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More than $25 billion was wiped off the value of the Australian market on Monday as shares suffered their biggest daily fall since August.
But the dive was accompanied by a big jump in the value of the Australian dollar, which soared above US88c after the Reserve Bank of Australia announced it was keeping the official cash rate on hold.
The local slump came after disappointing United States manufacturing data sent Wall Street tumbling overnight. Japanese shares also extended their hefty sell-off
The local market continued to decline after the Reserve Bank of Australia kept the official interest rate at its record low as hopes for future cuts were dashed, boosting the local dollar.
The benchmark S&P/ASX 200 Index lost 90.8 points, or 1.8 per cent, on Tuesday to 5097.1, while the broader All Ordinaries Index fell 1.7 per cent to 5114.1, wiping more than $26 billion off the market’s value.
The soft US economic data sparked global worries that recent signs of a recovery in the US economy may have been premature. This came amid lingering concerns about how global markets will respond to reduced liquidity as the US Federal Reserve continues tapering its stimulus.
On Monday all three major equity markets in the US declined more than 2 per cent. A 3.5 per cent fall in Japan’s Nikkei added to the selling pressure in the afternoon.
Professional investors said equities could be headed for a correction.
“Markets were priced for perfection and things don’t go perfectly when central banks start removing stimulus,” Perpetual head of investment research Matthew Sherwood said.
Turning to the best and worst for the day, REA Group was top of the pops after its interim profit results, showing that a good report can trump the negative mood in markets. The online classifieds business jumped 5 per cent.
Gold miner Newcrest was next best, jumping 4.7 per cent, followed a bunch of other mid-cap resource stocks.
Among the worst of the day (and there were plenty to choose from - 170 stocks finished down, 22 up and 8 were unchanged), Acrux plunged 10.3 per cent before entering into a trading halt to give it a chance to explain reports around the health implications of testosterone replacement therapy.
Energy World Corp fell 9.7 per cent, while Ten Network gave up some of its recent gains, down 5.4 per cent.
Karoon Gas is now plumbing market lows, while Flight Centre dropped 4.8 per cent.
The best and worst performer on the ASX 200 today.
Sentiment continues to deteriorate in equities land, with Japan once again at the heart of the moves lower, IG's Chris Weston notes:
- The market feels like it’s been hit by a freight train and traders are asking what exactly is going on. What started out as a profit taking exercise has steamrolled into something far more substantial, with trend-breaks seen in a number of asset classes and 200-day moving averages either being broken or about to be tested.
- Naturally we need to see these averages head lower (at the moment they are still heading up) to define a new trend, but they are lagging indicators and the fast money would have already sold, or would be adding to bearish positions on these breaks.
- The story has shifted from a predominantly emerging markets narrative, to one of disinflation risks and growth concerns in developed markets, therefor you are going to see this space struggle.
Well, wrap it up and put a bow on it - the local sharemarket has finished a dismal day, with the ASX 200 down 90.8 points, or 1.8 per cent, to 5097.1. The All Ords fell 1.7 per cent to 5114.1.
Worst performing corners were information technology, down 2.3 per cent and materials, down 2.2 per cent. Financials (excluding listed property trusts) also bore the brunt of the sell-off, down 2 per cent.
Gold stocks, however, are proving their worth on the dog days. The sector was up 2.6 per cent.
LPTs were only down 0.2 per cent, and utilities recorded losses of 1 per cent.
BHP was the biggest single drag on the market, as the stock lost 2.6 per cent, followed by the big four banks and Telstra.
Newcrest Mining, up 4.7 per cent, was the biggest booster, followed by REA Group, which was up 5 per cent.
Losses haven't only accelerated on the local market, Japanese shares are being wiped out today.
The Nikkei is down 3.6 per cent and the broader Topix has lost 4.3 per cent, taking their 2014 losses to 13 and 12 per cent respectively.
‘‘Very few would have predicted a fall of above 10 per cent in the first month of this year, but given the excellent run into year-end and the large move in 2013, a pullback was widely spoken about,’’ says Stuart Beavis, head of institutional equity derivatives at Vantage Capital Markets in Hong Kong.
‘‘Until now, this year has been dominated by opportunistic plays rather than long-term investments. The lower we go, the more funds will look for long-term core investments.’’
Here are the companies that have hit 52-week share price highs and lows today, with more of the latter than the former.
- REA Group traded as high as $44.03, last $43.65
- Coca-Cola Amatil, as low as $11.38, last $11.46
- Karoon Gas, as low as $3.06, last $3.08
- AMP, as low as $4.11, last $4.13
- ALS, as low as $7.63, last $7.72
- Tatts Group, as low as $2.90, last $2.91
- Treasury Wine Estates, as low as $3.42, last $3.52
- Metcash, as low as $2.96, last $2.98
Gold has held onto most of its overnight gains as regional equities slump and investors worry over US economic growth after disappointing manufacturing data.
Spot gold is down 0.1 per cent at $US1256 an ounce, after gaining 1.1 per cent overnight, and 4 per cent since the beginning of the year.
Equities have come under pressure this year due to slowing growth in China and capital outflows from emerging nations where the US Federal Reserve's stimulus tapering is taking a toll. Gold is gaining as it is often seen as an alternative investment to stocks and other risky assets.
