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Australian shares posted their biggest daily jump in seven months amid a rally in global equities after the United States Federal Reserve provided reassurance it plans to keep its monetary policy supportive for many months to come.
The benchmark S&P/ASX 200 Index jumped 85.5 points, or 1.6 per cent, on Thursday to 5468.2, while the broader All Ordinaries Index added 1.5 per cent to 5446.4, as the Australian market also received a boost from a lift in the iron price. It was the biggest daily jump on the ASX since December 19.
Local shares followed equity markets in the United States, Europe and the United Kingdom higher as investors turned their attention away from the ongoing geo-political risks in Iraq and toward the US Fed and the Bank of England, which both kept interest rates on hold.
As expected, the US Federal Reserve Open Market Committee kept US interest rates on hold and tapered its monthly program of asset purchases from $US45 billion to $US35 billion. A statement accompanying the decision indicated that despite recent signs the US economy is improving, including higher inflation and stronger jobs data, rates will remain on hold till late next year.
“Investor sentiment was bolstered by the June FOMC meeting outcomes, as well as a speech delivered in London on Wednesday by Chinese premier Li, in which he confidently stated that the globe’s number-two economy would avoid a hard landing,” Patersons Securties chief strategist Tony Farnhamsaid.
On the local bourse, mining was the best-performing sector, up 2.7 per cent after the spot price for iron ore, landed in China, lifted 1.1 per cent to $US90.30 a tonne. It was the second session in a row the iron ore price lifted after starting the week at a 21-month low.
David Jones has postponed tomorrow's shareholder meeting - to vote on Woolworth's takeover bid - until July 14.
In the ASX announcement the company said:
"The scheme meeting has been postponed following lodgement of a substantial shareholder notice by Australian Retail Investments (ARI) yesterday, confirming that entities associated with Solomon Lew hold 9.89% of David Jones shares.
"David Jones, with the agreement of [Woolworths], applied to the Federal Court seeking the two week postponement of the scheme meeting. The Court has granted this postponement to allow sufficient time for the David Jones Board to assess the implications of ARI's shareholding in David Jones for shareholders."
And here are the best and worst performers today.
As has been mentioned, Ten is the worst performer after some gloomy comments around TV advertising revenue.
A couple of gold miners top the list, while the market cheered Asciano's announcement it would cut jobs and costs.
The Reject Shop enjoyed a nice rally, too.
So this is what it sounds like when hawks cry (sorry, we couldn't help it): confirmation that the US Fed will continue to keep rates low sparked a rally in local shares.
The ASX 200 recorded its best day in seven months, climbing 1.6 per cent, or by 86 points, to 5468.2, while the All Ords climbed 83 points to 5446.4.
Miners led the way early but banks soon joined the party, with BHP jumping 3.3 per cent, Rio 2.3 per cent and Fortescue 5 per cent.
The big four banks all gained between 1.6 and 1.8 per cent.
Only 27 names among the top 200 fell.
Among them was Woolworths, which eased 0.2 per cent, and Ten Network, which dropped 6.9 per cent after it warned of a slide in advertising revenue.Back to top
The subpar share price performance of Transpacific Industries Group looks set for a recovery.
According to Morgans, the company’s value should rise soon as concerns about an overhang from options owned by private equity firm Warburg Pincus are removed and the stock transitions into the S&P/ASX 100 Index.
Investors should also be buoyed by the imminent completion of the sale of Transpacific’s New Zealand business to Beijing Capital. Analysts Nathan Lead and Roger Leaning say this deal, scheduled to be completed at the end of the month, will significantly lower gearing, and leave the balance sheet capacity to fund growth at a relatively robust level of between $325 million and $600 million.
Earlier this year the waste management company indicated it intends to build market share and will tee up “tuck-in” acquisitions where route infrastructure is already in place.
But Morgans argues the market has been unable to focus on these positive aspects because of lingering concerns such as the equity warrants. Warburg Pincus exited its one-third holding of Transpacific last year, but its stake came with 77 million equity warrants – effectively a call option – that were due to convert in June at a strike price of $1.12.
Then in the run-up to this month, the company’s stock price started to flag, which according to Morgans reflected “concerns regarding potential dilution from conversion”. Had the warrants been exercised the shares on issue would have increased by 4.9 per cent.
Now that the company is free from this overhang, the market can start to concentrate on the “reinvestment strategy, revenue growth and vertical integration”.
Morgans reaffirmed its “add” ranking but cut its target price on Transpacific by 5¢ to $1.22, saying the stock looks “cheap and under-geared” compared with its international peer group.
Citi’s retail analysts have weighed into the debate around Solomon Lew’s intentions for David Jones, telling clients that while they doubted Lew would block the takeover, the offer could be changed slightly to release franking credits.
