That’s it for Markets Live today.
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Shares suffered their biggest fall in nearly a month as the RBA elected to hold the official cash rate at its record low 2.5 per cent for a tenth month, as was widely expected.
The benchmark S&P/ASX 200 Index and the broader All Ordinaries Index each lost 0.7 per cent on Tuesday to 5479.7 and 5460.5, respectively. Following the rates announcement the market was pricing the chances of a rate hike in the next 12 months at 20 per cent, compared to a zero chance a day earlier.
Local shares started to tumble minutes after trading began having taken a soft lead from offshore. Shares on Wall Street and around Europe were broadly flat on Monday night, while London’s FTSE added a modest 0.3 per cent, amid expectations the European Central Bank will act to increase stimulus when it meets on Thursday.
The ASX continued to decline in the afternoon despite Asian sharemarkets providing more support. Hong Kong’s Hang Seng and Japan’s Nikkei were each trading about 0.7 per cent higher when the Australian market closed.
“We are likely to see a cap on the local market around current levels until a catalyst for company earnings comes along,” Morgans stockbroker Stephen Pill said.
“A major theme at the moment is the reaction to last month’s federal budget, with consumer confidence slumping and a number of cyclical stocks, such as ALS Ltd, issuing profit warnings.”
In an accompanying statement to the rates decision, RBA board members upgraded their global growth outlook while welcoming slower house price growth domestically. The RBA also noted the dollar remains high by historical standards, “particularly given a decline in commodity prices”.
Contractor UGL is undervalued no matter what happens to property services arm DTZ, according to Deutsche Bank analysts.
As talks between UGL and private equity firm TPG come to a head, Deutsche upgraded the stock to “buy” and said UGL was worth up to $9.31 a share. The company was trading at $7.40 a share on Tuesday morning.
“Based on a DTZ sale price of $1.0 billion-$1.15 billion, we estimate UGL is worth $7.00-$7.91/share,” the broker told clients.
“Under a DTZ demerger scenario, we estimate the potential combined value of the de-merged businesses is $7.39/share. If DTZ is retained, we estimate UGL is worth $7.46-$9.31/share.”
The analysts said the market had undervalued UGL’s engineering division, concerned about its earnings outlook and debt levels.
Deutsche said UGL’s debt had peaked and should fall as cash flow strengthened.
And here are the best and worst for the day.
A bunch of stocks that depend on consumer discretionary spending - Myer, Reject Shop, Kathamandu, ARB Corp, Ten Network - appear in the bottom 10.
Topping the "best of" list is Lynas, which continues to gyrate violently, while Karoon Gas gained again.
Best and worst performing stocks in the ASX 200 today.
Aside from a brief period of optimism around the release of economic data in the late morning, the market started the day lower and kept heading in that direction right up to market close.
The ASX 200 and All Ords fell 38 points each, or 0.7 per cent, to 5479.7 and 5460.5, respectively.
Consumer discretionary stocks were hit the hardest after retail sales came in slightly lower than expected, while stronger than expected trade figures may have boosted fears of a rate rise; in any case the sector dropped 1.6 per cent with a host of retailers among the worst performing stocks (more on that when we post the "best and worst" for the day).
The big four banks all fell, aside from ANZ which was flat, which as a grouping was the biggest drag on the market. Macquarie fell 1.6 pr cent.
Wesfarmer was the biggest single detractor, falling 1.3 per cent, while Woolworths also dropped 1.1 per cent.
Miners had been up as a group early, but BHP ended the day 0.5 per cent down, although Rio added 0.7 per cent.
Utilities was the only sector not to suffer a drop.
It's what the RBA didn't say that's important, writes BusinessDay columnist Malcolm Maiden:
The RBA still has rates on hold, but it's something that doesn't get mentioned in its latest statement that will probably decide when it does move, and in what direction.
Compared to recent statements, there are a few changes in the RBA's tone for June.
It has gone from observing in May that the $A is stubbornly high to complaining mildly about it.
It has gone from predicting a month ago that low rates will trigger a strong rise in housing construction activity to stating that that the lift in activity has begun.
What it doesn't have anything to say about however, is consumer confidence, which has become the ''x-factor'' for the economy after the release of Joe Hockey's ''horror budget''.
The Reserve says consumer demand has been growing modestly, but that probably won't continue if the budget hit to confidence is sustained.
There are no clues from the central bank about whether or not that will happen, as you would expect.
Under the leadership of governor Glenn Stevens the Reserve hasn't held off in the past from moving rates at politically sensitive times.
Buying into a debate about the impact of the Abbott government's first budget before the economic evidence would be another thing entirely however.
The Reserve has wisely stayed clear.
Westfield Retail Trust lawyers met this afternoon in Sydney’s Supreme Court asking the judge for permission to submit a new supplementary notice - essentially asking to approach their unitholders with a new offer that takes into account Westfield supremo Frank Lowy’s apparently off-the-cuff remark that he was prepared to create a new vehicle if his demerger plans were voted down.
