Markets Live: Telstra at 12-yr high

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Shares bounced off a morning low to close stronger as Telstra hit a 12-year high.

Investors warmed to the latest confirmation by the Reserve Bank that interest rates are firmly on hold, while shrugging off concerns about declining consumer confidence and a slump in the iron ore price.

The benchmark S&P/ASX 200 Index and the broader All Ordinaries Index each gained 11.4 points, or 0.2 per cent, on Tuesday to 5420.4 and 5401.7 respectively as shares recovered from a 0.5 per cent drop in the morning session despite positive leads from the United States.

Strength in Asian markets, such as Japan, Hong Kong and India, helped buoy the local bourse in afternoon trade. At the Australian close, the Bangkok stock exchange was trading 0.9 per cent lower after the army imposed martial law in Thailand.

Telstra led the bourse into the black, lifting 0.8 per cent to a 12-year high of $5.30,  as US research house Sanford C. Bernstein & Co reiterated its "perform" rating on Australia's largest telecommunications company.

Treasury Wine Estates, the owner of Penfolds and Lindemans wines, also helped lift the index as it posted the biggest percentage gain among the ASX 200, up 17.9 per cent to $4.80 after rejecting a $4.70 a share takeover offer from private equity firm Kohlberg Kravis Roberts, fuelling speculation of a higher bid.

The market remained buoyant despite a private survey showing consumer confidence fell to its worst level since the wake of the global financial crisis in 2008 after the release of the federal budget last week.

Barclays economist Kieran Davies said he was hopeful the drop in confidence will prove temporary as it is offset by an ongoing improvement in employment but presented a downside risk to consumer spending.

Read more.

analysis

Turning to the hits and misses on the ASX today, and no surprise to see private equity target Treasury Wine Estates at the top of the pops with a 17.9 per cent gain.

Pacific Brands jumped 4.7 per cent for reasons unknown, while DUET gained 4 per cent as Spark Infrastructure gained a cornerstone stake.

Acrux was the worst of the top 200.

Best and worst performing stocks in the ASX 200 today.
Best and worst performing stocks in the ASX 200 today. 
airlines

A financially damaging airline capacity war on Australia-south-east Asia routes is showing signs of abating, with AirAsia X forecasting an improvement in fares and earnings in the second half of the year as seat numbers stabilise.

Qantas and Singapore Airlines - and their respective budget subsidiaries Jetstar and Scoot - have all cut or announced plans to slash capacity between Australia and Singapore in recent months after having been forced to slash prices to fill seats.

Meanwhile, AirAsia X and Malaysia Airlines, which compete on the Australia-Kuala Lumpur routes, are showing signs of bedding down double-digit capacity increases over the last year rather than unveiling further growth.

AirAsia X today reported its Australian unit, which flies from its Kuala Lumpur hub to Sydney, Melbourne, Perth, Adelaide and the Gold Coast, had swung to a 52.6 million ringgit ($17.6 million) loss in the first quarter despite reporting a 24 per cent rise in revenues as a result of capacity additions. A year ago, it had reported a 20.4 million ringgit profit from its Australian operations in the same period.

market close

After a less than inspiring start, shares managed to rally into the afternoon to post modest gains after miners bounced back from steep losses yesterday.

The ASX 200 closed 11 points, or 0.2 per cent, higher to 5420.4, while the All Ords climbed by a similar amount to 5401.7.

Telstra closed 0.8 per cent higher to $5.30, and traded as high as $5.34 to reach its highest price in over 12 years.

Treasury Wine Estates surged 18 per cent after the winemaker revealed its board had rejected a $3.1 billion offer from private equity behemoth KKR.

Fortescue recovered 3.9 per cent, despite the iron ore price dropping below $US100/tonne and with futures trading suggesting further falls when the spot price is printed tonight. BHP eked out a slight gain and Rio a slight loss, but junior iron ore miners did well.

Banks also rose, aside from Westpac after it revealed a rogue currency trader had cost the bank around $1 million.

Woolies gained 0.5 per cent.

CSL lost 0.7 per cent and Woodside and Santos fell 0.5 per cent and 0.6 per cent, respectively.

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AGM

After doling out a "first strike" to troubled driller Boart Longyear on Monday, it was ComOps turn today.

At its annual general meeting, around 45 per cent of the votes cast opposed the remuneration report, which was way more than the 25 per cent needed for a "strike".

wall st

The US sharemarket is very subdued. So subdued that analysts are starting to worry.

It’s got to the point, say the number crunchers at Societe Generale, that a mere two days of selling is enough for commentators to jump up and down and call it a significant sell-off.

