BusinessNow: Live coverage of financial markets and companies, plus analysis and opinion
The little shiver in the US dollar could be a preview of increased volatility.
- Five ‘what ifs’ to consider
- ASX creeps higher
- Tatts, Tabcorp in merger talks
- Crown upgraded to ‘buy’
- What to do as the ‘bondcano’ erupts
Welcome to the BusinessNow blog for Tuesday, October 18. Crown is enjoying a much-needed bounce after yesterday’s plunge, while Tatts and Tabcorp have revived merger talks.
7.59pm:Is the Fed falling behind the curve?
Financial stability risks should lead the Federal Reserve to resume its monetary policy normalisation this December, although the degree of slack in the US economy should ensure interest rates don’t rise as much as Fed members project in coming years, according to William Lee.
The Citigroup managing director and head of North America economics — who has worked for both the Federal Reserve and the International Monetary Fund — says the Fed risks falling behind the curve in dealing with financial risks that have built up because of years of monetary policy stimulus including quantitative easing and record-low interest rates in the wake of the great financial crisis.
“Because of the distortions that have taken place (as a result of extremely low interest rates) — even going back to 2008 — when you find that every sector of the US economy, households and banks, are deleveraging, the one sector that’s not continued to deleverage is the non-financial corporates,” Dr Lee said in an interview at the Citi Investment Conference on Tuesday. Read more.
7.32pm:Asian stocks close higher
Asian shares gained on Tuesday as weak economic data from the US prompted traders to dial back expectations the Federal Reserve would raise interest rates in December.
“There were worries that increasing interest rates would hurt the markets in the Asia-Pacific region and funds would flow back to the US,” said Michael McCarthy, chief market strategist at CMC Markets, explaining that those concerns have eased.
Hong Kong’s Hang Seng Index closed up 1.6 per cent, while the Shanghai Composite Index closed up 1.4 per cent. The Korean Kospi gained 0.6 per cent.
In Japan, the Nikkei Stock Average recouped earlier losses and closed up 0.1 per cent.
In Hong Kong, casino shares rebounded after sharp declines in the previous session.
Among key casino stocks, MGM China Holdings gained 3.4 per cent, Wynn Macau added 4 per cent, Galaxy Entertainment rose 2.7 per cent and Sands China added 0.9 per cent. Dow Jones.
7.09pm:Two Crown employees visited
Two of the three Australian Crown Resorts staff detained in China have been visited by Australian consular officials, Foreign Minister Julie Bishop has confirmed.
It comes after James Packer today expressed “deep concern” for the welfare of his company’s detained staff, numbering 18 in total, amid scant information from Chinese authorities.
Ms Bishop this evening confirmed the consulate has requested access “as soon as possible” to the third Australian held in detention.
7.01pm:French vote riskier than US: Citi
The French presidential election next year could be more “explosive” for global markets than the US election, Citi’s top equities expert has warned.
Citi chief global equity strategist Robert Buckland says the outcome of the US election next month is highly unpredictable.
He has advised his US colleagues that the chances of “the populist candidate”, Republican Donald Trump, winning the November election are higher than they think.
However, he says he’s much more concerned about the French presidential election, due in April, because of the overwhelming opposition in France to the European Union.
“I would probably put that as potentially more market sensitive than the US presidential election,” Mr Buckland said at a Citi investment conference in Sydney in Tuesday. Read more.
6.09pm:Grylls lifts pressure on BHP, Rio
Andrew Burrell
Renegade West Australian Nationals leader Brendon Grylls has intensified his $7.2 billion tax war with the big miners, telling a Perth business audience he believes government contracts with BHP Billiton and Rio Tinto can be changed without the consent of the companies.
Mr Grylls, a senior minister in the Barnett government, accused the iron ore miners of not complying with their so-called state agreements — acts of parliament from the 1960s — and said the state parliament had the “sovereignty” to amend them unilaterally.
His comments will further concern at BHP and Rio, which are horrified at the prospect that the Nationals will hold the balance of power after the March state election and be able to implement a plan to slug them with higher taxes.