"Turmoil in emerging markets, due to the Fed's reduction of tapering, is causing some investors to become risk-off so they are looking to gold which has regained its status as a safe-haven asset," said Danny Laidler, head of Australia & New Zealand operations at ETF Securities.
Losses have accelerated this afternoon and if the market closes at its current level, today will be the worst session in 2014, and the biggest loss for the ASX200 since August 7.
Previously, the benchmark index had its worst day of the year on January 14, when it lost 1.5 per cent. It's lost more than 1 per cent on four occasion this year.
But the local market is still faring better than Wall Street, where the Dow Jones slumped more than 2 per cent overnight, and is down 7.3 per cent since the beginning of the year, easily underperforming the 4.7 per cent loss on the local market.
Acrux has gone into a trading halt, and is expected to release a statement to the market soon rejecting concerns outlined in an analyst report earlier today over the US regulator, the FDA responding to health issues over testosterone replacement therapies (TRTs).
The Acrux statement is expected to state there is nothing new in the move by the FDA, and that the labeling of the Acrux drug in this space, Axiron, already carries warnings.
Acrux shares have slumped 10 per cent on an analyst report over the FDA looking into links between TRT and the incidence of strokes, heart disease and death.
We mentioned below that fund manager Wellington has become a significant shareholder in Treasury Wine Estates.
But now the AFR reports that one of Australia’s higher profile analysts has warned that poor corporate governance at a company almost always results in returns to shareholders becoming severely compromised, with both David Jones and Treasury Wine Estates sounding alarm bells.
David Errington, an analyst with Bank of America/Merrill Lynch, says in a note on Tuesday that when good corporate governance breaks down, it invariably leads to a poor outcome for shareholders.
He says in the past week he has questioned the governance at two companies, Treasury Wine Estates and David Jones.
Separately, at a media briefing today, veteran fund manager Vince Pezzullo at Perpetual told journalists something to the effect of "Treasury is an absolute howler... that's issues with management".
Treasury has now lost almost a quarter of its market cap over the past few days.
Value or value trap?
Here are a few economist reactions to the RBA's decision. As mentioned earlier, consensus is the bank has turned more hawkish, indicating that the next rate move will be up (but that's probably not for a while).
Divya Devesh, foreign-exchange analyst at Standard Chartered
If you look at the RBA statement, that is much less dovish than the previous statement. They have dropped the reference to the exchange rate being uncomfortably high, so that’s definitely more hawkish. While earlier they were keeping the door open on more easing, now they are trying to say it’s the end of the current easing cycle. We’ve seen the Aussie rally on back of that.
Michael Blythe, chief economist at CBA
They sounded a bit more confident on growth, a bit less confident on inflation and took a bit of stab at forward guidance. The growth transition is underway and there is perhaps a bit more of an upside risk to inflation, so certainly the easing bias is gone and we think they'll be looking at rate rises by the end of this year.
Michael Turner, RBC Capital Markets strategist
They're back to a neutral bias, their statements have been neutral for the past couple of months, but in light of the minutes and their forecasts they have brought an easing bias, but that's pretty much gone from the language.
In this statement they don't express too much concern over the exchange rate, inflation's a bit higher, which gives the whole thing a reasonably less dovish tinge when you follow it up with the final sentence, where they say they think they're done for a period of stability. That probably means they think they're done unless the world falls apart.
Hans Kunnen, St George chief economist
It was quite positive on the global scene, which is a good backdrop, whilst acknowledging the emerging markets. Their comments on inflation were expected, but it doesn't seem to be a cause for concern from them.
And they had an extra comment on domestic cost remaining contained, so I think they see that as an important thing that non-traded goods must remain constrained in terms of price growth.
It's hard to find that they have an easing bias, so have they taken it out? Not entirely. But the statement doesn't read as if there is an easing bias.
The emerging markets thing will blow over this year, and they will keep an eye on that, but they haven't said they won't cut interest rates, they just said most likely they will be stable. So they haven't ruled the cut out.
It wasn't long ago when punters were talking parity for the Aussie dollar - against the New Zealand kiwi. That threshold has moved even further into the distance after the RBA's decision.
The Aussie jumped nearly a cent against the kiwi, outpacing its gains against the dollar, and is currently trading above $NZ1.09.
The Aussie has spiked against the Kiwi as the RBA drops its easing bias.
Consensus among the Twitterati is that the big news coming from the RBA today is that they cut the more dovish language and moved to a neutral stance on rate, dropping the easing bias. That's not a huge surprise but there'll now be more focus on the timing of the first rate hike.
Great to see RBA finally drop easing bias, tho they lag actual eco events - AUD at 0.8822 looks very oversold— adam carr (@AdamCarrEcon) February 4, 2014
Rates on hold, but Stevens gives great big bell to future rate cuts. On hold for a long while, then up...— Shane Wright (@swrightwestoz) February 4, 2014
You know the expression "hate to say I told you so"? It's a lie - everyone loves to. So, told you RBA would drop last alleged "easing bias"— Michael Pascoe (@MichaelPascoe01) February 4, 2014
#RBA on hold at 2.5% as exp. Sees global grwth pick up, slightly better conditions in Aust, slightly higher inflation..— Shane Oliver (@ShaneOliverAMP) February 4, 2014
I love RBA day, especially when they validate a non-consensus call.— Stephen Koukoulas (@TheKouk) February 4, 2014
RBA states a period of stability in rates is likely. ANZ expects the next move in rates is up in early ‘15. Risk is for a move later this yr— Warren Hogan (@anz_warrenhogan) February 4, 2014
This is a nice line from the RBA's statement for those holding stocks exposed to the building sector, or thinking about investing:
In Australia, information becoming available over the summer suggests slightly firmer consumer demand and foreshadows a solid expansion in housing construction.