The preliminary date set down for the next meeting is June 20.
After an hour of dry legal argument there’s a short adjournment now while the judge decides what details can be included in the new documents.
While most observers are busily cutting their growth forecasts for China, Nomura has lifted its predictions, due to improving data and Beijing's mini-stimuli. It’s worth noting that Nomura has been (and still is) pretty bearish about the Chinese property market.
- We raise our GDP forecast for Q2 to 7.4% y-o-y from 7.1% and for full-year 2014 to 7.5% from 7.4%. The revision reflects improvements in leading indicators in May and the intensification of policy easing measures already taken, with more expected.
- We expect growth to rebound in H2, in contrast to the consensus expectation of a decline in growth.
- We remain concerned about the structurally oversupplied property sector and the amount of leverage in the economy. We expect growth to slow to 6.8% in 2015 as inflation rises, limiting the scope of future policy easing.
The revisions mostly reflect two issues, Nomura says:
- First, a surprising pick in economic momentum in May, as the official PMI, the HSBC PMI and the MNI China business sentiment indicator all strengthened. This suggests industrial production growth in May will improve from its April level of 8.7% y-o-y and on a quarterly basis is unlikely to fall sharply from 8.7% in Q1.
- Second, policy easing measures have clearly intensified in recent months, the cumulative results of which are starting to be felt on the macro front. There has been a long list of announcements in recent months, the latest being another targeted reserve requirement ratio (RRR) cut announced on May 30.
- The most important message we take from these announcements is a change of policy reaction – the government is clearly more concerned about downside risks to growth from the ongoing property market correction than it was a month ago.
- This suggests to us that it will likely loosen fiscal and monetary policy further in Q3, putting off the downside risks to growth to 2015.
Analysts have approved Virtus Health’s first international foray, after the fertility company bought a 70 per cent stake in Irish fertility medicine clinic SIMS IVF for €15.49 million ($22.8 million).
In its presentation to the market, management highlighted the low levels of IVF use in Ireland compared with Australia. The number of IVF cycles performed, per 1 million of population, is 750 in Ireland, compared with 1,642 in Australia.
UBS analyst Andrew Goodsall said the rate in Ireland was consistent with other European countries, essentially ruling out a rapid rise to Australian levels.
“Prices are high and affordability low (relative to Australia) given limited government assistance,” he said of the European Union. “We expect growth in the Irish market to continue at its recent run-rate of about 4 per cent per annum.”
UBS’s Goodsall upgraded his target price to $9.15, from $8.65. “In time, we would expect the relative unconsolidated EU market to present further accretive acquisition opportunities,” he told clients.
CLSA analyst Dave Stanton prefers Virtus to the soon-to-be listed Monash IVF, which is rattling the tin among institutions today and tomorrow to raise almost $300 million.
Virtus trades on a 17.3-times price to earnings multiple, while Monash will look to raise in the range of 15.1 to 17.0-times. “We don’t expect another Virtus-like boost to performance,” he said of the proposed Monash float.
Morgan Stanley analyst Sean Laaman said the SIMS acquisition increased Virtus’ net debt to $155 million. He said the company’s “highly cash generative nature” would see net debt reduce to $129 million by the end of financial 2015.
And here's what economists are saying in their first reactions:
JPMorgan chief economist Stephen Walters
- It's largely what they said last time. There's a reference to the exchange rate being high, which they said last time, but they're highlighting that the gap between the commodity prices and the Aussie is getting wider, which they didn't acknowledge last time.
- There's quite a lot of stuff about other sectors emerging (in relation to capital expenditure) but they still describe it as tentative so even that lacks a bit of conviction.
- It's still a work in progress. Things are working the way they'd hoped given the easing they've already delivered, but they're waiting for the more compelling evidence.
NAB senior economist David de Garis
- On the rate decision - very little change in the statement there. For GDP tomorrow we're expecting something around 1 per cent. We were expecting a fraction below that. The GDP-e will be reasonably strong, the GDP-i will be softer. Wages and profits have been soft.
- (Next rate move:) probably not for at least a year. The economy's still trying to make this light jump from resource investment to more domestically based growth and it's just taking time - one or two steps forward and one step back at the moment.
RBC Capital Markets Su-Lin Ong
- Despite some softer housing approval numbers, they still continue to characterise the construction upswing as strong. Despite some improvement in non-mining capex plans they still talk about them as being tentative. Despite some numbers in the past few months, there's really no change to the big picture view at all.
- It's telling you they're very comfortable with rates where they are, and see no reason to shift.
- They've highlighted the disconnect between commodity prices and the Aussie. It's a veiled reference to the notable drop in iron ore prices yet the currency has proved resilient. When they talk about fundamentals, it further cements the view that the currency remains high and possibly not justified by fundamentals.
- They've been frustrated before by the fundamentals when it comes to the currency, and it's probably no different this time around.