“I absolutely believe that state agreements can be changed,” Mr Grylls said. “The companies will come back and say ‘there’s a clause here that says they have to be done by mutual agreement’. That’s a debate were having at the moment.” Read more.
5.58pm:Brexit hits budget airline Ryanair
Irish no-frills airline Ryanair cut Tuesday its full-year net profit forecast by 5 per cent owing to the pound’s slump since Britain voted in June to exit the EU.
“The primary cause of this slightly lower growth in full year profitability is the 18 per cent fall of sterling post Brexit which will reduce second half average fares,” the Dublin-based airline said in a statement.
The pound’s tumble is reducing the amount Ryanair earns from its key British market once the currency is converted into euros -- the unit of Ireland and which Ryanair uses to price its earnings.
Ryanair said it was cutting its 2016/17 net profit forecast by 5 per cent to between €1.3 billion and €1.35bn ($US1.4 billion and $US1.5 billion). Its financial year runs to the end of March.
Ryanair chief executive Michael O’Leary added in the statement that “stronger traffic growth and better cost control” would contribute to offsetting the hit in revenues, adding that the British market represents about one-quarter of the group’s total income. AFP
4.41pm:APRA takes a closer look at risk culture
The prudential regulator has started pilot reviews of risk culture in an effort to minimise industry losses and threats to financial stability, leading to much closer scrutiny of organisations with shortcomings in their risk management practices, writes Richard Gluyas.
In a highly anticipated information paper on risk culture, released on Tuesday, the Australian Prudential Regulation Authority said it had no intention of imposing a common risk culture on institutions, or even listing the characteristics of a “good” culture.
However, it recognised that a poor risk culture led to higher levels of risk-taking, significant losses and even institutional failures in the financial crisis, although Australia was largely spared.
APRA chair Wayne Byres said it was incumbent on boards and chief executives to develop a sound culture that enabled companies to operate within their risk frameworks.
4.22pm:Crown, miners boost ASX
The Australian sharemarket has rebounded from Monday’s heavy fall, boosted by a modest bounce in Crown’s shares and strength in the resources space after iron ore prices rose offshore, writes Daniel Palmer.
At the close, the benchmark S&P/ASX 200 index advanced 22.1 points, or 0.41 per cent, to 5,410.8, while the broader All Ordinaries index rallied 21.1 points, or 0.39 per cent, to 5,492.
The market focus remained on James Packer’s Crown Resorts through the day’s trade as investors pondered the ramifications of the arrests of 18 Crown staff members in China, likely in relation to gambling promotion activities.
A 13.9 per cent plunge in its share price yesterday encouraged Deutsche Bank to raise its rating on the stock to ‘buy’, which in turn helped drive a 1.7 per cent lift in its shares on Tuesday.
Rival Star Entertainment was not quite so lucky, losing a further 0.5 per cent.
4.04pm:CBA took too long to change: Narev
Commonwealth Bank chief executive Ian Narev has held his hands up to the accusation that, when it comes to the way banks do business, it took too long to recognise “what was acceptable a number of years ago” no longer is.
Mr Narev on Tuesday said global disaffection at capitalism, worldwide resentment over banks’ role in the global financial crisis, and local concern at the way customers have been treated had all led to people changing their opinion of banks - and their expectations of how they should behave.
“All those aspects have contributed to what we see as a structural shift in community expectations of their banks - what was acceptable a number of years ago, was no longer acceptable,” Mr Narev told a Trans Tasman Business Circle event in Sydney.
AAP
3.55pm:US dollar shivers a volatility warning
The little shiver in the US dollar overnight as traders responded to slightly disappointing economic statistics is perhaps a preview of increased volatility in currency markets, as the US Federal Reserve Board approaches another of its “do we or don’t we” moments.
The dollar has been strengthening steadily — it reached its highest levels against a basket of its major trading partners’ currencies in more than six months last week — as the markets’ conviction that there would be another rise in US rates has itself strengthened. The receding likelihood of Donald Trump winning the presidential election has also been a factor in its recent rise.