The broker came up with a list of four possible motivations on Lew’s part:
1. Solomon Lew is protecting his retail interests. Solomon Lew’s ARI [Australian Retail Investments] owns 11.9 per cent of Country Road (worth $165 million). He and his family have other wholesale and retail interests that sell to David Jones;
2. Release franking credits. We estimate David Jones will have excess franking credits of $50 million if the deal proceeds. These are worth $0.10 per share and could be distributed;
3. Block the deal now to takeover later. Premier Investments, 37.6 per cent owned by Solomon Lew, has strong retail management that may add value to David Jones; or
4. Launch a rival offer. At an EV/EBIT [enterprise value to earnings before interest and tax multiple] of 15.5 times [2015-16 earnings], we very much doubt Solomon Lew will be a higher bidder.
Lew revealed his 9.9 per cent stake in David Jones on Wednesday, putting the retailer’s $2.2 billion takeover in doubt.
NIB Holdings has crashed 6.9 per cent to $3.10 per share after announcing at a strategy day that the company's latest forecast indicates that FY14 consolidated operating profit will be at lower end of the previously published range of A$73m-A$80m.
Australian Real Estate Investment Trusts have had a stellar 2014 – at least so far.
While all the focus has been on the Westfield tussle and the bidding for the Australand Property Group, the sector as a whole has risen strongly.
This year the ASX/S&P Property Index, which covers the top 17 REITs, is up over 9 per cent. Broader equity indices are up less than 1 per cent.
Both sectors wound back on Wednesday but for the six months, the A-REITs have delivered massive outperformance. And it is largely due to interest rates.
Credit Suisse REIT analyst John Richmond says the main reason for the REIT surge is the bond rally.
Sure there are other reasons.
Richmond says the M&A activity in the sector has been the second driver. For Richmond the third reason is the fundamentals. They’re OK.
The risk for the REITs is a turn in the bonds – as happened in May 2013.
Credit Suisse predicts bond yields will stay low for some time, even rally further. On that basis, the REIT sector is trading at small, 1.4 per cent, discount to net asset value.
AMP Capital’s head of investment strategy, Shane Oliver, says this year’s global bond rally is due to a combination of soft growth readings, dovish central banks, short-covering and increasing belief in “secular stagnation”.
But AMP’s Oliver is cautious. “It’s likely that the (bond) rally has gone too far and that sooner or later the focus will shift to when the Fed will start to raise interest rates,” he says.
“This could cause a resumption of the gradual rising trend in bond yields and volatility in shares.”
And yes, it would also bring some volatility to the A-REITs.
Vodafone users across the country are unable to make or take phone calls after a huge network outage.
In a statement Vodafone said the outage had been caused by a failed transmission link and that engineers were working hard to restore coverage.
Some customers are unable to make or receive phone calls while others are experiencing poor quality, a spokeswoman for the telco said.
It is unknown exactly how many people have been affected but there are reports of disruption in all states.
The spokeswoman said the outage was "intermittently" affecting customers but could not say when it would be fixed.
"We're aware that we do have a network outage. We're just trying to understand where it is exactly," she said.
It's understood the network first failed in Western Australia this morning. The spokeswoman said customers on the east coast started to experience problems about 12.40pm.Back to top
Retirement funds are on track for another financial year of double-digit returns, with the typical superannuation fund notching up growth of 12.6 per cent over the 11 months to May.
Research house Chant West said funds were poised to deliver positive returns to members for the fifth financial year in a row, after a 1.1 per cent gain last month.
It is highly likely to be the second consecutive year of returns in excess of 10 per cent, after the typical fund gained about 15 per cent last financial year.
With just over a week until June 30, the surge also underlines the recovery in average household wealth, which has risen to record highs on the back of soaring house and share prices.
Chant West said the most common type of funds – those with 60 to 80 per cent of their funds in ''growth'' assets such as shares, property or infrastructure – were likely to record returns of more than 10 per cent. This compares with the inflation rate of 2.9 per cent.
"Super fund members will be pleased to hear that they're in line for positive returns for the fifth consecutive year,'' director Warren Chant said.
''Markets have been mixed so far in June but barring something dramatic happening in the next 12 days the median return will be well into the double digits.''
Chinese Premier Li Keqiang has made a bold statement to those who believe the country’s economy is on the road to ruin: “I can promise everyone honestly and solemnly, there won’t be a hard landing”.
The comment was contained in a speech to the Bank of England overnight, and has former Goldman Sachs chief economist Jim O'Neill excited
In O'Neill's Bloomberg column O'Neill labels Premier Li's comments as "a Draghi moment", referring to when European Central Bank governor Mario Draghi told markets that he would do "whatever it takes" to keep the euro system whole.
Markets underestimated Draghi then, just as they underestimate Premier Li's determination now, reckons O'Neill, who, it must be noted, is a well-known China bull.
