Trading Day: ASX, $A trim losses with coronavirus stimulus on the cards
The ASX reversed most of a 3pc fall to be down just 0.7pc amid rising hopes of global monetary stimulus as the virus threat widens.
- Aussie earnings season a fail: Macq
- US yields fall to new low
- RBA cuts are coming, and fast: JPM
- Legal battle, milk prices squeeze Bega
- Don’t rule out 50bps cut tomorrow: Goldmans
That’s it for the Trading Day blog for Monday, March 2. After a brutal sell-off last week, Australian stocks fell further by 0.8 per cent to close at 6397.5, though recovering from a drop as much as 3pc.
It came after weak China manufacturing data which showed purchasing intent at its lowest level on record in February, the first signs of the virus hit to the economy. Comments from the US Fed that it would “use our tools” to “support the economy” also increased bets of a local rate cut tomorrow, with even 50bps of cuts on the table according to JP Morgan and Goldman Sachs.
Fortescue, Origin, Qantas and G8 Education were some of the key names trading ex-dividend today.
4.37pm: Banks squeezed ahead of double cuts
Rising odds of further rate cuts put pressure on the major banks on Monday as commentators noted the low-rate environment was “problematic” for funding decisions – sending the sector down 1.5 per cent.
Commonwealth Bank shares fell 1.6 per cent to $80.47 – a 12 per cent from its February record high at $91.05. ANZ shed 1.97 per cent to $24.34, Westpac dropped 1.9 per cent to $23.19 and NAB was worst hit with a drop of 2.5 per cent to $24.47.
Energy stocks mounted a rebound, as crude oil prices bounced from a 12-month low. Woodside put on 1.5 per cent to $28.33, Santos lifted 2.9 per cent to $7.03 and Oil Search added 0.9 per cent to $5.54.
Ex-dividend trade in Fortescue restrained any gains in the miners – as it fell 9 per cent to $9.17. BHP slipped 0.7 per cent to $33.35 while Rio Tinto lost 1.1 per cent to $86.27.
Elsewhere in ex-dividend trade, Qantas wound back by 4 per cent to $5.31, Origin added 0.43 per cent to $7.01 and G8 Education lost 3.1 per cent to $1.57.
Here’s the biggest movers at the close:
Adeshola Ore 4.36pm: First local human-to-human virus case
Australia has confirmed its first human-to-human transmission of coronavirus, meaning the person contracted it without travelling abroad.
Nine is reporting the infected person is a medical worker at a hospital in Sydney’s western suburbs who caught the virus while treating patients.
4.12pm: ASX trims loss ahead of likely RBA cut
Shares hit a ten month low on Monday in its seventh consecutive down day as the widening impact of the virus on global economic growth began to trigger a monetary response from central banks at home and abroad.
A sharp slump in Chinese manufacturing activity revealed in Saturday’s PMI data set local shares up for a battering at the open – the benchmark ASX200 slid as much as 3 per cent lower to hit 6245.2, its lowest level since May 2019.
The data, along with unscheduled comments from the US Fed that it would “use our tools” to support economic growth, spurred market pundits to raise their bets for local rate cuts as soon as the RBA’s next meeting on Tuesday.
That helped to ease some of the pressure on the local market, helping shares to close down a more moderate 50 points or 0.77 per cent at 6391.5.
Meanwhile, the All Ords wound back by 50 points or 0.77 per cent to 6461.1.
3.50pm: Market right for gold to thrive: MS
Morgan Stanley analysts say the virus risk presents “a good environment for the gold price to thrive”, as it double upgrades Newcrest.
The broker notes that most of the disruption from the virus is on the supply side, and alongside rising inflation risks and volatility, will buoy demand for the safe haven commodity.
“Any signs of increasing inflation is also likely to push real rates negative as central banks aren’t seen increasing borrowing costs over next few years, boosting gold’s relative value,” analyst Rahul Anand says.
But he cautions that if the virus is “successfully managed” there is scope for a market rebound in the second half, which could detract from the rally.
The broker lifts Newcrest to Overweight from Underweight, as it's a long life, low cost liquid miner, while Regis is lifted to Overweight as a “stable producer”.
NCM last up 3.4pc to $27.21 while RRL trades down 7.2pc to $3.74.
3.09pm: US coronavirus outbreak widens
New cases of the novel coronavirus reported Sunday, including the second death from the virus in the US, raised fears of a wider spread of the disease, prompting federal officials to ramp up efforts to test for and fight the growing health threat.
Health officials are focused on a cluster of confirmed cases in Washington, including the two deaths. Those infections, and several others in states such as Oregon and California – many with no clear path to exposure – signal that there might be wider spread of the virus in some communities, with many cases still undiagnosed. New cases were also reported in New York, Florida and Rhode Island.