Some reactions on Twitter to the RBA's statement:
upgrade from the RBA on global growth - now moderate pace— Chris Weston (@ChrisWeston_IG) June 3, 2014
RBA makes the slightest of changes to its dollar chat. Still high by historical standards "PARTICULARLY given decline in commodity prices."— Jacob Greber (@jacobgreber) June 3, 2014
RBA: "Volatility in many financial prices is currently unusually low." Another quasi-warning as we've seen from other CB's of late.— David Scutt (@David_Scutt) June 3, 2014
"The most prudent case is likely to be a period of stability in interest rates." Yep - rates on hold for a while: http://t.co/iZ9mdKWh1L— Juliette Saly (@julesaly) June 3, 2014
Here's the full statement by the governor on today's RBA decision. A lot of same-same to last month's statement, apart from the bit pointing out how strangely (and worryingly?) low volatility in many markets is:
Growth in the global economy is continuing at a moderate pace, helped by firmer conditions in the advanced countries. China's growth appears to have slowed a little in early 2014 but remains generally in line with policymakers' objectives. Commodity prices in historical terms remain high, but some of those important to Australia have continued to decline of late.
Financial conditions overall remain very accommodative. Long-term interest rates have fallen further and risk spreads remain low. Emerging market economies are once again receiving capital inflows. Volatility in many financial prices is currently unusually low. Markets appear to be attaching a very low probability to any rise in global interest rates over the period ahead.
In Australia, the economy grew at a below-trend pace in 2013 overall, but growth looks to have been somewhat firmer around the turn of the year. This has resulted partly from very strong increases in resource exports as new capacity has come on stream, but smaller increases in such exports are likely in coming quarters.
Moderate growth has been occurring in consumer demand and a strong expansion in housing construction is now under way. At the same time, resources sector investment spending is set to decline significantly. Signs of improvement in investment intentions in some other sectors are emerging, but these plans remain tentative, as firms wait for more evidence of improved conditions before committing to significant expansion. Public spending is scheduled to be subdued.
There has been some improvement in indicators for the labour market in recent months, but it will probably be some time yet before unemployment declines consistently. Recent data confirm that growth in wages has declined noticeably. If these and other domestic costs remain contained, inflation should remain consistent with the target over the next one to two years, even with lower levels of the exchange rate.
Monetary policy remains accommodative. Interest rates are very low and for some borrowers have edged lower over recent months. Savers continue to look for higher returns in response to low rates on safe instruments. Credit growth has picked up a little. Dwelling prices have increased significantly over the past year, though there have been some signs of a moderation in the pace of increase recently.
The earlier decline in the exchange rate is assisting in achieving balanced growth in the economy, but less so than previously as a result of the higher levels over the past few months. The exchange rate remains high by historical standards, particularly given the further decline in commodity prices.
Looking ahead, continued accommodative monetary policy should provide support to demand, and help growth to strengthen over time. Inflation is expected to be consistent with the 2–3 per cent target over the next two years.
In the Board's judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates.
The Reserve Bank has kept the cash rate at its record low of 2.5 per cent - as widely expected.
Japanese stocks are on a roll, rising for nine straight sessions (the Topix) or at least eight out of nine (the Nikkei), as the yen weakens further. The indices are up a further 0.7 per cent today.
More tailwind for the Tokyo bourse could come as Japan's public pension fund, the world's biggest, mulls raising its investment in domestic stocks, from the current level of 12 per cent.
Yasuhiro Yonezawa, the recently appointed head of the investment committee of the $1.36 trillion Government Pension Investment Fund, said: "Twenty per cent would not necessarily be too high a hurdle" for the GPIF's weighting of Japanese stocks, the Nikkei financial daily reported.
Global financial markets are keenly watching the GPIF's investment strategy as the fund, bigger than Mexico's economy, is a huge investor and a bellwether for other Japanese institutional investors.
The government overhauled the GPIF's structure in late April, appointing new committee members in a push towards Prime Minister Shinzo Abe's goal of a more aggressive investment strategy.
GPIF now targets 12 per cent of its investments in Japanese stocks, 60 per cent in domestic bonds, 11 per cent in foreign bonds, 12 per cent in foreign stocks and 5 per cent in short-term assets.
GPIF could lower its weighting in Japanese government bonds and shift the proceeds into Japanese stocks, foreign bonds, US and emerging markets equities, the Nikkei quoted Yonezawa as saying.
A little bit over half an hour to go until the RBA announces its June rates decision.
The central bank is considered certain to leave its cash rate unchanged at 2.5 per cent and maintain a steady policy outlook.
Many market watchers, however, will be looking for any comment on the high Aussie dollar and falling prices of iron ore.
"We now think it's likely the RBA will commence 'open mouth operations', once again making comments around the AUD being uncomfortably high," says UBS economist Scott Haslem.
"While we doubt we'll see the RBA move to re-instate an explicit easing bias anytime soon, this is likely to see the RBA sounding a little more 'dovish' in its tone, whether at today's meeting, or over coming months."
