Markets Live: Qantas flies again

That's all for today - thanks everyone for reading. We'll be back Monday at 9am.

Here's the weekly wrap.

Have a great weekend!

analysis

The Australian M&A cycle is on it way back up, developing more steam even than in the US as a share of market cap, Morgan Stanley notes:

  • On the basis of historical cycles, the M&A cycle could have further to run. Announced transaction values stand at 9.5% of market cap, which compares with the 1995-2007 average of 14.2% (trailing 12 month basis).
  • Debt markets are supportive and investor focus is gradually shifting from yield to growth (supporting acquirers), which should push boards from ‘paying out’ to ‘paying up’.
  • We think further momentum in M&A activity will be an incremental driver of market multiple expansion. M&A activity underpins asset values and growth expectations, which remain undemanding, while acting as a bridge for capital from a relatively expensive credit market.
  • As our East Coast Recovery plays out over the next 12 months, we expect further support for balance sheet utilisation.
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The surprise winner of the day was Qantas, as the airline ends the capacity wars. Shares jumped 4.7 per cent to seven-month high of $1.33.

Here are the other biggest winners and losers among the top 200 shares:

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market close

Australian shares have closed the week with a whimper, edging higher to post a modest gain for the week, as Telstra rises and rises.

The benchmark S&P/ASX200 index today rose 12.9 points, or 0.2 per cent, to 5492.8, while the broader All Ords added 12.2 points, or 0.2 per cent, to 5470.3.

Among the sectors, financials gained 0.5 per cent, while materials slipped 0.3 per cent.

For the week, the ASX200 rose 0.25 per cent, its third straight week of gains.

forecast

UBS equity strategist David Cassidy has taken a look at stocks that are expected to deliver decent earnings and has come up with a list that show some are vulnerable when compared to what they delivered in 2014.

The list he comes up with includes Sims Metal Management, Iluka Resources, Qantas Airways, GrainCorp, Myer Holdings, Navitas, Origin Energy, AGL Energy, WorleyParsons and Brambles.

He also takes a look at the big increase in profit margins that is expected, if the companies examined have a history of downward revisions to earnings per share, and where the broker’s earnings expectation is below what most others are forecasting.

Stocks that really stand out as a no-go zone on the earnings outlook include Cochlear, Coca-Cola Amatil and Treasury Wine Estates.

Looking ahead to what might hurt earnings, Cassidy believes there’s a few things that could go wrong:

  • Lower commodity prices, in particular the iron ore price that this week reached it’s lowest level in almost two years, and softer capital expenditure in the resources sector are the two that really stand out.
  • In addition, any leg up in earnings from the $A might not flow through given that it’s stubbornly high above US92c and if it doesn’t fall soon will become a headwind again.

The local economy is growing below trend but the housing sector is doing well, however “the federal budget, while not strictly a tight budget, is at risk of damaging consumer and business confidence although this risk is offset by the prospect of an ‘on-hold’ RBA into next year.’’

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legal

The owner of disgraced Chinese company Sichuan Hanlong, Liu Han, has been sentenced to death in his homeland, according to reports.

Han has been fighting murder charges in recent months after being accused of running a mafia style group based in the Chinese province of Sichuan.

Chinese media reported that a court in Hubei has sentenced Han and his brother to death.
There have been suggestions he could be executed before the weekend is over. The news comes after rumours in January that he may have been executed already.

Han rose to notoriety in Australia during 2011 and 2012, when Hanlong was accused of insider trading while trying to get a foothold in the local mining industry.

The company took a controlling stake in ASX-listed Moly Mines, and launched takeover bids for iron ore aspirant Sundance Resources and uranium aspirant Bannerman Resources.

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Liu Han, former chairman of Hanlong Mining.
Liu Han, former chairman of Hanlong Mining. Photo: Reuters
interest rates

SABMiller, the world's second biggest brewer and which bought Foster's three years ago, has witnessed a 1 per cent sales decline for its flagship brand VB while its wider Australian beer portfolio overshot volume falls posted by the local beer market.

Releasing its full-year results in London overnight, SABMiller reported falling sales volumes in Australia for its top three local brands, blaming economic uncertainty, weak consumer sentiment and increased price competition for the set back.

The brewer had a 3 per cent volume decline, doing worse than the broader Australian beer segment which posted a 2 per cent fall over the same period.

Crown Lager declined reflecting both a strong prior year comparative and price compression from imported brands, the company said. Carlton Draught was impacted by its exposure to the more depressed on-premise channel.

However, SABMiller said its strategy to restore the core portfolio and build a winning competitive position resulted in strong volume growth of Carlton Dry and Carlton Mid.

This strategic shift also included a greater focus on its premium and craft beer brands, which was paying dividends.

Rates

Quick afternoon quiz: which OECD country has the highest corporate tax?

The perhaps slightly surprising answer is revealed in the following chart, and may explain why companies from that country have been particularly creative in their tax avoidance techniques. Think 'Double Irish Dutch Sandwich' ...