Vice President Mike Pence, who is overseeing the Trump administration’s task force on the virus, promised Sunday that more testing kits are being produced and distributed so that infections can be detected and contained.
Dow Jones Newswires
3.05pm: Aussie earnings season a fail: Macq
Macquarie’s Australia equity strategist Matthew Brooks gave the recently concluded Australian earnings season a “fail” with a grade of C minus.
“Fiscal 2020 earnings (consensus) has been materially downgraded, in part due to coronavirus outbreak,” Mr Brooks said.
After a “disappointing” final two weeks, 36 per cent of reporting companies missed estimates and only 23pc beat. Downgrades dominated with the FY20 consensus earnings estimate falling for 34pc and rising for only 11 companies.
Macquarie’s aggregate FY20 EPS growth estimate for Industrials ex-banks and REITs is now a decline of 3.2pc, compared to flat going into results.
The downgrades were larger for domestic industrials, where earnings are now forecast to fall 8pc. Offshore earners continue to deliver superior growth with FY20 EPS of nearly 5pc, supported by a lower AUD.
“All asset classes are now pricing in some weakness in growth due to the Coronavirus, but we continue to believe the impact will be temporary,” Mr Brooks said.
“We also believe the market volatility increases the likelihood of stimulus, which adds to growth tailwinds when the virus fades.”
He recommends improving the quality of share portfolios given the fall in valuations, and bargain hunting in some stocks negatively impacted by the Coronavirus, including resources, travel and leisure.
2.58pm: Job ads still down 10pc annually: ANZ
ANZ’s survey of job ads gained 0.7 per cent in February, for a second consecutive rise, but remain down 10.2 per cent in year-on-year terms.
Senior economist Catherine Birch described the data as a “surprise to the positive side”.
“A welcome relief from the more negative data from the private sector on construction work done, capital expenditure, and business conditions and confidence. The uptick in job ads and in ABS job vacancies in November could have been a signal for some improvement in the labour market,” Ms Birch notes.
Still, she says demand for labour could pull back as the virus effect on tourism, trade, supply chains and the wider economy become apparent.
Some better news, after the run of negative. Events may see this modest momentum reverse, however. https://t.co/24ID8D4LpQ
— David Plank (@DavidPlank12) March 2, 2020
2.35pm: Shift to defensive stocks: MS
Morgan Stanley equity strategist Chris Nicol has shifted to a more defensive positioning in Australian stocks, even as he raises his recommendation for the market to Equalweight from Underweight today.
“Our advice is to now take a more defensive position as events unfold. This result season has seen continued weak growth outcomes,” Mr Nicol said.
“The current risk backdrop continues to gravitate towards more sustained disruption – this is something hard to ignore and positioning should reflect as much.
“While the sell-off in recent days (almost 13 per cent at worst) leaves the ASX 200 near 5 per cent below our price target of 6700 we believe that until the extent of disruption and growth impacts are known, calling a ‘buy the dip’ moment is premature.
“We concur with our global team that a recovery will occur, however, until valuations can find an earnings anchor to hold onto caution is required around the direction of travel for the index.”
2.10pm: Citi adds weight to RBA cut calls
Citi economist Josh Williamson has joined the chorus of banks bringing forward their rate cut calls, now tipping a 25bps cut tomorrow, followed by a second cut next month.
“The combination of a weak forecast Q4 GDP result, likely negative Q1 GDP result and threat of longer global downside risk from COVID19 to trade and supply chains in an environment where the Australian NAIRU is not in reach and inflation is below the target makes the path of least regret for the RBA one of further policy accommodation,” Mr Williamson says.
2.05pm: Some upside in China data: Innes
Today’s China Caixin PMI data has echoed similar sentiment to disappointing PMI data released on Saturday, but AxiCorp’s Stephen Innes says there is a pleasant surprise amid the negativity.
The read on the performance of the private manufacturing sector, derived from a survey of 430 private industrial companies, came in below expectations at 40.3, from 51.1 last month. Any read below 50 signals a contraction.
“If you’re wondering why the bounce in risk sentiment and oil bounding higher, look no further than business confidence, which rose on hopes of output recovering – firms are anticipating production to improve over the next year after coronavirus-related restrictions are lifted ramped up again,” Mr Innes says.
“Note that the positive sentiment was the strongest in 5 years. This is the crucial reason which explains why the Caixin PMI came in higher than the NBS one and the bounce higher across risk assets.”
The ASX200 is sharply making up ground, last down 0.6pc from an earlier drop of 3pc.
2.01pm: This Afterpay rival teamed up with Visa
Buy now, pay later company Splitit says it is partnering with Visa, becoming an early adopter of Visa’s instalment payment solutions API that lets cardholders divide their purchases into smaller payments.