“The Chinese government is adjusting its economic operations to ensure the minimum growth rate is 7.5 per cent, the level to ensure job creation,” Li said. Inflation won’t exceed 3.5 percent, he added, without specifying a time period for the prediction. China will have “medium to high-level” growth in the long run and will rely on “smart and targeted regulation” rather than strong stimulus measures, Li said.
Li’s comments came after an announcement that China will allow the yuan to be exchanged directly for British pounds from today in Shanghai. The pound becomes the fifth major currency to trade directly against the yuan in Shanghai, joining the Australian and New Zealand dollars, the Japanese yen and the US dollar.
The consumer watchdog has launched court action against budget airlines Jetstar and Virgin, claiming they engaged in misleading and deceptive conduct when advertising airfares.
The Australian Competition and Consumer Commission, which on Wednesday celebrated its court win over Coles for lying about its half-baked bread, said the airlines made false representations on their websites about flight prices. It said advertised prices were only available by using specific payment methods.
The airlines are accused of using drip pricing. This is when a price is advertised to attract customers, only for extra fees and charges to be "dripped" in during the purchasing process.
Some of these charges may be unavoidable for consumers, says the watchdog, forcing them to pay a higher price.
A three-year best performance by manufacturers could be cut short by uncertainty surrounding the federal budget.
A new report shows the sector expanded for three consecutive quarters, the first such run since 2011, albeit at a modest pace.
But the Australian Chamber of Commerce and Industry-Westpac survey of industrial trends found confidence is on the decline.
‘‘This is potentially a sign businesses are still uncertain about the future,’’ ACCI chief economist Burchell Wilson said in a statement on Thursday.
The survey’s composite index rose to 51 points in the June quarter, up slightly from 50.9 points in the previous three months, and holding about the key 50 point mark that separates expansion from contraction. However, expectations for the September quarter slipped to an index of 49.6 points.
Westpac senior economist Andrew Hanlan said, while conditions had improved on a year ago, the upturn has been relatively modest over the first half of the 2014.
‘‘The overall tone of the June quarter survey is underwhelming,’’ he said.
Foreign investment in the housing market has held steady for the past decade, confounding claims offshore buyers are pushing homes out of the reach of first-time purchasers while potentially driving up prices of more expensive dwellings, according to Reserve Bank of Australia research.
Acknowledging that much of the hard statistical evidence is incomplete, economists at the central bank said Foreign Investment Review Board approvals to foreigners appeared over the past decade to have held steady at around 5 to 10 per cent of the value of homes bought and sold every year, with the number of transactions around half that level.
Foreigners have also tended to concentrate their purchases on new, rather than old dwellings; at the higher end of the market; in apartments rather than detached homes; and in inner-city areas of Sydney and Melbourne rather than anywhere else.
Fears about the impact of foreigners on the housing market have intensified in recent years, triggering a parliamentary inquiry into whether measures should be taken to curb offshore investors. Critics say cashed up Asians in particular have priced many younger buyers out of the market.
However, the Reserve Bank’s economists said that without such foreign investment, the supply of new homes in Australia would probably have been lower than otherwise over the past decade, something that would have helped put downward pressure on prices.
That said, inherent delays in the way builders respond to increased demand might have helped push up prices, especially for more expensive homes, the bank said in research published on Thursday.
The value of approved foreign investment in the residential market has grown from around $6 billion a year in the 1990s to more than $17 billion in 2012/13, the bulk in new dwellings.
“However, with national dwelling prices and turnover having increased significantly over the past 20 years, the value of foreign residential approvals as a share of total dwelling turnover in Australia has not increased over time, fluctuating around 5–10 per cent, and in 2012/13 it was in the middle of that range,” the central bank said in the report.
The actual number of approvals to foreign buyers has also held steady at around 2 per cent of the total.Back to top
"[US Fed Chair] Yellen's preference is to keep monetary policy accommodative, even if inflation exceeds the target as it’ll quicken the unemployment improvement," Fidelity Worldwide Investments head of quantitative research David Buckle told Fairfax Media's Sally Rose this morning.
"Yet again on Wednesday night in the United States she referred to her appetite to be accommodative for that reason."
"I’m struggling to see why that’s a surprise to the bond market," he said.
In early trade in the local market share and bond prices were both pushing higher following the FOMC announcement this morning.
At 11am, the Australian government 10-year generic bond yield was down 2.1 per cent, or less than 0.1 point, at 3.66 per cent, while the Australian government 3 year generic bond yield was down 2 per cent, or less than 0.1 point, at 2.68 per cent.
“It is still a weird economic situation in the US headline unemployment is scheduled by the Fed to drop to trend levels by 2015 or 2016, but still no sign of wage inflation," Mr Buckle said.
