable above-market earnings growth, along with a relatively high return on invested capital, or ROE.

Another commonly sought-after characteristic, they say, includes above-average top-line growth.

“We find high ROE, high top-line growth companies have on average been outperforming in recent years,” they write.

Not that it is a full-proof approach: ALS Ltd, Monadelphous Group, Worley Parsons, Coca Cola Amatil and are all examples of stocks that have been de-rated as earnings growth stalls.

Searching for growth stocks at a reasonable price - UBS's growth universe.
Searching for growth stocks at a reasonable price - UBS's growth universe. 
shares down

Charlie Aitken isn't the only one turning cautious on the big banks (see 11.48am), with Citi downgrading Westpac and NAB:

  • We are downgrading our recommendations for WBC to a 'neutral' and NAB to a 'sell' with no change in our target prices. Over the past 3 months, the sector has continued to outperform the broader market, with WBC being the standout performer.
  • NAB has performed more in line with the market; however, we are reducing to a sell due to poor expected H1 revenue and underlying profit growth and continuing lackluster demand for business lending.


Morgan Stanley went slightly further, saying in a research note that it sees a 70 per cent to 80 per cent chance that NAB will fall in the next 60 days. It reckons the first-half result on May 8 will '‘highlight revenue headwinds in business banking and an end to the era of positive cost surprise’'.

NAB is the leading the sector's falls today, dropping 1.5 per cent, while the other three are between 0.8 per cent and 1.1 per cent lower after briefly touching all-time highs this morning.


As the Ukraine crisis dominates headlines once again, Capital Economics has put together a useful Q&A on the potential economic and market impacts:

  1. Will the crisis escalate much further? Probably not, even though the risks of miscalculation are high. Neither Russia nor the West would want tensions to build from here. Despite the threats from the US  and EU, the pace at which Western sanctions are being tightened is glacial and their scope still limited. Russia seems content to force Ukraine’s new government into concessions on regional autonomy, rather than invade and annex more territory. That said, Russia may want to keep up the pressure on Kiev at least until Ukraine’s Presidential elections due on 25th May. In the meantime, violence could yet spiral out of control, prompting more overt Russian intervention and a stronger response from the West.
  2. Could a further escalation derail the recovery in Western Europe? Probably not on its own, although growth is already weak. Exports to Russia typically account for only a small share of GDP. What’s more, Europe is less dependent on Russian energy than the headlines suggest. Stocks of natural gas are high, and other producers, such as Norway and the MENA countries, would be able to increase supplies. Admittedly, prices might have to rise further, but alternative suppliers would have a strong incentive to keep their costs down to encourage customers of Russian gas to switch permanently.
  3. How big is the threat to the Russian economy? Greater than many think. The direct effect of targeted sanctions may be limited. But the fall-out from the slump in Russian financial markets will be significant, and the mere threat of further sanctions will be a long-lasting deterrence to foreign investment. The crisis has certainly damaged Russia’s reputation as an energy supplier and trade partner.
  4. What does it mean for commodity prices? The risk of disruptions to supply may put some further upward pressure on the costs of energy and a handful of other commodities of which Russia or Ukraine are important suppliers (including palladium, nickel and grains). But the upside, particularly for oil, could be limited by releases from strategic reserves. Over the longer term, the crisis may also accelerate the development of alternative energy supplies for Europe, including shale and imports from the US.
  5. Which assets are most vulnerable? So far, the main casualties have been Russian and Ukrainian equities, bonds and currencies, and an extended period of weakness here seems likely. In contrast, after some contagion in the early stages of the crisis, other potentially vulnerable markets appear to have decoupled again. This is consistent with the relatively sanguine views about the wider implications outlined above. But if the crisis does escalate further, we would expect to see some renewed falls in global equity markets too. The biggest losers would presumably be those with the greatest economic and financial exposure to Russia (so Germany’s DAX should fall further than the UK’s FTSE). But Japan’s Nikkei might also underperform due to renewed yen strength.
  6. Will there be any market “winners”? Increased geopolitical and economic risks are, of course, likely to boost demand for traditional safe-havens: US, German, Japanese and UK government bonds; gold, and the yen. In contrast, any support to oil prices may be short-lived, especially if reserves are released.
Will the Ukraine crisis escalate? Probably not, says Capital Economics.
Will the Ukraine crisis escalate? Probably not, says Capital Economics. Photo: Reuters
Back to top

So what's weighing on the local market? For one, the drop in the iron ore price overnight is taking its toll on the miners.