Visa announced the instalment solutions program last year as buy now, pay later services such as Splitit, Afterpay and Klarna gained more popularity in the marketplace.
Splitit managing director Brad Paterson said the partnership makes it clear Visa was interested in partnering with buy now, pay later services rather than competing with them.
“We feel it was a great match for aligning our mutual interests,” he said. “It’s another reinforcement of our business model.” Splitit says it is unlike other buy now pay later companies in that it does not issue new debt for shoppers.
SPT last up 13.5pc to 42c, from heights of $2 after its IPO last year.
AAP
Ben Wilmot 1.45pm: Property debt levels under review
It has been more than a decade since debt metrics were seriously looked at in the listed property trust sector as companies learned their lesson in the wake of the GFC and secured longer term debt across different markets.
But the coronavirus-sparked markets crisis has forced it back into the thinking of analysts and the prices of property stocks are being hit.
In a note today, Jefferies equity sales specialist Michael Vincent said the coronavirus will again dominate headlines and urged cautious for investors looking at buying leveraged stocks.
Analyst Sholto Maconochie said A-REITs were generally well hedged with 75 per cent of debt hedged, gearing of 27 per cent and cost of debt at 3.5 per cent, with tenor of 5.6 years.
“Basically, companies that raised equity in 2019 – GPT, Dexus, Mirvac – have very strong balance sheets (low gearing) and credit metrics,” he said. “Ironically, Goodman Group has the best debt metrics but the lowest credit rating.”
He added that shopping mall owners Scentre and Vicinity Centres had relatively high gearing at 33 per cent and 27.3 per cent with buybacks on that would increase gearing 150b basis points
The stocks both trade at net tangible asset discounts of 20 per cent and 22 per cent respectively and Jefferies expects asset values are too high and will come under pressure.
But one of the hardest hit stocks today has been the Centuria Industrial Trust that had dropped 19c to $3.40 at 1.03, after earlier touching a low of $3.28.
1.19pm: US yields fall to new low
The rally in US government bonds broke fresh ground, with the yield on the benchmark 10-year debt dropping to as low as 1.031pc, after a week of steep stockmarket sell-offs and escalating bets on interest-rate cuts.
In lunch trade, the yield on the 10-year Treasury was 1.096 per cent, or as low as 1.043 per cent. That was significantly lower that its record-low settling price from Friday, of 1.127pc. The recent rally reflects investors’ intense demand for safer assets and escalating bets that the Federal Reserve will move quickly to cut interest rates. Bond yields move inversely to prices.
Fed Chairman Jerome Powell signalled Friday that the central bank was prepared to cut rates to cushion the economy against the effects of the spreading coronavirus.
After a week in which the Dow industrials posted their steepest weekly decline since the financial crisis, and several markets fell into correction territory, stocks were again under pressure.
Dow Jones Newswires
1.02pm: Shares bounce from daily lows
The local market is edging off its daily lows, as economists raise their expectations for monetary easing this week.
The benchmark ASX200 had been as low as 6245.2, but is now down by 115.2 points or 1.8 per cent to 6326.
Here’s the biggest movers at 1pm:
12.46pm: Bank under review amid outbreak: UBS
UBS analyst Jon Mott has placed Australian banks’ under review pending a regulatory response to the sell off in financial markets spurred by the coronavirus outbreak.
“We remain cautious on the banks, noting that absolute valuations remain elevated and banks are highly leveraged to interest rates and economic activity,” Mr Mott warns.
He notes that with the continued outbreak of COVID-19 the market is now fully pricing in a 25bp cut in the official cash rate at tomorrow’s RBA meeting and a fall to a cash rate of just 0.15 per cent by August.
Given that the RBA has signalled a Cash Rate floor of 0.25 per cent he says this indicates the market is now pricing in some probability of QE.
Mr Mott also expects an announcement from the Council of Financial Regulators – which is meeting today – and potentially the Federal Government in the coming days.
He notes that given the emergency nature of any rate cuts, banks will be under pressure to pass through the vast majority of the cuts to borrowers and accelerate the effective date and warns that it is unlikely reductions to deposit rates will be sufficient to offset lending rate reductions.
“Further, the earnings hit from the run-off of hedges/replicating portfolios will accelerate,” he says.
He expects the housing market to respond positively to rate cuts and doesn’t see any imminent macroprudential policy tightening. But he sees banks increasing overlays for any slowdown affecting employment and asset quality as yet.
Ben Wilmot 12.24pm: National Storage falling below deal value
The market rout has slammed into one of the property sector’s largest takeover battles with National Storage falling well below the value implied by a $1.9bn proposed takeover offer from US giant Public Storage.
