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Investors brace for Fed taper

On the eve of a highly anticipated decision from the United States Federal Reserve, local shares finished only slightly lower as investors were hesitant but orderly ahead of a likely reduction in global liquidity.

The benchmark S&P/ASX 200 index dipped 6.2 points, or 0.1 per cent, to 5097, while the All Ordinaries index slipped 6.8 points, or 0.1 per cent, to 5099.3.

Local shares got a weak lead after equity markets in the United States, United Kingdom and around Europe fell ahead of a highly anticipated decision on if the US central bank will start reducing its $US85 billion in monthly asset purchases.

“Investor nervousness about tapering has been the hot topic for weeks. The market is looking for a roadmap and greater certainty of how the Fed will deal with the process of reducing stimulus “ Morgans private client adviser Alistair McCorquodale said.

Before the local market opens on Thursday morning, the US Federal Reserve will make its December announcement on monetary policy. Many strategists, including Pimco boss Bill Gross, see a 50-50 chance that quantitative easing will be trimmed this month.


“Delaying the taper till March would be more cautious and appropriate,” Equity Trustees chief investment officer George Boubouras said. “However, it is very clear the taper will begin soon and that markets have started to price this in.”

“If the US Federal Reserve does start the long process of withdrawing artificial liquidity this month, the key risk is a sharp spike in long-dated US bond yields,” Mr Boubouras said. “An expanding US economy should be able to sustain a higher bond yield, but if yields rose too rapidly that would be bad for sentiment and a drag for future earnings.

“If the taper is delayed, bond yields will be driven lower pushing equity markets higher in the very short run. High yielding equities, such as Telstra, utilities and real estate investment trusts would get a particular benefit,” Mr Boubouras said.

Telecommunications was the best-performing sector on Wednesday, up 0.4 per cent, as Telstra Corporation rose 0.4 per cent to $5.04. The dominant telco is refusing to reveal its asking price to sell a legacy copper network to NBN Co.

Utilities stocks were mostly higher following the release of the Australian Energy Regulator’s final rate of return guidelines, which were broadly unchanged from the draft released in August.

Goldman Sachs analysts noted the updated guidelines “may weigh against regulated returns” and lowered their cash flow estimates for the sector. However, the biggest listed utility, AGL Energy, dropped 0.6 per cent to $14.43.

Woolworths dipped 0.2 per cent to $32.68, while Wesfarmers, owner of Coles, fell 1.8 per cent to $41.80.

In the Reserve Bank of Australia’s semi-annual testimony to Parliament, governor Glenn Stevens told politicians that “monetary policy can’t force spending to occur” and repeated his assertion the currency must depreciate.

At the local close, the dollar was buying US89.04¢, down from US89.41¢ at the previous close.

The big four banks were mixed. ANZ added 0.7 per cent to $30.70. Addressing the bank’s annual general meeting, chairman John Morschel said the outlook for the world economy was becoming more settled but risks remain. As expected, David Gonski was appointed as the next chairman of the board.

National Australia Bank edged 1¢ higher at $33.41. Commonwealth Bank fell 0.3 per cent to $73.68, while Westpac dropped 0.8 per cent to $30.62.

QBE Insurance Group reclaimed 2.3 per cent to $10.39.

The big metals and mining stocks were higher, despite weaker commodity prices.
BHP Billiton rose 0.4 per cent at $35.79, while Rio Tinto added 3¢ to $65.33, as the spot price of iron ore, landed in China, fell to $US134.30 a tonne.

Industrials was the worst-performing sector, down 1.1 per cent, as online travel company Wotif plummeted 31.8 per cent to $2.85, after it warned first-half annual profit will fall by up to 20 per cent and said the second-half outlook was also soft.

“The local market has been hurt by a string of companies downgrading guidance over the past six weeks. The QBE downgrade had the biggest direct negative impact, but downgrades from smaller industrial companies such as GUD Holdings, Silver Chef, a number of mining services companies and now Wotif, also create uncertainty in the market,” Mr McCorquodale said.

Mining services company Bradken lost 3.1 per cent to $5.33 as it entered a bid to fully acquire Austin Engineering, which last traded at $3.13 before entering a trading halt before the market opened.

Construction group Decmil was the best-performing stock, climbing 5.3 per cent to $2.10, after winning a $147 million contract from the Department of Immigration and Border Protection to expand its offshore asylum seeker processing centre on Manus Island.

CFS Retail Property Trust Group entered a trading halt with the intention of raising up to $280 million in new capital for a management rights buy-back, the stock was last priced at $1.90.

“The continued under-performance of IPOs hitting the boards this month is indicative of this poor sentiment,” Mr McCorquodale said.

On Wednesday, packaging brand Orora defied the sluggish market to rise 5.2 per cent on debut to $1.22, after being spun-out of Amcor.