And little wonder.

On average, since 1969 there have been 27 days a year where the S&P 500 is down 1 per cent or more; yet the key US index has only had 16 such days over the past 12 months, calculate the SG analysts.

What’s more, it’s been 468 days since a market correction of 10 per cent or more – the fourth longest period on record.

And as the chart below shows, the maximum peak-to-trough loss over the past year has only been 5 per cent, against a typical annual drawdown of 15 per cent.

“The point of all these figures is to illustrate a potentially risky build up of investor complacency,” writes the team at the French investment bank. “The longer equities (and other risk assets) go without a typical period of losses, then the more these assets may be seen as one-way upward plays.”

It’s these kind of smooth waters that can entice in “new investors who may not have the capacity to absorb normal equity volatility and losses,” they say.

Downplaying risk serves no one in the long term and we think policy makers should be more vocal about the potential downside.”

Volatility in the US sharemarket is worringly low, reckon analysts, with the annual peak-to-trough at only 5 per cent ...
Volatility in the US sharemarket is worringly low, reckon analysts, with the annual peak-to-trough at only 5 per cent against a 15 per cent average. Source: SG. 
analysis

Has the recent slump in the shares of iron ore miners turned them into bargain buys? Judging by analyst calls it would seem so, with the majority of professional stock watchers surprisingly bullish for the sector.

Shares in Fortescue have fallen 25 per cent this year but 18 brokers recommend buying the stock while just one, Goldman Sachs, think clients should sell it, according to Bloomberg. Credit Suisse is the most bullish with a price target of $7.50 compared to today’s level of $4.57, while Goldman’s target is $4.20.

It’s a similar takeout with other stocks. Rio Tinto has 15 brokers calling the stock a buy, while just five have a ‘hold’ rating and no broker thinks it’s an outright sell.

Atlas Iron has dropped 36 per cent since trading began in January but now is not the time to sell. Only one broker suggests reducing exposure to the stock while 13 believe it’s a buy and eight have a recommendation of hold.

Arrium has halved in value this year but only one analyst, CIMB, has a sell recommendation on the stock with four others calling it a buy. The stock is changing hands at 92 cents but even when brokers such as JPMorgan have a neutral rating the target price for the stock is $1.40.

shares up

Telstra is continuing it march higher, trading up 1.3 per cent today to 12-year highs.

The stock fetches $5.33 - the last time it reached these heights was March 2002.

Speculation has been building on how the giant telco will put to work its enormous cash pile - recently boosted by asset saleswith chatter around potential acquisitions, and investors appear to be happy to back management's ability to add value.

Telstra's share price since 1998.
Telstra's share price since 1998. 
legal

The corporate watchdog has banned a former Westpac and Nomura trader who is alleged to have filed fictitious foreign exchange trades to conceal losses.

Jeremy Kaviraj Nambiar of St Ives, NSW, was named by ASIC having received an eight-year ban from the financial services industry. He may appeal to the Administrative Appeals Tribunal to have the decision overturned.

Nambiar allegedly created more than 100 fictitious trading entries designed to appear to be profitable and some hid more than $1 million in losses in the Australian dollar-US dollar spot market, ASIC said.

The regulator said $17.6 million was written off Westpac’s income statement for accounts dating back to March 2011.

“Mr Nambiar did not personally benefit from the trades. The trades were internal to Westpac and no customers were affected,” ASIC said.

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mining

Chinese iron ore futures fell for a third straight day to a fresh low and spot prices dropped to a 2-1/2 year trough on weak buying from steel mills in top consumer China.

Spot prices have fallen 25 per cent this year to below $US100 a tonne due to rising supply and weak Chinese demand growth for steel. A cooling of economic growth and the property sector is expected to further weigh down steel and iron ore prices.

Iron ore futures on the Dalian Commodity Exchange touched a low of 695 yuan ($US110) a tonne, the lowest since the contract was launched in October last year. It fell 1.3 per cent to 699 yuan by midday break.

"The tepid steel market and rising iron ore supplies from overseas put the raw material under huge pressure, and there is risk that some traders may rush to sell at low prices to liquidate some stocks," said an iron ore trader in Shanghai.

On the Shanghai Futures Exchange, the most active rebar futures for October delivery fell for a fifth consecutive session to 3,075 yuan by the midday break, down 0.3 per cent. It touched a low of 3,065 yuan, not far from the record low hit last Friday. 

"Prices could test the lower end of the next trading range $US95-100 a tonne, but should improve as steel stocks reach the low point for the year in the next month or two," ANZ said in a research note.