Here are some of the more interesting parts of the RBA's statement, in which it specifically mentions the emerging markets situation and flags stable rates for some time:
The United States economy continues its expansion and the euro area has begun a recovery from recession, albeit a fragile one. Japan has recorded a significant pick-up in growth, while China's growth remains in line with policymakers' objectives. Commodity prices have declined from their peaks but in historical terms remain high.
...for some emerging market countries conditions are considerably more challenging than they were a year ago.
Looking ahead, the Bank expects growth to remain below trend for a time yet and unemployment to rise further before it peaks. Beyond the short term, growth is expected to strengthen, helped by continued low interest rates and the lower exchange rate. Inflation is expected to be somewhat higher than forecast three months ago, but still 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.
Ok, looks like traders had a closer look at the RBA statement and noticed that the central bank has dropped the sentence jawboning the dollar. They also seem to have turned more neutral, dropping their easing bias.
The dollar has extended gains and is now up nearly half a cent at 88.37 US cents.
The Aussie dollar has had a bit of a boost from the RBA decision to keep rates on hold.
No change to rates - the RBA has chosen not to surprise anyone with its decision. The dollar still rose a bit, about 0.2 of a cent.
More to come
Former federal Liberal treasurer Peter Costello has been appointed head of the Future Fund.
Costello, who was treasurer for more than 11 years in the Howard government (1996-2007), has been acting chairman of the fund since January 11 following the resignation of David Gonski to become chairman of ANZ Bank.
As treasurer he was responsible for the establishment of the Future Fund in 2006.
‘‘Mr Costello’s unique experiences and background at the most senior levels in government and in business will be a great asset to the Future Fund board,’’ Treasurer Joe Hockey and Finance Minister Mathias Cormann said in a joint statement.
Now officially the head of the Future Fund ... Peter Costello Photo: James Davies
With the RBA decision on rates a mere 20 minutes away, a reminder that all of the 32 economists surveyed by Bloomberg are predicting it will remain unchanged at 2.5 per cent.
Most of the attention, therefore, will turn to the statement for a glimpse on whether we are at the bottom of the monetary easing cycle.
Here's a quick look around the region, showing that all sharemarkets are under pressure, following the hefty sell-off on Wall Street overnight:
- Japan (Nikkei): -2.8%
- Hong Kong: -2.3%
- Korea: -1.6%
- ASX200: -1.6%
- Singapore: -0.85%
- New Zealand: -0.7%
Chinese markets are still closed for the Lunar New Year holidays.
‘‘After a few poor data points, markets may well decide to weaken here for a few more days or weeks,’’ says Angus Gluskie, fund manager at White Funds Management in Sydney, said by phone. ‘‘There might be some further nerves out there. People are alert to some of the risks in China and some emerging economies, but at this stage very few people are concluding that it is going to run away too far.’’
What a difference a year makes. At the end of January 2013, Japanese stocks trailed only Portugal for the biggest rally among developed markets.
Now the Nikkei is leading declines, slumping 12.6 per cent since the beginning of the year, after the market took another nearly 3 per cent hit this morning.
Losses snowballed in Tokyo during a global retreat that erased $US1.9 trillion from equity values worldwide amid signs of slower growth in China and stimulus cuts by the US Federal Reserve.
The yen, down 18 per cent in 2013, has started to strengthen, potentially curbing company profits, says Coutts & Co. The US dollar was last fetching 101.29 yen, coming perilously close to the 100-yen mark.
‘‘The stronger yen is probably the main driver,’’ of the bigger declines in Japanese stocks, says Gary Dugan, Singapore-based chief investment officer for Asia and the Middle East at Coutts. ‘‘Investors are locking in profits as they back away from equities.’’
A sales tax increase for April will damp consumer spending, according to Sumitomo Mitsui Asset Management Co.
‘‘Japan’s market finally came to its senses,’’ said Tetsuo Seshimo, a portfolio manager at Saison Asset Management. ‘‘Investors ignored risk too much toward the end of last year and the market was out of balance.’’
Never mind today’s slump, Platypus Asset Management chief investment officer Donald Williams is confident the local equity market will be higher in the first half of financial year 2015, and will outperform Wall Street.
"Australia follows the United States. If US markets make a correction we will follow them," he says.
Williams concedes a short-term correction in equities - or fall of more than 10 per cent - while not a foregone conclusion, is a current risk.
"The US market has gone 14 months without a correction and people are ready to take profits on bad news."
But Williams describes his outlook for Aussie equities as "bullish":
- The global economic recovery is gaining momentum and while the domestic economy has lagged and is still quite its current flat that is changing.