Then, investors in banks seem to think it's best to take some profits after the recent surge in the shares, which took three of the big four to record highs as recently as this morning. The market is expecting another solid set of results when bank earnings season kicks off on Thursday.

 "Investors are going to wait to see what the results are," says Martin Lakos, division director at Macquarie Bank. "Seeing the upgrades by analysts in the sector, I think the banks are also viewed as a proxy to the recovery in the economy - there's good reason to hold onto the banks."

Investors are also cautious ahead of key US and Chinese economic data due for release over coming days, headed by the late April FOMC rates decision, “advance” March quarter US GDP and April US non-farm payrolls as well as the April “official” Chinese PMI numbers.

From a local angle, our market is hanging out for the Woolies March quarter sales data tomorrow (the Wesfarmers numbers which issued today were patchy) and the ANZ March half profit result, broker Patersons says in a note this afternoon.


Perth conglomerate Wesfarmers’ chief executive Richard Goyder is predicting further falls in coal prices for the June quarter, but says the group is in the commodity “for the long run”, after posting a strong March quarter production result for its two Australian coalmines.

“We would expect a reduction in metallurgical coal pricing,” Mr Goyder said, as the group was finalising its contract pricing for the June quarter.

“A majority of producers would find it very financially challenging at current pricing.”

He said some coal producers, both in Australia and globally, would not survive the current conditions. But Wesfarmers, as a low cost producer, could afford to “batten down the hatches”, and wait it out.

He said he was positive that at current coal prices the group could continue to export above cost. However, he said the supply into the domestic market was run at a loss for Wesfarmers.

Wesfarmers recorded a rise in coal production for the March quarter at both its Australian operations.

Read more ($).

asian markets

The local market, which is trading at the day's lows, is the clear underperformer in the region:

  • Japan (Nikkei): closed
  • Hong Kong: +0.4%
  • Shanghai: +0.15%
  • Taiwan: +0.6%
  • Korea: -0.3%
  • ASX200: -1.1%
  • Singapore: -0.3%
  • New Zealand: +0.6%

Kerry Stokes' Seven is the only local television company to lodge an expression of interest with the International Olympic Committee for the rights to broadcast the next three Olympics.

Preliminary bids were due last week for the broadcast rights to the Rio de Janeiro 2016 Games, the 2018 Winter Games in Pyeongchang, South Korea, and the 2020 Tokyo Games.

The IOC is understood to have originally wanted about $230 million for the three Games but expectations have been tempered by the metropolitan free-to air networks, Seven, Nine Entertainment and Ten Network.

The eventual price could fall well below $200 million, given Nine is unlikely to bid and Ten would be reluctant to pay a hefty sum.

Industry sources say that for the networks, a price of more than $150 million would likely make the games broadcasts unprofitable, although premium sport offers the opportunityfor networks to promote the rest of their schedule.

Nine and Ten have not ruled themselves out of the process by not participating in the expressions of interest.

Pay-television service Foxtel also did not bid, but is likely to pick up parts of the Games from the successful free-to-air bidder.

Read more.

Swimmer James Magnussen at the 2012 London Olympics.
Swimmer James Magnussen at the 2012 London Olympics. 

The health of online accommodation provider Holdings is being monitored very closely with some in the market suggesting a downgrade could be on the way.

As of the last publicly disclosed accounts, Wotif’s total transaction value for accommodation was $502 million, down 6 per cent on the $532 million in the previous corresponding period.

This decrease occurred while there has actually been overall growth in the online booking sector, which might mean that Wotif’s competitors are taking away market share.

The competitors include Expedia, which owns, Priceline, which owns, and Trip Advisor, which owns

All have massive marketing budgets which are being deployed in Australia. Wotif has increased its marketing costs to try and protect its market share.

Wotif, whose share price has dropped by more than half in just under a year, reported net profit after tax of $22.64 million for the half-year ended December 2013, down 18 per cent.

Bank of America Merrill Lynch analyst Mark Bryan said in a note to clients that “we continue to forecast three years of no underlying earnings per share growth” in the company.

Valuation is stretched and does not reflect the earnings risks. We see a further gradual de-rate occurring,” he said.

Recent reports have declared that Goldman Sachs was appointed as “defence adviser” to the company but market observers saw that as unusual given the two largest shareholders, including founder Graeme Wood, own next to 40 per cent of the company.

Back to top

Indiscriminate selling across emerging markets has opened up a massive discount for Asian technology stocks making them look “cheap” relative to the higher multiples that global peers such as Apple and Google demand.