The steady rise in the dollar against the other major currencies signals something more, however, than the shifting perceptions of the probabilities of a Fed rate rise, although that is an obvious influence.
Stephen Bartholomeusz
3.03pm:Beware of the ‘bondcano’ erupting
Will stronger economic growth mitigate the “bondcano”?
Credit Suisse Australia strategist Hasan Tevfik is wary of a short-term pullback in shares as the bondcano — the potentially damaging effects of a substantial rise in bond yields — starts to erupt.
In his view, stocks with high PE ratios, high dividend payout ratios and high financial leverage — those at the top of the bondcano — are most sensitive to higher bond yields, while lowly valued companies should benefit as the premium associated with growth stocks diminishes.
Check out more on this in our earlier post, or read Evacuate risky shares before bondcano blows
2.35pm:$50 for a box of Weet-Bix?
Such is the twin powers of Chinese TV soap operas and the popularity for western-style foods that when an actress on one of China’s most popular shows grabbed a box of Weet-Bix as she sat down for breakfast it sent sales in Australia’s most popular cereal through the roof.
Much like the insatiable demand for infant milk formula and vitamins, Weet-Bix has become the hot new commodity as ‘daigou’, or Chinese professional shoppers, strip Australian supermarket shelves of cereal boxes. Some of their China-based clients prepared to pay as much as $50 a box for Weet-Bix.
It has made China the single biggest export market for Weet-Bix, with the company’s owner Sanitarium launching yesterday the next stage in its expansion in the region with new branding to hook even more Chinese who are turning away from traditional hot breakfasts to more western-style meals like cereal.
Eli Greenblat
2.05pm:Property: worst investment of next decade?
Will property be the worst investment of the next decade? Join Wealth Editor James Kirby for a live Q&A session tomorrow from 12.15pm (AEDT). Submit your questions here before the event and tune in for James’s response.
Property investment Q&A with James Kirby
1.38pm:Antipodes Partners’ LIC slides on debut
Antipodes Partners’ first listed investment company (LIC) has slid 3 per cent on its debut on the local bourse, writes Daniel Palmer.
The Sydney-based global equities manager received strong demand for the Antipodes Global Investment Company Limited ahead of listing, raising $314 million at $1.10 a share.
The oversubscribed raising represented the third largest LIC IPO in Australian history, trailing only the floats of the Magellan Flagship Fund and Geoff Wilson’s WAM Leaders.
1.15pm:Challenger shares surge 7pc
Shares in Challenger have surged 7 per cent after the investment management group reported a 3 per cent lift in assets and funds under management to $62 billion in the September quarter.
The company said its two funds management units — Fidante Partners and Challenger Investment Partners — achieved net flows of $0.9bn through the quarter which, combined with a $1.3bn boost from “positive investment markets”, pushed funds under management up $2.2bn to $58.9bn.
The group’s life arm also enjoyed a strong quarter, with annuity sales up 46 per cent on the prior corresponding period to $1.03bn.
Daniel Palmer
12.53pm:Sydney Airport seeks low-cost carriers
Sydney Airport is looking to lure more low-cost Asian airlines to its operations in a bid to continue passenger growth at the nation’s premier airport, writes Mitchell Bingemann.
China — and its burgeoning and travel-hungry middle class — remain a key driver of growth for Sydney Airport but at an investor update held in Sydney yesterday, the airport said it wanted more Asian low-cost carriers to use the airport.
Sydney commands a 45 per cent share of the 3.3 million passenger movements between China and Australia with some 13 mainland cities being served direct by 7 airlines. But the airport believes there is more opportunity to increase the number of airlines flying into Sydney through the introduction of low-cost carriers.
12.13pm:Telstra hunts for new security guru
Telstra’s on the hunt for a new security guru with the telco’s current chief information security officer (CISO) Mike Burgess leaving the telco next month.
Mr Burgess is set to depart on November 4 and Telstra has flagged an international search for a new CISO.
Supratim Adhikari
12.05pm:Crown lifts as Star falls further
Crown shares have bounced in morning trade as investors take note of analyst musings that the shares have been oversold, but rival Star Entertainment has been left out in the cold, sliding more than 4 per cent just before midday.