- At some point in 2014 the Australian market will start to outperform the US market, which will be the beginning of a very interesting period for the market.
- Low interest rates and a lower dollar are in place providing two key building blocks for a faster growing local economy.
There's a pattern here: Select Global Equity Indexes, rebased to 100 at the start of 2014: pic.twitter.com/POPfRmRjnA — Michael McDonough (@M_McDonough) February 4, 2014
Take a chill pill and keep your powder dry, says BusinessDay columnist Malcolm Maiden:
Everyone might be in a flap, but worries about the US and Chinese economies are getting exaggerated, so don’t be surprised if cheap shares soon have buyers coming back.
Sharemarket valuations became extended after the US Federal Reserve failed to follow up on its own signalling and begin its quantitative easing last September.
The taper did begin in December, and the second instalment came last week.
Share prices around the world are adjusting to the taper, which reduces the amount of cheap cash in the system, albeit gradually.
The bottom line however is that Fed is cutting the size of its cash splash because it believes the US economy is strong enough to handle the contraction.
There is absolutely no doubt that the Fed will slow down the taper if it sees serious signs that America's recovery is faltering.
As share prices fall, earnings growth is becoming cheaper to buy.
The over-valuation that was built in after the Fed's false start with QE in September is being removed, and value is returning the sharemarkets, not just in the United States, but here in Australia.
The point where the correction creates serious new buying interest is not far away.
Citi has put out a note saying what it likes, and dislikes about Downer EDI's earnings report:
- Mining EBIT margins were strong – Mining EBIT of $90m was well ahead of our $76m forecast. Mining EBIT margins of 8.8% vs 7-8% guidance highlight improved productivity and cost efficiencies.
- DOW NZ was strong – DOW NZ 1H14 EBIT of $31m was up 91% vs $16m in the previous corresponding period, driven by 11% top-line growth and 245bp of margin improvement.
- Cash flow was strong – Operating cash flow of $280m was strong, up 52% vs the pcp and representing 98% cash flow conversion.
- Rail was weak – 1H14 Rail EBIT of $4.6m vs $34m in the pcp was impacted by lower loco sales and maintenance, as well as $10.5m of restructuring costs.
- Infrastructure Australia (IA) was weak – IA EBIT of $56m fell 35% vs the pcp, impacted by mining-related volume and price pressure.
Overall, Citi is sticking with its 'buy' recommendation and has a $5.85 price target for Downer, saying the company is its preferred pick in the engineering and construction sector, "given its undemanding valuation, strong balance sheet with capacity for acquisition growth, and, relative to peers, a more diversified and defensive business model."
Shares are down 1.4 per cent at $4.79, well off early losses of nearly 5 per cent.
It might be easy to forget today, but we have a big event looming: the RBA's rates decision.
Ahead of the bank's statement at 2.30pm today, here's a look back at some of the key points of the previous statement in December and at possible changes in today's decision.
The Reserve Bank last noted that global growth was "running a bit below average" but that volatility in financial markets had abated. Economists say it is possible that unlike the US Federal Reserve, the RBA will mention the turmoil currently facing emerging markets.
The RBA said in December that the jobless rate was likely to edge higher, which has been borne out by the recent soft labour force reports. It said it was not yet clear how sustainable the rise in private demand would be, although the recent recovery in retail sales would encourage the central bank. It said government spending was tipped to be weak, which is as expected so far.
This one line, about "inflation [being] consistent with the medium-term target", could change given the unexpected rise in fourth-quarter consumer prices.
Impact of previous cuts
The Reserve Bank has said that full effects of its previous cuts (225 basis points since November 2011) are still flowing through into the wider economy, and that's likely to be reiterated in today's statement.
Here's another key part of the statement that could change today. The RBA has said repeatedly that the dollar is "still uncomfortably high". It might drop the phrase, given that the exchange rate has fallen from about US91¢ to US87.50¢ since its last meeting. But it could continue to note that a lower currency would help to drive growth.
Westfield Group and Westfield Retail Trust will pay a half-year distribution in line with guidance in late February.
Westfield Group has estimated a distribution of 22.5¢ for the six months to December 31 2013, exactly 50 per cent of the forecast distribution of 51¢ for all of 2013.
The Australian-focused Westfield Retail Trust will pay an estimated distribution of 9.925¢ for the six month period. The payment date for both vehicles is February 28.
WRT stocks are down 0.7 per cent at $2.99, while the mothership is trading down 0.2 per cent at $10.24.
The emerging markets may be in a state of turbulence, but the Financial Times' foreign affairs editor Gideon Rachman says that these economies will return to growth, just as they have in the past:
The reason for this is that the factors that have propelled the rise of non-western economies in the past 40 years still apply.
These include lower labour costs, rising productivity, huge improvements in the communications and transport that connect them to global markets, a rising middle class, a boom in world trade as tariffs have fallen and the spread of best practice in everything from management techniques to macroeconomic policy.
The moral of the story is that the rise of non-western economies is a deeply rooted historic shift that can survive any number of economic and political shocks. It would be a big mistake to confuse a temporary crisis with a change to this powerful trend.
News that the US drugs regulatory agency FDA is investing the possible link between testosterone replacement therapies and stroke, heart attack and death, has seen Acrux dumped a brutal 10 per cent.