Spot iron ore for immediate delivery to China dropped 2.1 per cent to $US98.50 a tonne on Monday, its lowest since September 2012.

dollar

The Reserve Bank has never been shy about its preference for a lower Australian dollar. And Guy Debelle, assistant governor for financial markets, has taken this theme and run with it at a speech in Adelaide today.

Debelle hypothesises that capital flow trends could lead to a lower Australian dollar because direct investment inflows into the resources sector from offshore will decline. That's but one reason in a complex web of factors that compose Australia's complete capital position, including the funding activities of banks and investments in Australian government debt.

"The net implication of these developments is that one might expect to see reduced capital inflows in the period ahead, with the possibility of a consequent further decline in the Australian dollar," says Debelle. "That said, the ability of economists to forecast exchange rate movements is notoriously poor."

The dollar has slipped below US93 cents for the first time in two weeks as investors digest the fall in the iron ore price and the sustainability of Australia's triple-A credit rating.

Foreign investment in Australia. Source: RBA
Foreign investment in Australia. Source: RBA 
iron

Chinese iron ore traders are dumping stocks ahead of a June deadline to repay bank loans, according to one industry player who said demand remained weak for the key steel making commodity.

Ji Minlei, a trader who operates from the port of Rizhao, told AFR china correspondent Angus Grigg that pressure from banks partly explained why the iron ore price had dipped below $US100 a tonne for the first time since September 2012.

“Some traders have been caught in the liquidity crunch and have been forced to sell,” he said.

Ji said banks had been increasingly tightening credit this year and were now demanding deposits of up to 30 per cent to finance cargos, double the previous level.

“The biggest risk to the price now is that banks further tighten credit,” he said.

China’s state-owned banks have reined in credit this year, fearing a spike in bad loans. There are also unconfirmed suggestions that banks have cracked down on property developers and others using iron ore as collateral to obtain bank financing.

Ji said traders were usually required to repay loans in June and December each year. He said many had been forced to sell iron ore stock in the lead up to this deadline, even though they would be taking significant losses.

Superannuation

Superannuation funds are on track to deliver returns of more than 10 per cent for the second financial year in a row, as retirement savings are propelled higher by a global surge in shares.

Six weeks from the end of the financial year, new figures show the typical managed super fund bounced back in April, positioning funds for another year of strong growth.

Research house SuperRatings said the median balanced fund returned 0.7 per cent in the month, taking returns over the first 10 months of the year ending June 30 to 11.1 per cent.

Some of these gains have been eroded in May, but analysts believe double-digit returns are likely for the current financial year, after a bumper 14.7 per cent increase in the year ended June 2013.

It is almost certain to be the fifth consecutive financial year of higher returns from the typical managed fund.

Separate figures also published by Chant West highlighted strong performance of ‘‘growth’’ funds, which are 60 to 80 per cent invested in riskier assets such as local and international shares.

The typical growth fund gained 0.8 per cent in April, taking returns over the financial year so far to 11.4 per cent.

malcolm-maiden_127x127

Who will uncork Treasury Wine Estate's potential, Malcolm Maiden asks:

Treasury Wine Estates' revelation that it has studied and rejected a $3 billion takeover approach from US private equity group Kohlberg Kravis Roberts raises the usual question: will the target company have the time to prove that it can deliver gains that new owner would collect if control passed?

Private equity funds are bottom-fishers. They find companies that are weak and marked down by investors, privatise them, repair them and then ''flip'' them, either into a sharemarket float or a trade sale.

Treasury Wine Estates' new chief executive, Michael Clarke walked in the door at the end of March, and for the rejection of KKR's approach to make sense, he has to deliver similar improvements to those that KKR would achieve if it took the company private.

The Australian wine group argues that he can, and in a separate announcement it detailed his plan. It includes a 50 per cent increase in the group's marketing spend in the year to June 2015, and a crackdown on costs that it says will involve job cuts across the group, office space rationalisation, new IT contracts and a reduction in discretionary spending.

There's another sleeper. Treasury has been building up its stocks of super-high quality vintage wine, and they are coming onto the market over the next two years. That will deliver an earnings lift regardless of what else the new CEO does.

Treasury is arguing that at $4.70 a share, KKR offered a price that failed to value the gains that are coming, and it is correct. A takeover premium of 30 per cent is standard in this market, and KKR's indicative scheme of arrangement acquisition price is 5.5 per cent above Treasury's share price on Monday, before the approach was revealed.

Still, Treasury is now officially a takeover target.