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dollar

Much of the good news appears to be priced into the Australian dollar at the moment, and longer-term valuation signals suggest revising the lower end of the range down, Westpac notes.

The bank’s economists say it’s likely the dollar will move closer to the 90 US cent level by year end, because of:

  • Improving US data/ higher yields
  • Softer commodity prices
  • Weaker Chinese data pulse
  • An RBA very much on hold.

"In the short term, the outcome of first-quarter capex (capital expenditure) and GDP plus the May data will be important drivers," Wespac says and adds: "The ECB outcome next month will be important too, as another wave of QE would be supportive for the A$."

"However, our overall bias remains to sell strength in the A$."

asian markets

Thai stocks have dropped 1.6 per cent to their lowest in nearly two weeks, a day after the army chief seized control of the government in a coup.

The benchmark SET index closed up 0.16 per cent on Thursday before the military announcement, with foreign outflows continuing for a third straight session after the imposition of martial law on Tuesday.

Thailand's army chief, General Prayuth Chan-ocha, seized control of the government in a coup late Thursday, two days after declaring martial law, saying the military had to restore order and push through reforms after six months of turmoil.

A Thai soldier stands guard at a checkpoint after a curfew started at 10pm on May 22, 2014 in Bangkok, Thailand.
A Thai soldier stands guard at a checkpoint after a curfew started at 10pm on May 22, 2014 in Bangkok, Thailand.  Photo: Getty Images
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iron

Iron ore, pummelled by brisk supply and a weak Chinese steel market, is headed for a sixth straight weekly fall in what would be its longest losing streak since May 2012 and is at risk of sliding further.

The raw material's fall to a 20-month trough below $US100 a tonne this week helped revive buying interest for spot cargoes in top consumer China, but a sustained weakness in Chinese steel prices kept purchases in check.

The price needs to fall below $US90 to squeeze out some suppliers and "balance the market," said an iron ore trader in China's eastern Shandong province. "That's the only way I can see for iron ore to recover since China's steel market is not doing good," he said.

Iron ore for immediate delivery to China gained 30 cents to $US98.80 a tonne on Thursday, not far above Monday's $US97.50 which was the lowest since September 2012. It’s so far down about 2 per cent for the week.

At the current price, top miners from Australia and Brazil are still making money given their cash cost of as low as $US20 a tonne. But miners elsewhere, including those in China where many spend around $US100 a tonne, are now at risk of being shut out of the market.

eco news

Some more good news for Greece: Fitch has upgraded its credit rating to 'B' from 'B-' and gave it a stable outlook, citing the government's better fiscal track record.

That's still in junk territory, with a 'high credit risk', but it's at least showing signs of recovery, as the economy bottoms out, according to Fitch.

Fitch is the most upbeat so far on Greece, as the other big ratings agencies, S&P and Moody's, rate Greece a notch lower.

Fitch also lifted the issue ratings on Greece's senior unsecured foreign and local currency bonds to 'B' from 'B-'. The country ceiling has been raised to 'BB' from 'B+' and the short-term foreign currency IDR has been affirmed at 'B', it said.

Greece in April returned to the bond market, selling 3 billion euros worth of five-year bonds that were eagerly snapped up by investors happy with a yield of just 4.95 per cent - just two years after the country nearly crashed out of the eurozone.

euro

Continued sluggish economic growth in the Eurozone, coupled with negligible inflation (running at 0.7 per cent vs the European Central Bank target of 2 per cent) means that further significant monetary easing is on the cards, Bell Potter strategist Peter Quinton told clients today.

"We expect the ECB to lower its policy interest rate again in June and then turn to quantitative easing of around €1000 billion, equivalent to 10 per cent of the Eurozone’s gross domestic product, in the second half of calendar 2014," he said.

But with this stimulus coming at a time when the global economy is on the mend, this will throw further fuel on the equity fire, he argues.

"Since the global financial crisis, the seven quantitative easings by the US Federal

Reserve, the Bank of England, and the Bank of Japan have generated an average

domestic share market return of 24 per cent. However, these previous QEs were generally delivered against the backdrop of severe economic fragility and depressed share markets.

"Any QE by the ECB would be in very different circumstances — the

Eurozone economy is already improving, albeit slowly, and the European share market is already up 57 per cent from the September 2011 low point — so the accompanying share market gain is likely to be well below 24 per cent, say around 15 per cent," he said.

"To put all of this into the proper context, the European share market accounts for a fairly hefty 25 per cent of the global share market so it would make a meaningful direct contribution to further gains in the global share market as well as an indirect positive contribution through the lifting of investor sentiment in other regions."

At least one veteran investor has his doubts re Telstra's mooted expansion into Asia:

 

 

asian markets

Japan's sharemarket is is posting more strong gains, extending yesterday's rally. Here's how the rest of the region is doing:

  • Japan (Nikkei): +0.95%
  • Hong Kong: -0.05%
  • Shanghai: flat
  • Taiwan: +0.25%
  • Korea: flat
  • ASX200: +0.3%
  • Singapore: +0.2%
  • New Zealand: +0.5%

‘‘US economic indicators announced yesterday confirmed a recovery,’’ said Juichi Wako, a Tokyo-based equity strategist at Nomura Holdings. ‘‘The rise in US long-term bond yields will support a weaker yen, which in turn is likely to bolster Japanese stocks.’’