Macquarie said it expects the FDA review ‘‘will almost certainly compound the recent softness we have seen for industry volumes’’.
Since industry-wide volumes are in decline, along with prices and with generics expected to enter the market in a few years time, ‘‘we continue to view the stock as expensive’’, it told in a note today clients.
The investment bank has maintained its ‘'underperform'’ rating on the shares, with a 12-month price target of $1.80.
Shares are down 22 cents at $2.10.
Market volatility has spiked to its highest point since late 2012, with investors spooked that the recovery of the United States economy may be overstated.
The Chicago Volatility Index - also called the fear index - has jumped 56.3 per cent to 21.24 this year, pushing above the spikes seen last year when former US Federal Reserve chairman Ben Bernanke announced the central bank’s intention to taper its $US85 billion bond buying program.
Despite the spike, volatility is still more than 50 per cent below its 2008 high, reached during the collapse of Lehman Brothers.
The managing director at Neuberger Berman in New York, Matthew Rubin, said the recent stock falls were reasonable given the market’s rise last year, but that fundamentals both on a macro level and at a company level will show current valuations as justifiable.
‘‘I think that volatility is creating, especially what’s happening in emerging markets, a tremendous amount of uncertainty. A lot of investors were on the edge of their seats given the great year we saw last year and that markets were looking for a reason to correct,’’ Rubin says.
The Chicago Volatility Index over the last five years. Photo: Bloomberg
As investors race to the exit, here are some soothing words on why there won't be an emerging markets crisis and why those economies should continue to show growth over the long term, from - who else? - but "Dr Doom" himself, economist Nouriel Roubini:
The threat of a full-fledged currency, sovereign-debt, and banking crisis remains low, even in the Fragile Five.
All have flexible exchange rates, a large war chest of reserves to shield against a run on their currencies and banks, and fewer currency mismatches (for example, heavy foreign-currency borrowing to finance investment in local-currency assets).
Many also have sounder banking systems, while their public and private debt ratios, though rising, are still low, with little risk of insolvency.
Over time, optimism about emerging markets is probably correct.
Many have sound macroeconomic, financial, and policy fundamentals. Moreover, some of the medium-term fundamentals for most emerging markets, including the fragile ones, remain strong: urbanisation, industrialisation, catch-up growth from low per capita income, a demographic dividend, the emergence of a more stable middle class, the rise of a consumer society, and the opportunities for faster output gains once structural reforms are implemented.
So it is not fair to lump all emerging markets into one basket; differentiation is needed.
Large US fund manager Wellington Management has ploughed an extra $25 million into buying shares in the ailing wine group Treasury Wine Estates.
Boston-based Wellington was buying up shares as other investors were bailing out late last week during the hefty share price slide of 20 per cent when Treasury revealed a $40 million profit downgrade as it came out of a trading halt.
Wellington is now one of Treasury’s biggest shareholders after spending $5.4 million buying Treasury shares last Thursday, and then splashed out a further $19.8 million on Friday to lift its holding further, in the wake of the share price rout.
Wellington told the ASX this morning that it now holds 5.73 per cent of Treasury Wines.
The company's shares are still down 0.6 per cent at $3.49.
In other news, investment experts have cautiously backed calls from Australian stockbrokers for regulators to reduce the amount of time it takes to settle trades to two days from three, amid concerns that it may put Australia in the “too hard basket” for some offshore investors.
In a paper titled Introducing T+2 for the Australian Equities Market, which is due to be released this morning, listed wealth and broking technology company GBST and the Stockbrokers Association of Australia argue that shorter settlement times for trades on the stock exchange would reduce risk and the overall amount of regulatory capital brokers put aside in the event of a default.
The paper also says that by changing what is known as the T+3 settlement period to T+2, meaning only two business days for trades to settle, would better align Australian markets with Hong Kong and Germany.
“The move to T+2 is sensible and better aligns the Australian capital markets with their offshore counterparts,” says Pengana Capital senior fund manager Tim Schroeders.
However, he added that before such a move is implemented the industry needs to ensure it adequately plans for the transition ensuring systems are capable of enacting the transition seamlessly.
Perpetual’s head of investment markets research Matthew Sherwood said while he supports the move, the benefits may only be minimal.
”If you are going to buy a stock you should be able to settle today, rather than a few days in the future. It will better help the balance sheet of stock brokers, who will be able to reduce the amount and duration of their reserves. But the benefit of this is likely to be measured in inches and feet, not miles,” he said.
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In an update to that last post, the flow-on from the steep fall on Wall Street overnight is causing renewed ructions in Tokyo, with the Nikkei 225 index opening down a steep 384.3 points, or nearly 3 per cent, at 14,234.9.
Also hurting sentiment is the drop in the US dollar to as low as 100.78 yen this morning, a fall of nearly 1 per cent, which hurts Japanese exporters. The USD is currently fetching 101.16 yen.
One of the big questions for currency traders is how far will the Bank of Japan let the US dollar fall against the yen.
Having broken through its December support level of 101.60, the currency pair is now vulnerable for a test of 100, says BK Asset Management’s managing director Kathy Lien:
- The Nikkei fell nearly 2% overnight and after the steep sell-off in US stocks, we expect further losses in Japanese equities and the continued risk aversion could carry USD/JPY lower.