Kelvin Tay, UBS Wealth Management’s regional chief investment officer for Southern Asia-Pacific, has identified IT equities as one of the most compelling themes in the region right now:

  • I would actually be flogging Asian IT companies because I think there’s this huge interest in the IT sector now on a global basis.
  • We like Asian IT because on a valuation basis it’s quite attractive, it’s actually cheap compared to global IT.

Historically, Asian IT stocks have traded on comparable multiples with global IT but the emergence of a 21 per cent discount in favour of regional tech equities is attractive for long-term investors, Tay says.

Tay highlights the changing nature of the sector in Asia in the space of a few years and how it is no longer dependent on the number of iPhones Apple ships in any given quarter:

  • Previously it was always the hardware companies listed in Taiwan, these companies have very thin margins... since then it has changed quite significantly, now it’s a more higher-margin space to be in.

The biggest stocks in India, China, Korea and Taiwan are all technology companies, he says, pointing to Infosys, Tencent, Samsung and TSMC.


Money managers and hedge funds have mistimed the Australian dollar for a second time this year.

Commodity Futures Trading Commission data show the most-bullish six-week change to Aussie positions in more than 1 1/2 years over the period to April 22, just in time to catch a slump that made the local dollar the past week’s worst performer among 10 currencies tracked by Bloomberg Correlation Weighted Indexes.

Earlier this year, futures traders were forced to abandon near record bets on declines when the Aussie rallied from the 3 1/2-year low reached on January 24.

“The Aussie is in a steady range and, rather typically, short-term money is getting poorly positioned at both ends of the ranges,” says Hugh Killen, Westpac’s global head of foreign exchange. “The market has got itself long at relatively unattractive levels and we could see a further sell-off as a result.”

The local dollar slid 1.5 per cent in the past week against other major peers, after a report showing subdued inflation eroded bets the RBA will increase rates this year. The currency is currently fetching 92.43 US cents, down from its 2014 high of 94.61 US cents it hit earlier this month.


China’s continuing efforts to crack down on the country’s shadow banking sector have pushed the iron ore price to a seven-week low.

Overnight, the iron ore price, measured at China’s Tianjin Port, dropped 2.2 per cent, adding to last week’s 4.7 per cent slump. Iron ore is now trading at $US108.60 per tonne, its lowest point in seven weeks.

The raw metal has been heavily involved in financing deals in China, which has caused significant volatility in 2014, as the Chinese government attempts to curb the country’s shadow banking sector.

The China Banking Regulator Commission (CBRC) has argued for an investigation into iron ore financing deals. It is rumoured that banks are local regulators are due to hand in detailed reports on April 30, leading increased volatility over the last week.

It is believed that tighter financing regulation will cause borrowing costs for iron ore buyers to jump.

“Reports were that the regulator, the CRBC has requested banks to investigate iron ore financing deals to reduce ‘fake’ trades and improve risk management,” ANZ head of commodities Mark Pervan said.

“The order follows measures already introduced by Chinese banks to better secure trade finance deals, requesting mills provide higher deposits to issue letters of credit."

Trade sources said Chinese banks have started to tighten loan requirements for steel mills and trading firms seeking credit for iron ore imports.

"The thing we've been hearing from traders is the margin on the letters of credit has gone up quite sharply over the last week - it used to be 10-20 percent and now is 40-50 percent, and that seems seems to be forcing a bit of liquidation (to cover the margin call)," says Graeme Train, an analyst at Macquarie Commodities Research in Shanghai.


Celebrity chef Justin North has been banned from running companies for two years over the multi-million dollar collapse of his restaurant empire in 2012.

North's flagship restaurant, Becasse, at Westfield Sydney, had just 25 seats and offered a $190-a-head degustation menu, served on ostrich-skin tables.

Collapse left staff nearly $1 million out of pocket in unpaid super and creditors were owed $7 million.

Here's more

Fall from grace: Justin and Georgia North at Becasse.
Fall from grace: Justin and Georgia North at Becasse. Photo: Marco Del Grande
trading halt

Cabcharge executive chairman Reg Kermode has announced his resignation from the top job on health grounds.

The 39-year company veteran will vacate the CEO job once an replacement is found.

Kermode has developed an “aggressive form of cancer” and will “make a further statement down the track,” said the ASX release.

Shares in the company fell 2 per cent on the announcement, now down 1.4 per cent at $3.89.

Back to top