Iron ore futures in Dalian have slipped for a fourth straight trading day, hovering near their lowest since their October launch, weighing on spot prices that have already fallen by almost a third this year.
Chinese steel futures also dropped for a fourth session to hit their lowest on record, reflecting pressure on demand from a weak property sector and hefty supply as markets reopened after a holiday weekend.
The growth in China's housing prices slowed to a near one-year low in April, while property investment also lost steam in the first four months of the year as developers feel the pinch from slowing sales and rising borrowing costs.
While stocks of steel products among Chinese traders have been falling, those held by producers have been rising, suggesting an uncertain outlook for demand has been keeping traders from replenishing their inventory, says Zhou Ting, analyst at Jinrui Futures in Shenzhen.
"Given the risks in the real estate market, traders and end-users are not willing to increase their stocks and this is putting pressure on the mills," says Zhou, adding those risks had overshadowed recent signs of recovery in China's manufacturing sector.
Iron ore for delivery in September on the Dalian Commodity Exchange fell 1 per cent to 678 yuan a tonne, a tad above the contract low of 677 yuan reached on Friday. Chinese markets were shut on Monday for a public holiday.
The most-active rebar for October delivery on the Shanghai Futures Exchange touched a session low of 3042 yuan ($US490) a tonne, the lowest for a most-traded contract since the bourse launched the product in March 2009.
The good news for News Corp print zealots is that its new co-chairman, Lachlan Murdoch, knows how to make a paper profit even in radio land.
The radio stations owned by Murdoch reported a slide in the ratings today but the News Corp heir apparent reported a big win where it counts.
Murdoch’s Illyria Investments, home of his radio group Nova Entertainment, reported a net profit of $58.15 million for the year ending December 31 on revenue totalling $110.2 million.
This compares to a $210,000 net profit for the prior year.
The key ingredient in the profit figure was Illyria’s acquisition of the other 50 per cent of the Nova radio group from Britain's Daily Mail and General Trust on April 1 last year. It generated a $58.5 million net gain on revaluation of the 50 per cent of the Nova radio group that Murdoch already owned.
Murdoch would still have done well without the paper profit. According to the financial accounts, the group reported an operating profit before tax of $10.7 million, excluding the valuation gains and foreign exchange.
The most interesting item was how the $86.2 million acquisition of the remaining 50 per cent of Nova was financed. The accounts report that ‘‘this acquisition did not involve cash flows as it was funded through intercompany loans with related parties’’ for the entire $86.2 million.
No detail was offered on who these ‘related parties’ are.
The big news for the latest radio ratings period was the Kyle and Jackie O Show losing its ratings crown to ARN stable mates The Jonesy and Amanda show on WSFM.
NAB has stepped up its push to win more credit card business, with a new offer giving new customers zero per cent interest on new purchases for the next year.
The decision follows a move by NAB to increase its unsecured lending earlier this year, which resulted in it cutting personal loans and offering zero per cent interest rates on credit card balance transfers. With its flagship business bank losing market share, NAB has been expanding in unsecured lending.
Official figures last week showed it had expanded its credit card book by an annualised rate of 32 per cent during April - most probably the result of its previous offer in the market.
The bank today also said it had experienced a 120 per cent year-on-year increase in credit card balance transfers.
This morning it also has raised variable interest rates on its personal loans to 12.99 per cent. Despite this increase it still has the lowest personal loan interest rates of the big four.
The slump in the iron ore price is being exacerbated for producers of lower grade iron, with Atlas Iron confirming that it is suffering a wider discount to the benchmark price than usual.
Atlas typically sells ores containing 58 per cent iron, slightly below the benchmark which is ore containing 62 per cent iron.
The lower grade means Atlas is paid a discount to the benchmark price of the day for its iron ore, but Atlas boss Ken Brinsden said that discount was widening at the moment, as increased exports gave buyers a choice of product.
"Increasing supply is placing further downward pressure on 58% (iron) products, with significantly increased discounts to the 62% index being experienced for that product while the market adjusts to accomodate the increased presence of this type of product," he said during a presentation in Sydney today.
Sceptics have previously argued that lower grade iron producers will face a tougher future, as Chinese steel mills seek to improve their environmental performance, and therefore favour higher grade iron ore.
The benchmark iron ore price rose slightly overnight from $US91.80 to $US92.10, but is still more than 30 per cent lower than at the start of 2014, and many pundits expect it to fall further in coming weeks. But on the positive side, Atlas is the second iron ore miner over the past 24 hours to suggest that the Indian market is opening up for Australian producers.
Atlas said today that the reduced price levels were making Australian iron ore competitive in India, with Atlas completing its first sale into the subcontinent during May.
Financial Index Wealth Accountants is in a bidding war with private equity firm Anchorage Capital Partners to gain control of the nation’s fifth largest accounting firm based on revenue, Crowe Horwath Australasia.