- On CNBC today, I was asked if the Japanese government would take steps to stop the yen from rising. I believe that they will save their bullets and wait until the consumption tax is increased.
- While the government won't be happy to see the recent change in the yen's trend, as long as USD/JPY is trading above 97, they won't feel pressured to act. With no major US or Japanese economic reports scheduled for release this evening, risk appetite should drive yen flows.
Somewhat surprisingly, the Nikkei (white) is much more closely correlated to the S&P500 (green) than to the yen's exchange rate with the USD.
Another analyst note on where they see potential for earnings surprises or disappointments this earnings season, this time from Credit Suisse, starting with companies with those companies with higher than average chance of announcing better than expected profits:
- Materials: Rio Tinto based on the likelihood of exceeding operational cost cutting targets and the associated benefit of the declining Aussie dollar.
- Consumer staples: Woolworths based on like-for-like sales growth upside for its Australian food & liquor division.
- Financials: Challenger based on September quarter run-rate will likely result in stronger sales and hence upside to net book growth for the life business. Australand Property Group based on improved volumes on the back of residential recovery, and Goodman Group based on continued strong growth in funds under management flows.
Now for those with earnings "downside" risk:
- Consumer staples: Coca-Cola Amatil based on continued market share erosion, specifically private label water. Goodman Fielder based on the risk around the companies' ability to pass on to consumers the higher raw milk costs in the second half of 2H14.
- Financials: Suncorp as it appears that target growth of 7-9 per cent across each division will be unlikely flowing through to lower base earnings in addition to bank and life risks. Stockland based on timing of residential earnings skew to 2H14.
- Consumer discretionary: Echo Entertainment based on both higher-than-expected capex for QLD casinos leading to value destruction and weak main gaming floor revenue. Southern Cross Media, based on more subdued radio advertising spend and continued market share declines.
Global capital flight into safe havens and developed markets has exposed in emerging markets “underlying fragilities from deteriorating trade, high inflation and high debt burdens,” writes CommSec’s equity strategist, Tim Rocks, in a note to clients.
So, now after setting that rather grim scene, Rocks has identified the stocks most vulnerable to EM troubles and weakening China:
- Iron ore companies - exposed to credit tightening in China.
- Industrials with direct exposure to EM - including Amcor, Ansell, Brambles, Coca-Cola Amatil, SingTel, Toll Holdings, ANZ and Treasury Wine Estates.
- Banks - EM turmoil usually coincides with higher funding costs.
On the other side of the ledger, here are his stocks that stand to gain:
- Offshore industrials exposed to developed countries – lower Aussie dollar and improving US economy should help along Resmed, CSL, and 21st Century Fox.
- Yield plays – periods of flight to quality tend to see bond yields move lower. Stocks to benefit are Transurban, Sydney Airport, Spark Infrastructure and Duet Group.
Stocks most exposed to weakness in emerging markets.
Here's how some of the market's blue chips are performing this morning:
- BHP: -1.5%
- Rio: -1.4%
- ANZ: -1.4%
- CBA: -1.3%
- NAB: -1.75%
- Westpac: -1.45%
- Woolies: -0.4%
- Wesfarmers: -1.3%
- Telstra: -0.7%
- CSL: -1.2%
But there are a few winners in the top 200, most of them gold miners:
Despite this morning's plunge, the local market is down "just" 4.5 per cent since the beginning of the year, which means its holding up better than some of the major markets:
- Japan (Nikkei): -10.3%
- China (Shanghai Comp): -3.9%
- US (Dow Jones): -7.3%
- US (S&P500): -5.8%
- UK (FTSE100): -4.2%
- Germany (DAX): -3.8%
- Spain (IBEX): -1.9%
- New Zealand (NZX): +1.15%
As expected, the local sharemarket is diving in early trade, following Wall Street's lead.
The benchmark S&P/ASX200 index is down 1.4 per cent at 5115.4, so far wiping more than $20 billion off the market's value. The broader All Ords is also down 1.4 per cent, at 5130.3.
All sectors except for gold (+0.3%) are sharply lower, with materials dropping 1.5 per cent, financials down 1.3 per cent and consumer discretionary off 2 per cent.
Janet Yellen did not receive a warm welcome from the financial markets on her first day as Federal Reserve chair, BK Asset Management's Kathy Lien notes:
- While the overnight move does not reflect the market's lack of confidence in her abilities, the beginning of the Janet Yellen era has not lifted the spirits of investors.
- Growing concerns about global growth and the Federal Reserve's determination to continue to taper drove US assets sharply lower.
- Between the meltdown in emerging markets and slower growth in the US and China, investor confidence has taken a big hit over the past 2 weeks.
- At this stage, we need an extremely strong non-farm payrolls report (US jobs data on Friday) to stabilise the market or reassuring comments from Janet Yellen that suggests she may be open to idea of taking a break from tapering if the markets continue to sell-off or economic data weakens.
- However we don't expect encouraging comments from Yellen because the US economy is still in the process of recovering.