At 11.49am AEDT, Crown shares were 1.35 per cent higher at $11.30, while Star shares were down 4.35 per cent at $5.28.
11.54am:RBA uncertain about economy
The Reserve Bank of Australia says it’s uncertain about conditions in the economy and will look to inflation data next week to assess better the outlook.
Interest rates were left on hold at the Reserve Bank of Australia’s board meeting on October 4, with minutes showing policy makers want to see if two prior rate cuts this year are having any impact on lifting inflation.
“Members noted that data on CPI inflation for the September quarter and an update of the forecasts would be available at the next meeting,” the minutes said.
“This would provide an opportunity to consider the economic outlook, assess the effects of the previous reductions in the cash rate and review conditions in the labour market and housing markets,” the minutes added.
Dow Jones
11.45am:Mortgage Choice chairman resigns
Mortgage Choice chairman Peter Ritchie has abruptly announced his resignation from the brokerage network after giving a fiery speech defending the business as shareholders lodged their third vote in three years against the board’s remuneration plan.
Speaking at Tuesday’s annual general meeting, Mr Ritchie slammed proxy advisors, which advised Mortgage Choice’s relatively few institutional shareholders to vote against the group’s remuneration report — giving the board a third strike. He said the approach taken by proxy advisors is “actually hurting Australia”.
Michael Roddan
11.33am:Cochlear threatens to move R&D offshore
Cochlear has hit out at Canberra’s savings measures, warning it may move its R&D activities offshore as local tax incentives are trimmed, writes Daniel Palmer.
Chairman Rick Holliday-Smith said the hearing implants maker had benefitted greatly from the Commonwealth’s R&D tax concession, but with an annual tax benefit of $10 million now at risk, other options were emerging.
“We note that Australia is now reducing these R&D incentives at a time when many other countries appear to be increasing incentives to attract R&D investment,” he said at the group’s annual general meeting today.
11.15am:LNG prices lift Oil Search revenue
Papua New Guinea-focused Oil Search enjoyed a jump in revenue in the third quarter as higher prices for its exported natural gas offset a dip in crude oil over the previous quarter.
Production and sales volumes for the three months were also higher and the energy company (OSH) said it continued to generate operating cash flows, boosting its cash balance.
Revenue for the three months through September rose 16 per cent on-quarter to $US309.5 million, although it was 18 per cent lower than the $US379 million of the same period a year earlier, the oil and gas company said.
Dow Jones
10.50am:Five ‘what ifs’ to consider
Macquarie analysts are starting to worry that consensus views have converged so much that even a slight deviation from the plan could cause “significant positioning implications”.
The analysts are eyeing five major themes where the market is heavily positioned for a certain outcome — what should investors do in the event of an upset?
Here are the five biggest consensus calls to consider, along with their non-consensus equity hedges, according to Macquarie:
1. Commodity prices tactically correct through 4Q16-1Q17 as Chinese growth momentum tails off
“It is conventional wisdom to think that China’s housing market is simply a credit-fuelled bubble that will unwind as property tightening is more broadly implemented. The alternative view is a mismatch between supply and demand and not over-investment. On this basis, property will slow, but overall growth will not be threatened.
Best non-consensus hedge: Long capex derivatives — ALS, Downer EDI, Worleyparsons, which are due some earnings relief even if commodity prices head lower.”
2. Global inflation remains benign with limited upside in nominal bond yield
“There is risk to the consensus underestimating a pick-up in headline inflation particularly as the USD and oil shift from headwinds to tailwinds. In addition, the willingness of central banks to let inflation run ‘hot’ in order to protect a nascent recovery is non-trivial.
Best non-consensus hedge (after commodities and gold): Long yield curve steepeners — ANZ, CBA, Westpac.”
3. Hillary Clinton wins the US election
“It is difficult to see a Trump victory given current polling differentials and as momentum continues to desert the Republican nominee. However, this is what makes the potential for surprise so significant.