It emerged Monday after Crowe entered a trading halt that Findex, which is part-owned by KKR Asset Management, the local arm of United States private equity firm Kohlberg Kravis Roberts, had a multi-million dollar takeover offer.
Anchorage, best known for ramping a $94 million Dick Smith Holdings investment into a $520 million listing within 14 months last year, made a non-binding and “highly conditional” privatisation proposal to Crowe in March.
Findex has just bedded down its $130 million acquisition of Centric Wealth. The transaction, completed in March, solidified Findex’s position as the biggest non-bank affiliated financial planning group in the country with $7.6 billion in funds under management.
Shopaholic Findex chief executive Spiro Paule has turned the focus of his aggressive growth by acquisition strategy to the related field of accounting.
Crowe chief executive Chris Price was not returning calls Tuesday morning.
The company told the market the trading halt will last until Wednesday.
Macquarie Group’s domestic mortgage book will almost double to $30 billion in two years, transforming the investment bank into one of most significant players in the market, and allowing it to nip at the heels of the four major banks.
But the biggest threat is to the regional banks.
In a research note, JPMorgan analysts characterise Macquarie’s aggressive incursion into domestic mortgages as “more meaningful than investors or even Macquarie management themselves may suggest”.
The investment bank notes growth has been exceptional over the past two years with the portfolio expanding by around 50 per cent to $17 billion.
Further growth will be fuelled by the redeployment of some $10 billion of surplus cash management account (CMA) deposits.
JPMorgan argues regional lenders have the most to lose from Macquarie’s mounting appetite for this market, pointing out that smaller institutions such as the Bank of Queensland have, in recent times, opted to sit on the sidelines, in order “to preserve margin”.
But the analysts believe this strategy results in BOQ “being locked out of the market” and ultimately weakens its ability to compete against the investment bank - once dubbed the Millionaire’s Factory.
JPMorgan is targeting a $200 million uplift in revenue at Macquarie over the next two years.
The bank has maintained its neutral rating but lifted its price target on the stock to $54.62 from $54.34.
And the last bit of economic data today, the current account deficit almost halved in the first quarter thanks to booming shipments of iron ore and coal, in fresh figures showing underlying strength across the economy.
The current account deficit narrowed to $5.7 billion from $12.7 billion in the December quarter, as exports swung to a surplus of $3.6 billion from a deficit of $609 million, the ABS said. Economists had tipped a deficit of $7 billion.
The surge in volumes of goods shipped will add 1.4 percentage points to gross domestic product growth in the first quarter, according to the bureau, which will release national accounts on Wednesday.
China's factory sector turned in its best performance in four months in May as export orders improved although activity still contracted, a private survey showed this morning, adding to signs the economy may be stabilising.
The final reading of the HSBC/Markit purchasing managers' index (PMI) for May rose to 49.4, lower than a preliminary reading of 49.7 but up from 48.1 in April.
The final PMI was weaker than the flash reading due to an upward revision of the stocks of finished goods, HSBC said.
The official PMI hit a five-month high of 50.8 in May from April's 50.4, the National Bureau of Statistics said on Sunday, beating market expectations of 50.6.
The official PMI is weighted more towards bigger and state-owned enterprises and tends to paint a rosier picture than the HSBC/Markit survey, which focuses more on smaller private firms.
"The final PMI reading for May confirmed that the economy is stabilising, but it is too early to say that it has bottomed out, particularly in light of a weaker property sector," said Qu Hongbin, chief economist for China at HSBC.
"The lack of a sustainable growth momentum warrants stronger policy support. We expect both monetary and fiscal policy to be loosened gradually over the coming months."
The government has unveiled a slew of targeted policy measures, including faster investment in railways and public housing, in recent weeks to underpin the slowing economy.
Last week, China's cabinet announced fresh supportive measures, including cutting reserve requirement ratios (RRR) for more commercial banks, expanding re-lending and bond financing to support small firms.
The central bank has already cut RRR for rural banks.
On the fiscal front, the finance ministry has urged local governments and state agencies to quicken budget spending.
Chinese leaders have ruled out the possibility of any big fiscal stimulus as they focus on reforms to try to put the economy on a more sustainable footing over the long term.
Government consumption and investment spending fell 0.8 per cent in the first quarter to an inflation-adjusted $85.88 billion, the ABS reported this morning.
Government spending for consumption rose 0.3 per cent in the first quarter to $68.42 billion in real terms.
However, investment spending by the government and public enterprises fell by 5 per cent to $17.46 billion. This series has been volatile due to accounting for the transfer of assets between the public and private sectors.
The data will feed into the gross domestic product report for the first quarter due tomorrow.
Meanwhile, consumer confidence seems to have bottomed after plunging in the wake of the Federal Budget, but households are negative about their own financial situation, according to a survey.
ANZ-Roy Morgan’s weekly consumer confidence survey shows the first signs that consumers are adjusting to news from last month’s budget, as consumer confidence rose 2.9 per cent, its first lift in six weeks.