Committed to continuity ... Janet Yellen. Photo: Bloomberg
Stocks in focus:
On Wall Street: BHP Billiton ADR -1.6%, Rio Tinto ADR -2.3%
Spot gold rose 1 per cent overnight; China import iron ore benchmark grade was unchanged
- Ausdrill (ASL): Renegotiates to extend contract with OZ Minerals (OZL) at Prominent Hill open pit until end of life in 2018
- Challenger Diversified (CDI): 1H earnings; conf. call 10:30am Sydney time
- Downer EDI (DOW): 1H earnings; conf. call 9am
- REA Group (REA): 1H earnings; conf. call 10:30am
- Rio Tinto (RIO): 2013 NPAT est. $4.9b to incl. negative one-offs totaling ~$4-$5b, with further asset impairments, mostly in aluminum: Deutsche Bank
- SingTel (SGT): Optus gets 5-yr satellite contract with NBN: Australian
- GPT Group (GPT): Raised to outperform from neutral at Credit Suisse; PT $4
- JB Hi-Fi (JBH): Raised to overweight from neutral at JPMorgan; PT $20.36
- Rio Tinto (RIO): Added to Europe Focus List at Credit Suisse
Amid all the overnight wobbles, the Australian dollar emerged remarkable stable: the currency pushed higher after the US dollar dropped on the back of weaker-than-expected US ISM manufacturing data, but eased back after US equities fell amid the disappointing data and continuing emerging market concerns.
The local currency rose as high as US88.34¢ after midnight, but lost all its gains to fall back to currently US87.51¢.
"There's still lingering concerns about emerging markets and the US equity market turned lower. The Aussie is still traded as a proxy for global risk sentiment, so that's really why you saw it come off late last night," Commonwealth Bank currency strategist Peter Dragicevich says.
The Reserve Bank's board meets at 2.30pm. While the central bank is expected to keep rates on hold at 2.5 per cent, analysts said it could drop comments about the Australian dollar being "uncomfortably high".
"What they may change are their views around the Aussie. They've been reiterating that the Aussie has been uncomfortably high, but since then, the trade-weighted index has come off quite a bit," Dragicevich says.
"So we think they may remove the reference to uncomfortably high or they may continue to stress that a lower currency will help with the rebalancing in the economy."
Back to where it came from ... the dollar over the past days.
Government bonds, which have marched higher this year, rallied further overnight in response to the poor economic data out of the US overnight.
10-year US Treasury yields fell 7 basis points to 2.58 per cent, the lowest in more than three months.
UK 10-year bonds fell a point to 2.69 per cent, to levels last seen in early November, while Japanese bonds dropped 2 points to 0.62 per cent, where they traded at the beginning of December.
Aussie government bonds fell 6 points to 3.95 per cent with the RBA decision on rates due this afternoon, their lowest levels since the end of October.
"The trifecta of declines in US bond yields, US shares and the US dollar is very rare and indicative of growth concerns spreading from the emerging markets into the US," writes Perpetual's Matt Sherwood this morning.
"With data in China also pointing in the direction of slower growth, if the negative trifecta continues, markets assumptions that the US Fed will taper at every meeting this year would have to be reviewed."
10-yr government bond yields this year have fallen in Australia (yellow), the US (white), the UK (pink) and Japan (green).
The only word to describe the trading on the US market overnight is brutal, IG's Evan Lucas notes:
- This is the worst start to a February on the US market since 1933, with the S&P off 5.5% year-to-date.
- One fact to be aware of is the S&P hasn’t had a 10% correction since May 2012; in that same time the Nikkei has had three, and the ASX two.
- The commodities space hasn’t escaped the sell-off, with copper off for the ninth consecutive day; it hasn’t suffered a ten-day losing streak since 1997 and it looks like breaking this record. Aluminium, nickel and zinc all suffer a similar fate, as industrial metals continue to suffer a red start to the year.
- We are going to have to ride out this negative pessimism for a while to come, as it looks likely that February will be a fairly red affair.
- Locally, like with the US markets, the negative sentiment is unlikely to subside in the near term, and until I see some form confidence returning, the slide is likely to tread its own path.
The resurgent property market has helped online property classifieds company REA Group deliver net profit growth of 37 per cent to $70.7 million for the six months ended December 31, compared with the previous corresponding period.
The company, which is 62 per cent owned by News Corp Australia, said first-half revenue rose 30 per cent to $209.4 million, buoyed by strong demand for the company’s premium advertising slots.
Outgoing chief executive Greg Ellis said the Australian residential business posted growth of 34 per cent, with revenue in REA’s premium advertising slots – “listing depth product” in the company’s jargon – growing 67 per cent to $100 million. Earnings before interest, tax, depreciation and amortisation rose by 38 per cent to $106.8 million.
Commonwealth Bank had forecast net profit growth of 39 per cent to $71.9 million and EBITDA growth of 37 per cent to $105.8 million.
Good time for a poll - will we see big losses at the end of the day?
Poll: Stocks will plunge at the open, but how big will the damage be at the end of the day?
- The ASX200 will fall more than 2%, taking it twoards 5050 points.
- The ASX200 will fall, but losses will be limited to around 1%, keeping the index above 5100.
- After an early plunge, investors will jump back in and the ASX200 will end flat.
- What sell-off? Bargain hunters will drive the ASX200 higher, above 5200 points.
Total votes: 782.
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Poll closed 5 Feb, 2014
These polls are not scientific and reflect the opinion only of visitors who have chosen to participate.