Best non-consensus hedge: Boral, James Hardie, Reliance Worldwide as US growth upside beneficiaries.”
4. The Australian dollar begins to reverse against the greenback (as the Fed tightens and RBA jawbones the Aussie down)
“Strong growth, firm commodity prices, and a falling unemployment rate are key markers that could solidify the view that the RBA easing cycle is over and the A$ is headed higher.
Best non-consensus hedge: JB Hi-Fi (Restricted), Nick Scali, The Reject Shop.
5. Overweight ‘growth’ and underweight ‘value’
“Despite the strong correlation between value and momentum in the year to date, there is little conviction outperformance can be sustained. However, ‘Growth’ is expensive and vulnerable to higher rates even without a strong cyclical earnings upswing.
Best non-consensus hedge: Bluescope, Fortescue, Harvey Norman.
10.34am:ASX creeps higher, Crown bounces
The Australian sharemarket has crept higher in early deals as Crown bounced marginally from yesterday’s heavy losses, while BHP Billiton and Fortescue were aided by higher iron ore prices.
At the 10.15am (AEDT) official market open, the benchmark S&P/ASX 200 index tacked on 5.2 points, or 0.1 per cent, to 5,393.9, while the broader All Ordinaries index lifted 5.1 points, or 0.09 per cent, to 5,476.
CMC Markets chief market strategist Michael McCarthy said the local market was at an “inflection point”, with mixed signals from offshore markets.
Daniel Palmer
10.15am:Tatts, Tabcorp halted pending merger update
Tatts and Tabcorp shares have been halted pending M&A announcements.
Both companies say they are considering a scheme of arrangement for potential change of control — implying a likely merger announcement.
Tatts boss Robbie Cooke hinted in June that he was open to dusting off the previously failed merger talks with Tabcorp.
Tatts and Tabcorp, which combined would create a $9bn gaming and lotteries giant, failed to reach an agreement on key transaction terms during merger talks late last year.
With Sarah-Jane Tasker
10.00am:Crown upgraded to buy: Deutsche Bank
Deutsche Bank analysts have upgraded their view on Crown to ‘buy’ from ‘hold’ following yesterday’s ASX hammering.
The stock tumbled 14 per cent to $11.15 in its worst fall on record as investors fled following the news that 18 Crown employees had been arrested in China on suspicion of gambling crimes.
But Deutsche Bank analysts, led by Mark Wilson, clearly see a buying opportunity as the market overreacts to the news.
“Following the detention of Crown’s VIP employees in China, we estimate that VIP turnover will decline by 20 per cent in FY17 with Chinese turnover down 30 per cent,” Mr Wilson and his team said.
“We believe the market is now pricing in a 70 per cent reduction in VIP turnover and a 100 per cent decline in Chinese VIP turnover, which we view as excessive.”
The stock is trading at a 19 per cent discount to Deutsche Bank’s revised valuation of $13.75.
9.56am:Broker rating changes
Whitehaven cut to ‘underperform’ vs ‘neutral’ — Credit Suisse
Crown raised to ‘buy’ vs ‘hold’; price target $13.75 vs $14.35 — Deutsche Bank
Westfield raised to ‘Buy’ vs ‘Hold’ — Morningstar
9.38am:Lowe leaves door open to more rate cuts
RBA governor Philip Lowe has left the door open to a further interest-rate cut, saying upcoming inflation data remain important for policymakers, while also expressing concern over falling inflation expectations, notes WSJ reporter James Glynn.
Lowe said inflation data, due next week, is still important to the interest-rate setting board of the central bank, adding that the bank will “continue to review” its judgement at future meetings.
The comments suggest that the RBA might be prepared to lower interest rates further should inflation in the third quarter again surprise on the low side.
9.16am:Caltex bids for Woolies’ fuels business
Caltex has confirmed its interest in Woolworths’ portfolio of petrol stations as a sales process continues, writes Daniel Palmer.
The commentary follows reports in The Australian’s Data Room column that Caltex — which currently has a fuel alliance with Woolworths — remained the frontrunner in the high-profile $1.5 billion auction.