Here's the whole article

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asian markets

Regional bourses are mostly higher, but investors are complaining about a lack of impetus for further buying:

  • Japan (Nikkei): +0.9%
  • Hong Kong: +0.6%
  • Shanghai: +0.1%
  • Taiwan: +0.1%
  • Korea: -0.4%
  • ASX200: +0.1%
  • Singapore: flat
  • New Zealand: -0.6%

‘‘The market lacks catalysts,’’ says Daiwa Securities chief strategist Junya Naruse. The situation in Thailand, where the army imposed martial law today, ‘‘doesn’t impose much of a geopolitical risk, but it still weighs on the market when it doesn’t have other catalysts.’’

legal

The competition watchdog has begun monitoring companies in preparation for the repeal of the carbon tax.

The ACCC said it was monitoring prices in the sector and would take action against any businesses that attempted to exploit consumers by inflating costs due to a repeal. It said it would also take action against any business that made false or misleading representations about the effect of a carbon tax repeal on the price of goods or services.

“The ACCC is gathering information that will provide a benchmark to allow the ACCC to compare prices charged to consumers both before and after the carbon tax is removed,” ACCC acting chairman Michael Schaper said.

The government is hoping to repeal the carbon and mining tax in a Senate sitting in July. 

AAA_rating

Investors say they would not mourn Australia's triple-A credit rating if the economy were stripped of its prestigious badge by ratings agencies because top ratings have become less relevant to bond fund managers since the financial crisis.

Australia is one of only 12 countries which boast triple-A status under the Standard & Poor's methodology.

Sovereign analyst Craig Michaels told Fairfax Media there was "at most" a one-in-three chance of Australia being downgraded to double-A, and S&P is counting on the Abbott government to win Senate approval for at least some of the $37 billion in planned savings to address the budget deficit position. Labor has signalled its opposition to almost half of that.

Investors suggested that if Australia were unable to hold onto triple-A, the damage would be more of a reputational blow than an economic one.

Vimal Gor, head of fixed interest at BT Investment Management, said by virtue of the shrinking pool of triple-A sovereigns, Australia now represented about 15 per cent of global triple-A issuance from less than 1 per cent before the crisis.

"I don't know whether anyone really pays attention to sovereign credit ratings anymore. There's no question that Australia's debt metrics are among the best in the world... and if we were to lose the triple-A rating I don't think it would be significant for our bond or equity markets," he said.

"Ten years ago I think it would have had a much greater significance. The issue is the GFC questioned the whole way people use credit ratings because a lot of the issues that blew up were triple-A rated."

Read more.

quote

Pimco’s former chief executive, Mohamed El-Erian, has cautioned investors about the present low-interest rate environment and possible sell-offs in some assets.

El-Erian, who left the world’s biggest bond fund in March this year, wrote in a comment piece for the Financial Times that “sudden drops in interest rates raise concerns about the health of the global economy, leading to fundamentally-driven sell-offs in equities and other risky assets – a worry that is amplified by the extent to which the earlier equity rally had decoupled prices from more economic sluggish conditions.

His comments come after last week’s rally in the bond market which saw bond yields - which move in the opposite direction to price - fall to their lowest point this year. The yield on US 10-year government bonds touched its lowest point since October, while the yield on 10 year Australian government bonds also struck a nine month low last Tuesday.

El-Erian who was a key investment strategist at Pimco, along with the company’s founder Bill Gross, before the two men had a falling out, blamed the fall in bond yields on several factors, including the view that interest rates would stay lower for longer and the risk of deflation, investors readjusting their portfolios, tapering by the US Federal Reserve, and failure of American and European growth to “lift off”.

He said it would be difficult to combat these forces in the weeks ahead given potential volatility stemming from “the combination of stretched valuations, geopolitical risks from Ukraine, and the challenges China faces in negotiating a soft landing for its economy while reorienting its growth model,” he wrote in the Financial Times.

Here's the whole piece

Mohamed El-Erian, now ex-Pimco warns about sudden drops in interest rates.
Mohamed El-Erian, now ex-Pimco warns about sudden drops in interest rates. Photo: Virginia Star
IPO_float

Mortgage insurer Genworth is off to a strong start on its ASX debut, with shares up 11.3 per cent, or 30 cents, at $2.95, the biggest initial public offering for the year to date.

US financial services giant Genworth Financial raised $583 million by selling 34 per cent of its Australian business, joining a rush of companies to capitalise on the buoyant equity market.

The jump in its share price gives Genworth a market capitalisation of $1.92 billion. The company has a 45 per cent share of the lenders’ mortgage insurance market in Australia

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