In local earnings news, engineering group Downer EDI's December half net profit of $99.1 million came in modestly ahead of market expectations of a profit of around $95 million.
Previously the group had forecast the net profit forecast for the year to June to be flat at around $215 million, with analysts tipping that around 45 per cent of the full year profit would be earned in the December half. Earnings a share were flat at 20.8c compared with 20c a year earlier.
The interim dividend was raised to 11 cents from 10 cents.
Earnings before interest, tax, depreciation and amortisation fell to $297.5 million from $324.2 million a year earlier. Revenue for the half fell 16.7 per cent to $3.9 billion, with the rail division down a sharp 19.3 per cent to $600 million, which was overshadowed by a 23.2 per cent slump in mining division revenue to $1 billion.
As flagged, US stocks had their worst day since mid-2013, with the S&P 500 down 2.3 per cent.
The primary catalyst for the steep sell-off appears to be the release of survey results from the Institute of Supply Management which suggest the pace of growth in American manufacturing declined sharply in January.
The ISM index fell to an eight-month low of 51.3 in January, from 56.2 in December, a plunge that eclipsed economists’ expectation of only a slight dip to 56.
Below the unattractive headline lurked some even uglier numbers. The new orders sub-index sagged to 51.2 from 64.4 – the biggest monthly fall since December 1980.
Perhaps the most worrying for investors was the employment sub-index to its lowest since June last year, a worrying precursor for a crucial employment report due out Friday, US time.
Economists are now speculating that the poor results reflect foul weather conditions earlier this year, in which case the numbers should prove an aberration.
“You’d have to be thinking that the exceptionally bad weather affected not only manufacturing, but other sectors including construction and transport employment, giving a downside tilt to this coming Friday’s consensus expectation for US job growth of 185,000,” said NAB senior economist David de Garis.
But with trouble in emerging markets continuing to bubble away, and concerns of a faster than expected slowdown in China’s economy, jumpy investors seem prepared to sell now and ask questions later.
As if the markets didn't have enough to chew on, US Treasury Secretary Jack Lew has warned the US may default on its debt by the end of the month if Congress does not raise its borrowing limit.
Lew said overnight he could rely on emergency measures to pay US debts after the limit is reinstated on February 7. But he anticipated the treasury's reserves would quickly be exhausted as it issues annual income tax refunds.
Congress suspended the debt limit in October as part of a deal to reopen the federal government after a shutdown.
“It is imperative that Congress move right away to increase our borrowing authority,” Lew said. “It would be a mistake to wait until the 11th hour to get this done.”
Lew’s remarks, delivered at the Bipartisan Policy Center, were the latest salvo in what has become something of a rhetorical ritual in Washington, with lots of sabre-rattling and posturing from both sides of parliament.
Here's the Wall Street recap: US stocks slumped, with the S&P 500 suffering its worst drop since June, after weaker-than-expected data on the factory sector in the world's largest economy provided investors with the latest reason to move away from riskier assets.
US manufacturing grew at a slower pace in January as new order growth plunged by the most in 33 years, while spending on construction projects barely rose in December.
Investor sentiment soured sharply after the factory data, driving the cost of protection against a drop on the S&P to its highest level in nearly four months. The CBOE volatility index jumped 16.5 per cent to 21.44, its highest level since December 2012.
"Nothing is preserved today - once the market started selling off, that was that," said Keith Bliss, senior vice-president at Cuttone & Co in New York.
The Dow Jones Industrial Average fell 326.05 points or 2.08 per cent, to 15,372.8, the S&P 500 lost 40.7 points, or 2.28 per cent, to 1,741.89 and the Nasdaq Composite dropped 106.919 points, or 2.61 per cent, to 3996.958.
The Dow closed below its 200-day moving average for the first time since December 28, 2012, a technical breakdown which could indicate further declines.
"This is the best evidence yet, to me, that people knew the Fed's monetary policy in 2013 was doing nothing but providing a definite floor to the equity markets. As soon as they started signalling they were going to pull out of their extraordinary stimulus you saw the unintended consequences," said Bliss.
Dow down ... the index has lost 7.3% since the beginning of the year.
Looks like we're in for quite a ride today, after Wall Street posted its worst day since last June, with both the Dow Jones and the S&P500 sliding more than 2 per cent.
Here's how some of the major markets performed:
- SPI futures are down 99 points at 5045
- The AUD is stable at 87.5 US cents, 88.4 yen, 64.7 euro cents
- On Wall St, the Dow slumped 2.1% to 15,372.80, the S&P 500 2.3% to 1741.89
- In Europe, FTSE100 -0.69%, CAC -1.39%, DAX -1.29%
- Spot gold $US1259.28 an ounce, up $US14.95
- Brent oil $US106.10 per barrel, down 30 US cents
- Iron ore flat $US122.60 per tonne
More on how overseas markets performed in this morning's need2know.
The big local event on the agenda is the RBA's rates decision. The board will post its decision ar 2.30pm. No change to the 2.5 per cent cash rate is expected, but there's a chance the RBA will change the wording of its statement to reflect the current global markets turmoil.
Central bank watchers have also tipped the RBA will tone down its recent ''jawboning" of the local currency.