Confidence remains 12 per cent lower than it did six weeks ago, when it began to fall steeply on the back of budget leaks. However, it is not all good news. While confidence in economic conditions next year drove most of the increase, rising 14.5 per cent, households perceptions of their own financial situation deteriorated 3.1 per cent.
This last figure is concerning to economists as it may signal that households are preparing to spend less in the short term this year, despite being more positive about what next year holds.
ANZ is still expecting consumer spending to increase, but the budget announcements may affect the amount of spending and when it occurs. “The confidence impacts from the budget may weigh on consumer spending in the near-term and impact on the speed of that recovery,” the survey warned.
A quick reaction from ANZ economists to April retail sales data released this morning:
Retail sales growth were a touch weaker than market expectations in April, increasing a modest 0.2% m/m (ANZ: +0.2% m/m, mkt: +0.3% m/m).
In our view, the weakness in the month was likely in part due to the close proximity of ANZAC day and Easter, which appears to have weighed on spending in some categories. Even still, after a strong pick-up since August last year, retail spending growth has noticeably weakened over the past three months.
While consumer confidence has fallen sharply since negative newsflow related to the Commonwealth Budget first began, it rose 2.9% last week (the first time in six weeks) which is a tentative, positive sign that the sharp deterioration in consumer confidence is abating.
ANZ’s bottom line for the household consumption outlook remains that consumer spending will improve this year, although the confidence impacts from the Budget may weigh on consumer spending in the near term – and it will be important for the household consumption outlook to see where confidence eventually settles.
China's services sector grew at its fastest pace in six months in May, an official survey shows, reinforcing hopes hopes that the Chinese economy may be steadying.
The official non-manufacturing purchasing managers' index (PMI), or services PMI, climbed to 55.5 from April's 54.8, the National Bureau of Statistics said.
A storm alert today from Simon Derrick at the Bank of New York Mellon. He cites three warnings from leading central bankers, all alarmed by the remarkable disregard for risk in the equity, credit, and currency markets.
The Bank of England's Deputy Governor Charles Bean says the lack of volatility is "eerily reminiscent" of the run up to the financial crisis in 2007-2008. Investors are turning a blind eye to a large fact: that central banks are intent on extricating themselves from QE and emergency policies come what may, and this is going to be a painful experience.
Italy central bank Governor Ignazio Visco issued a similar warning on Friday: "Volatility on the financial markets in the advanced economies has subsided to well below the historic norm, reaching levels that in the past sometimes preceded rapid changes in the orientation of investors."
In America, Dallas Fed chief Richard Fisher has been warning for several weeks that the decline in the VIX index measuring volatility is an accident waiting to happen. One almost has the impression that he is itching to inflict some "two-risk way" into markets to shatter this complacency.
Mr Derrick says dash for yield is all too like the last stage of the carry trade just before Russia and East Asia blew up in 1998, and again in the summer of 2007 when investors seemed to lose all fear. Both episodes ended with a bang, at first signalled by a surge in the Japanese yen.
While the RBA is not expected to make any move on official interest rates, the falling iron ore price and slumping consumer confidence are expected to be at the top of the central bank's list of priorities.
The price of iron ore, one of Australia's most valuable exports, has plunged more than 30 per cent in 2014, but this has not been matched by a weakening of the local currency, which is up 3.6 per cent for the year.
''I would look at what they're going to say about the Aussie dollar in conjunction with the fall in iron ore prices because if the Aussie dollar had fallen in line with the iron ore price, it's less detrimental to Australia,'' HSBC chief economist Paul Bloxham said.
The RBA is unlikely to change its rhetoric in this afternoon's statement and are expected to keep interest rates quite low for some time, Mr Bloxham said.
Credit Suisse interest rate futures price in a 4 per cent chance of a rate cut today, and a 16 per cent chance of a rate hike in the next 12 months.
The central bank may argue the high dollar is holding back growth, Nomura rates strategists said.
''We and the market expect no change in policy, though we see the risk that a dovish tilt to the statement may take place. Helping that view would be the recent fall in confidence due to the budget, and the sharp fall in commodity prices,'' Nomura said.
RBA governor Glenn Stevens ... what will the central bank do after the release of weaker-than-expected business investment intentions figures. Photo: Alex Ellinghausen
Iron ore producers are expected to cut or push back non-essential spending until they have clarity about the bottom of the current price fall, mining executives have warned.
Grange Resources managing director Wayne Bould said discretionary spending such as training programs, external consulting and equipment upgrades should all be deferred.
Mr Bould's comments came as the iron ore prices slide continued down to $US91.80 per tonne over the weekend.
''When we see the numbers take a dive as they have and you don't see any clear bottom then a prudent CEO would implement a pretty straightforward plan to curtail any optimistic activity and lock down,'' he said.
''When it levels out and you understand where the bottom is and what that means in terms of costs of production, then we can re-evaluate.