BP and Puma Energy are seen among the key threats to Caltex on the deal.
In an update to the market this morning, Caltex said it had made a “conditional and confidential” bid for Woolworths’ fuels business.
8.54am:What to do as the ‘bondcano’ erupts
Credit Suisse Australia strategist Hasan Tevfik thinks stronger global economic growth will lift Australia’s S&P/ASX 200 share index to 6000 points by mid-2017, but he’s wary of a short-term pullback in shares as the “bondcano” starts to erupt.
The man who coined that term to describe the potentially damaging effects of a substantial rise in bond yields told clients last month to rotate from expensive bond proxies in the property, infrastructure, utilities, healthcare facilities and casino sectors to less-crowded and cheaper companies in the materials, financials, healthcare supplies and consumer discretionary sectors.
While the sharemarket was surprisingly resilient in recent weeks, the S&P/ASX 200 index suffered its biggest one-day fall in five weeks yesterday, diving 0.8 per cent to hit a three-week low of 5388.7 points.
READ: Evacuate risky shares before ‘bondcano’ blows
8.44am:Packer ‘deeply concerned’ for Crown employees
James Packer has released a statement regarding the arrest of 18 Crown employees in China on allegations of promoting gambling, which obliterated the share price in the worst day the stock has seen since November 2008.
Australian casino operators are tipped to be reviewing their options after the arrest of Crown Resort’s staff in China — a move that wiped $630 million from James Packer’s stake in the company — with a warning the operating model of domestic resorts will change “irrevocably”.
Packerhad the following to say this morning in a statement:
As the major shareholder of Crown Resorts, I am deeply concerned for the welfare of those Crown employees detained in China.
I have sought regular updates on this issue and have asked Crown to do everything possible to contact our employees and to support their families, as we await further details from Chinese authorities.
I am respectful, that these detentions have occurred in another country and are therefore subject to their sovereign rules and investigative processes.
Crown will do whatever it can to support our employees and their families at this difficult time. Our number one priority is to be able to make contact and to ensure they are all safe.
7.30am:Australian market set to open flat
The Australian market looks set to open steady or even slightly higher despite falls on Wall Street, where energy stocks slipped along with oil prices.
At 7.30am (AEDT), the share price index was up three points at 5371.
Locally, in economic news today, the Reserve Bank of Australia releases the minutes to its October board meeting.
And RBA Governor Philip Lowe is slated to speak at Citi’s Annual Australian & New Zealand Investment Conference in Sydney.
In equities news, Cochlear and Mortgage Choice hold their annual general meetings.
Commonwealth Bank of Australia chief executive Ian Narev is scheduled to speak at a trans-Tasman Business Circle lunch in Sydney and the CBA holds its Global Markets Conference, also in Sydney.
In Australia, the market yesterday closed lower, led downwards by casinos operator Crown Resorts, which fell 14 per cent after news that some its employees had been detained in China.
The benchmark S & P/ASX200 index fell 45.3 points, or 0.83 per cent, to 5,388.7 points.
The broader All Ordinaries index lost 47.6 points, or 0.86 per cent, to close at 5,470.9 points.
AAP
7.00am:Wall St slips as oil declines
Global stocks started the week in retreat as long-dated government bonds plumbed their lowest levels since the UK referendum.
Falling oil prices weighed on energy shares in the US as crude oil slipped below $US50 a barrel. The Stoxx Europe 600 fell 0.7 per cent and shares in Asia closed slightly lower.
Dow Jones
6.50am:Dollar makes more gains
The Australian dollar has continued to climb against the US dollar but has fallen against the yen.
At 6.35am (AEDT), the local unit was trading at US76.25 cents, up from US76.00 cents yesterday.
AAP
6.40am:Iron ore jumps over $US57
The iron ore price has topped $US57 a tonne, building on last week’s run of gains as investors prepare to examine production reports from the major miners this week, Elizabeth Redman writes.
Iron ore added 1.8 per cent to $US57.80 overnight, according to The Steel Index, from $US56.80 in the previous session.
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Trump’s trade war tariff thaw
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