Mr Buckle shares Dr Yellen’s view that without wage inflation this recovery is not sustainable, leading him to conclude there will be no rise in US interest rates until wages rise.
Moody’s Investor Services said it has downgraded drilling service provider Boart Longyear’s debt ratings with the corporate family rating downgraded to Caa1 from B3 and the probability of default rating cut to Caa1-PD from B3-PD.
In a statement to the Australian stock exchange, Moody’s said it had downgraded its speculative grade liquidity rating to SGL-4 from SGL-3 but that it had left the senior unsecured note rating unchanged at Caa2.
The company’s ratings could be further downgraded “should liquidity continue to deteriorate, the company be unable to be free cash flow breakeven or debt/EBITDA be sustained at or above current levels”.
Shares in the troubled company are unchanged at 20.5 cents - a year ago they fetched 75c.
The past 10 years may have been a great time to be invested in the equity market but residential property delivered better, more steady returns over the longer run, according to a new report.
Comparing the total returns - after fees and including income payments - over the past 10 years to December 2013, Australian shares unsurprisingly led at 9.2 per cent, even after the crash associated with the GFC, according to the latest Russell Investments Long-term Investing Report.
It was closely followed by hedged global shares, which delivered an 8.2 per cent return. Investment property lagged behind at 6.1 per cent, comparable to fixed interest over the same period.
But the results over the past 20 years look quite different: an investment in residential property returned a 9.9 per cent gain, beating both Australian shares at 8.7 per cent and global shares at 8.0 per cent.
Rio Tinto has been forced to heavily discount its low-grade iron ore just days after Fortescue cut prices, amid surging supply and weak demand from Chinese steel mills.
Rio told its customers on Tuesday night that it would increase discounts from 6 per cent to 13 per cent from July 1.
This applies to its 57 per cent FE Robe River fines and will see Rio receive about $US73 a tonne for its low-grade product.
The iron ore price has fallen 34 per cent this year to be trading at $US89.30 a tonne. This is the first time it has traded below $US90 since 2012.
The price reductions offer by Rio for its low-grade ore are broadly in line with the discounts being given by Fortescue.
Fortescue told its Chinese customers last week that it would be offering a 14 per cent discount from July 1. This is up from 12 per cent in June and an average discount of about 2 per cent last year.
Rio and Fortescue both publicised the new discounts via Chinese industry site Steel Home, which confirmed them to The Australian Financial Review.
Lower-grade iron ore is offered at a discount to the benchmark price, as it is more expensive for steelmakers to process and also has higher emission levels.
“Demand for low quality product is plummeting,” said the managing partner of J Capital Research, Tim Murray.
Mr Murray attributes the recent price falls to a combination of falling demand and rising supply. He estimates Chinese steel production has fallen 2 per cent so far this year, not risen 5 per cent as official data claims.
Over the same time the amount of imported iron ore has risen 20 per cent, he said.
“That equation makes for clear oversupply,” Mr Murray said.
China has plenty of cards to play on its economy, writes ANZ's chief economist, Warren Hogan, in the AFR ($):
The Chinese government must navigate the implementation of economic reforms while maintaining growth at a pace sufficient to keep unemployment steady. This is a difficult task for any government, and particularly so for the Chinese right now, as many critical reforms to the economy will be potentially disruptive to growth. This is all happening at a time in which most analysts and markets are worried about a significant loss of momentum in the Chinese economy.
To delay reforms is in itself a risk to growth, albeit over the medium term. China’s financial system presents a number of problems for its government. It is not allocating capital effectively, unregulated elements are growing rapidly, and the monetary policy transmission mechanism is under question.
Most of the immediate concerns around China focus on a collapse in property prices and construction activity.
We do not believe China’s property market is a macro-economic bubble waiting to burst. House prices have been volatile in recent years and there is nothing to say that the recent softening is any different to recent cyclical slowdowns. Furthermore, there have been major constraints on the market including tight lending conditions and a variety of curbs such as restrictive loan-to-value ratio targets for borrowers.
The major concern around the residential property market is construction activity, which looks to be more vulnerable to a slowdown than at any time since the global financial crisis. Developers are pulling back on land purchases and building commencements are slowing. As a result, construction is expected to slow down and help the market rebalance as demand softens. With this slowing comes the risk of a significant retrenchment which requires monitoring.
Despite these challenges, it should be clear that there is no disaster scenario on the horizon for China, no matter how dysfunctional the financial system appears to be. There is no “Lehman moment” just around the corner. China is, if anything, over-insured. It runs a savings rate of almost 50 per cent of GDP and presently has approximately $US4 trillion ($4.28 trillion) in FX reserves.
China can bail itself out of any financial mess that comes its way, and has been doing so for decades. That doesn’t mean there won’t be hiccups and volatility – because there will. Indeed, the noise around the Chinese financial system is likely to pick up as reform efforts continue.Back to top