''The trick for us is to protect our free cash flow and the value of our asset, so we are pretty good at belting the cost down on a short-term basis, it's not sustainable long term, but you can operate pretty cheap for a while.''
A $US10 movement in the iron price translates to a $US2.1 billion difference to Rio Tinto's bottom line, and $US1.2 billion for BHP Billiton, which is roughly half as exposed as its rival, according to Credit Suisse figures for the 2015 year. When applied to earnings, the Credit Suisse figures show a $US10 price movement had a 20 per cent impact on Rio and 9 per cent on BHP.
Diversified miners are ramping up iron ore production, while single-metal miners continue to add to supply, ultimately leading to oversupply and a further slump in the iron ore price.
Ore price slips closer to $US90 a tonne.
Shares have opened lower this morning with banks and miners switching roles from the start of the week, with lenders lower and diggers higher.
The ASX 200 is 12 points, or 0.2 per cent, lower to 5506.4, while the All Ords is down a similar amount to 5487.1.
Wesfarmers and Woolies are also dragging the market lower, down 0.4 and 0.5 per cent, respectively. Telstra is 0.3 per cent lower and Seek 2.7 per cent.
BHP and Rio gained 0.8 and 1 per cent, respectively, while Origin has rebounded 0.6 per cent and AGL Energy is 0.7 up.
UGL is 3.4 per cent higher.
A report on the potential impact of CSG extraction in Sydney's water catchment says fracking should be banned if the risk to human health can't be known with a high degree of certainty.
The government placed a moratorium on coal seam gas activity in the catchment area pending the release of the Chief Scientist's report, which was handed to the government on Friday night.
It says the use of chemicals in the fracking process would need to be severely controlled or even banned.
Chief Scientist Professor Mary O'Kane says there should also be strict controls on how companies manage produced water, which contains high level of salinity and other harmful chemicals.
"We've also suggested that in water quality that extra precautions be taken and that produced water if any CSG activity were to take place should be treated specially and not just put into the general catchment water," she said.
"And even though we went through the sums and there probably wouldn't cause trouble we did suggest it be treated specially".
Some 95 per cent of the extra credit extended by banks since mid-2012 has financed residential or commercial property, according to an analysis that highlights the lopsided nature of the post-mining boom economic transition.
In slashing interest rates to record lows, the Reserve Bank is trying to encourage borrowing and spending by households, while stimulating non-mining investment.
The central bank hopes this will help cushion Australia from a sharp fall in resources spending that will hit the economy in coming years.
However, analysis of official figures by UBS shows almost all the net credit growth since 2012 has flowed into property, as opposed to new productive plant or equipment.
The research by banking analyst Jonathan Mott found that of the total increase in credit since mid-2012, $60.6 billion had financed owner-occupied housing, $45.8 billion residential investment properties, and $10 billion had gone into commercial property.
Non-property business lending rose by just $3.2 billion, accounting for only 2.6 per cent of total credit growth over the period.
The finding illustrates the extent to which record low interest rates have helped to funnel tens of billions of dollars in debt into property, while doing little to spark increased business lending.
The soft growth in business credit is a headwind for all the major banks, but in particular the country's biggest business lender, National Australia Bank, which is also losing market share to rivals.
Low interest rates have helped to funnel tens of billions of dollars in debt into property. Photo: Glenn Hunt
Illustration: John Spooner
At last the big end of town can stop talking about why gaming billionaire James Packer and his best friend Nine Entertainment boss David Gyngell partook in a fisticuffs set-to on the pavement at Bondi Beach and instead turn its attention to what Solomon Lew is hatching at David Jones.
There are theories aplenty but my money's on the one that says Lew wants to sell his stake in Country Road, rather than make a bid for David Jones. It's greenmail with a twist. But more on this in a moment.
Last week Lew emerged with a 0.65 per stake in Australia's grande dame of top-end department stores just when it seemed South African retail group, Woolworths, was a shoo-in to buy it.
To further muddy the waters there now seems to be 10 per cent of the stock whose ownership is unclear.
If Lew has his foot on these shares - plus some more as people were suggesting yesterday - he could thwart the takeover offer which, incidentally, is pitched at a pretty generous price.
But it's worth sifting through the theories and their credibility.
First, some are suggesting he wants to buy David Jones himself. This is highly unlikely.
Lew is a retailer who never pays retail. He has had plenty of opportunities to acquire David Jones at lower prices and hasn't bitten the bullet. He has a history of never becoming involved in contested bids and prefers to buy assets from receivers.
Indeed it's a fair bet he has been waiting in vain for David Jones to go broke for years. Here's another thing about Lew - he is really patient.
Contractor Decmil Group has announced it has won "strategic" government contracts as the company moves to diversify its business away from the waning resources sector.
Decmil also bucked the downbeat tone among its peers to declare it is "well placed to deliver a strong result" for this financial year, the company said in an ASX statement.