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dollar

The Australian and New Zealand dollars have found a tentative footing today following a recent steep decline with the Aussie poised to show the largest weekly drop since January.

The Aussie edged up to $0.9244, from $0.9222 in early trade, but off a peak of $0.9274 set Thursday.

It has shed 1.3 percent since Monday, having failed to sustain gains after China, Australia's top export market, posted better-than-expected manufacturing activity on Thursday.

Dealers said the Aussie's fall was largely due to positioning.

A Singapore-based trader at a European bank said the Aussie could face more downside pressure next week as the US dollar is starting to show mild momentum following encouraging economic data.

The Aussie has been stuck in a tight $0.9203-$0.9410 range since mid-April.

The currency trimmed losses against the yen at 94 yen , though it was still on track to show a 1 per cent decline for the week. It touched a two-month low of 93 yen Wednesday.

The New Zealand dollar was firm at $0.8567, not far from an offshore low of $0.8551 and hovering close to a four-week low of $0.8538 hit earlier this week.

An ongoing slide in global dairy prices and a sluggish Aussie have dimmed the kiwi's appeal as investors have trimmed bets for more strength in the currency, which have been building in past months.

IPO_float

The strong nearly 10 per cent rise at the debut for Spotless, Australia's biggest float in almost four years - with about $1 billion worth of stock on issue - will encourage other private equity firms considering even larger listings, such as that of TPG and Carlyle owned healthcare provider Healthscope.

It is also likely to encourage the federal government which has said it plans to float health insurer Medibank Private in a listing expected to fetch $4 billion.

Private equity firm Pacific Equity Partners took Melbourne-based Spotless private in August 2012 after buying it for $723 million. After the float, the company had a market capitalisation of $1.9 billion.

"It listed at the bottom of its range so that could be one reason" for the strong debut, Lonsec senior client adviser Michael Heffernan says. "They're looking for something that's got a bit of grunt to it and is not priced over the odds."

The IPO market is heating up as the sharemarket trades around record levels following five years of erratic performance.

Shares in the company with the No. 2 Australian float of the year behind Spotless, mortgage insurer Genworth Mortgage Insurance Australia are trading at $2.94 on Friday, compared with their $2.65 issue price, having listed on Wednesday.

iron

After three years of spending cuts in the wake of the global mining boom’s $US250 billion capital investment spree, investors including Pengana Capital scent companies are looking to re-open their chequebooks.

“The reduction in spending plans will be rolled back, without a doubt, perhaps we’ll start to see this in the second half of the year,” said Tim Schroeders, who helps manage about $1.1 billion in equities at Pengana, including BHP Billiton and Rio Tinto.

“I suspect the austerity ethos had a limited shelf-life to begin with.”

Commodities outperformed equities and bonds in the first quarter and Glencore Xstrata this month said the outlook for its main products is positive, as industry debt levels plunge and cash flow forecasts gain. Glencore Xstrata, BHP and Rio are among companies who championed austerity after prices plunged and the industry was hit by $US60 billion in writedowns.

A substantial increase in new equipment purchasing is slated to start from 2016, according to Citigroup’s first- quarter mining survey. That year, net debt at Rio, the world’s second-largest mining company, is set to touch a 10-year-low of $US5.1 billion, while Glencore Xstrata may be the lowest since 2009, according to RBC Capital Markets

The austerity drive is generating bumper free cashflow forecasts. Free cash flow at BHP, the world’s biggest miner, is projected to rise to $US11.6 billion in fiscal 2016, an 8-fold increase on fiscal 2013 levels, according to Macquarie Group, and Rio’s will more than double to $US10 billion.

“Many investors believe that in 2016 miners will ramp up capex because they’re more concerned with growth than free cash flow yields,” Timothy Huff, a London-based analyst with RBC, said by phone.

Read more.

shares up

Teasury Wine Estates shares have jumped on reports China's Bright Food is considering a takeover bid for the company.

The shares are currently up 4.5 per cent at $5.16.

News of another mooted buyer follows recent speculation, denied by Treasury Wine, about interest in the US division from Pernod Ricard and Constellation Wines.

Persistent talk about a takeover – Bright Food was linked to the company in 2011 – has sent the stock into overdrive over the past week, even though management signalled a potential downgrade to earnings.

On Tuesday, Treasury said it had rebuffed a takeover bid from US private equity firm Kohlberg Kravis Roberts worth $4.70 per share.

ASX

Spotless Group (code SPO) has made its debut on the ASX at $1.75, a nice jump on the IPO price of $1.60.

It's eased back a little in the minutes following its midday debut to $1.735, equivalent to an 8 per cent gain.

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