The new business wins include demolishing and replacing an existing bridge in Marylands, Western Australia, as well as upgrading an Australian Defence Force training facility in WA's Port Hedland.
“These project wins are significant achievements for Decmil as they represent firsts for the company," Decmil chief executive officer Scott Criddle said in the statement. "The company’s strategy is to broaden the range of services that we can offer to our clients, with a key focus on the government sector."
Criddle also said that the company is "well placed to deliver a strong result for FY14 and to adapt to the current environment".
“Work in hand for FY15 is taking shape with some great opportunities on the horizon," he said.
"The business is well placed for long term sustainable success.”
UXC has told the ASX that there is no unannounced information that could explain the recent fall in its share price, which has plunged from 80c to 72.5c in the past few trading days.
UXC has told the ASX there's no unannounced information that could explain the recent slump in the shares.
Myer has responded to a drop in consumer spending by postponing its annual mid-year clearance while unveiling a one-day stock-take sale this week to entice shoppers into stores.
Australia's largest department store chain is offering discounts as deep as 60 per cent on womens apparel, 50 per cent off menswear and 40 per cent off manchester at the one-day 'stocktacular" sale in-store and online on Wednesday.
Myer plans to hold a series of 'countdown' sales in the lead up to the mid-year clearance, which kicks off on Wednesday June 18 and runs until July 27, or until stocks last.
In the past two years, both Myer and David Jones have launched their mid-year clearance sales around June 5 or 6 and finished by mid-July.
Myer postponed its mid-year clearance for almost two weeks after feedback from customers and in the hope that cooler weather will fuel demand for winter clothing and footwear.
David Jones mid-year clearance starts this week, the same week as it did last year.
Last week both Myer and David Jones said they had no current plans to delay or bring forward their mid-season sales,
But after record-breaking autumn temperatures and a sharp drop in consumer sentiment after the Federal budget, retailers have been left holding higher than expected levels of winter stock.
Sales of fashion and accessories slumped 20.2 per cent in the week after the budget, according to BDO's Australian Retail Index, while total retail sales fell 5.1 per cent.
US manufacturing expanded in May at the fastest pace this year as American assembly-line workers responded to increased orders by cranking up production.
The Institute for Supply Management's factory index rose to 55.4 from the prior month's 54.9. Readings above 50 indicate expansion. The release of the data, watched closely by financial markets as a gauge of the economy's strength, was anything but smooth.
Twice the Tempe, Arizona-based group had to amend its figures due to calculation errors.
Factories are helping spur a second-quarter economic rebound after a slowdown in inventory-building led to the first contraction in three years. Sustained demand from consumers, combined with corporate orders for machinery and equipment, are helping propel sales at companies such as Cisco Systems.
"The case for better growth is very good," said Ethan Harris, co-head of global economics research at Bank of America in New York, who projected a reading of 55.5. "We're kind of at the point where the economy should really have a chance to pick up speed."
The Standard & Poor's 500 Index and Dow Jones Industrial Average rose to records, erasing earlier losses after the ISM's corrections. The S&P 500 climbed 0.1 percent to 1,924.97 at the close in New York. The Dow advanced 0.2 percent to 16,743.63.
Local stocks are poised to open little changed ahead of today's RBA policy meeting and crucial retail sales data for April and trade figures.
Here’s what you need2know:
- SPI futures up 6 points to 5532
- AUD at 92.43 US cents, 94.75 Japanese yen, 68.02 Euro cents and 55.23 British pence
- On Wall St, S&P 500 +0.1%, Dow +0.2%, Nasdaq -0.1%
- In Europe, Euro Stoxx 50 +0.1%, FTSE +0.3%, CAC -0.1%, DAX +0.1%
- Iron ore gains 0.3% to $US92.10 per metric tonne
- Spot gold down 0.5% to $US1243.43 an ounce
- Brent oil slips 0.5% to $US108.86 per barrel
- LME copper retreats 0.6 per cent to $US6845 per metric tonne
What's on today:
- Australia: April retail sales and trade (current account) data for March quarter (11:30am AEST); RBA cash rate decision at 2:30pm AEST; Queensland and ACT state budgets
- China: Non-manufacturing PMI at 11am AEST; HSBC manufacturing data 11:45am
- UK: Nationwide house prices
- US: Factory orders; construction spending
- Europe: Spanish, Italian and Euro unemployment rates
Stocks to watch:
- BHP to cut 500 coal jobs in Illawarra
- Collection House rated a new buy at Bell Potter; price target $2.10
- CSR trades ex-dividend
- RCG rated a new buy; price target 72c
- SAI: Pacific Equity may pull $1b offer after company said would open online data room for potential bidders
- Sirius rated new buy at Paradigm Capital
- Telstra cut to neutral vs outperform at Credit Suisse; price target $5.61
- Mirabela Nickel quarterly results
- Deutsche Bank has maintained its “buy” recommendation on Peet Ltd following a slew of positive housing data; price target $1.70