National Storage shares have slipped to $2.195, continuing a slide from $2.39 that began last Friday when the target company revealed that rival suitors had walked away from the deal for now.
Two groups – Warburg Pincus and Gaw Capital – that had flagged making $2.20 per share bids for the company dropped out of the race last week, albeit with Warburg saying it could return.
That left US group Public Storage, the US sector specialist, in the box seat for the company. Public Storage is undertaking due diligence and has proposed making a bid at $2.40 per share.
National Storage, which has a $2.2bn portfolio, is now working with Public Storage on closing out its proposal.
But with its rivals on the sidelines out and market volatility potentially hitting debt funding it may not pay a premium for National Storage, which was also under pressure after turning in mixed first half results.
12.17pm: NAB joins rate cut chorus
National Australia Bank have brought forward their rate cut call, now expecting the RBA to cut rates by 25bps tomorrow, and again in April.
That’s sooner than the bank’s original forecast of April and June cuts.
Similar to previous updates from Goldmans and JP Morgan, NAB’s Alan Oster notes that there is still a risk of a 50bps cut tomorrow “in an aggressive response to the unfolding growth shock resulting from the spread of coronavirus”.
He adds that he also expects a 25bps cut from the US Fed this month.
“The virus outbreak represents both a supply shock and a demand shock, likely significantly weighing on business and consumer sentiment,” Mr Oster writes.
“Lower interest rates can help cash flows, lower the exchange rate and potentially boost confidence, but easier fiscal policy will also be required, particularly when both the household sector and business investment are already weak.
“Measures to assist firms manage across cash flow impacts (such as delaying tax payments) would likely be helpful.”
12.05pm: BoJ pledges liquidity, stability
BoJ Governor Kuroda made an unscheduled “emergency” statement reminiscent of the statement from Fed’s Powell on Friday.
Kuroda says the BoJ will “closely monitor” financial markets amid “unstable” moves caused by the coronavirus outbreak. The BoJ will “ensure stability” via “appropriate market operations” including its money market operations and asset purchases.
But at this point the market wants action not words, since China’s February PMI data on Saturday were extremely weak. USD/JPY seems to be coming off again after bouncing on reports that the BoJ was going to take some action.
AUD/USD is failing to push higher after it also staged a recovery ahead of Kuroda’s statement. S&P 500 futures are down 1pc after falling more than 2pc earlier.
Australia’s S&P/ASX 200 remains fragile, down 2.8pc after falling 3pc.
11.51am: Company profits signal recession risk
Australian 4Q company profits fell 3.5pc versus a 1.5pc fall expected by economists, and an upwardly revised 0.6pc fall in 3Q.
Inventories rose 0.3pc vs a 0.1pc fall expected by economists and an upwardly revised 0.2pc fall in 3Q.
While the data predate coronavirus, it increasingly looks as if the starting point for the economy is weaker than expected.
The consensus estimate of a 0.4pc Q/Q rise in GDP remains under pressure and could end up closer to zero.
With several forecasts of negative 1Q growth on a quarterly basis, there’s increasing risk of the economy slipping into recession.
Mackenzie Scott 11.52am: Property rebound fastest on record
Coronavirus concerns did little to stay the rising property market last month, with a renewed surge in Sydney and Melbourne house prices likely to push the national median above its 2017 peak in a matter of weeks.
The property rebound is continuing to climb at its fastest rate on record. Both Sydney (up 1.7 per cent) and Melbourne (up 1.2 per cent) prices surged through February, according to monthly home value data from property researcher CoreLogic.
The national property market was up 1.1 per cent last month and is now just 1.2 per cent behind peak 2017 prices. Should growth continue at its current pace, values will likely push to new highs in the next two months. Sydney median dwelling prices currently sit at $872,934, while Melbourne property can be purchased for a median of $689,088
CoreLogic Aust home prices up again in Feb as demand remains strong on back of election unleashing pent up demand, rate cuts, pop grth, banks more inclined to lend. High clearance rates pointing to solid gains in mths ahead but rising threat from CV given hit to econ, shares, etc pic.twitter.com/thLWoMeXdQ
— Shane Oliver (@ShaneOliverAMP) March 2, 2020
Gerard Cockburn 11.41am: Bushfire hits 70pc of SMEs: NAB
A survey conducted by NAB indicates more than 70 per cent of small to medium sized businesses in Australia have been impacted by the recent bushfires.
The bank’s study indicated two thirds of SMEs had directly or indirectly been affected, noting disruption to business, increased insurance premiums and low consumer confidence as factors.
NAB chief customer officer, Anthony Healy said agricultural, storage and transport businesses were some of the most affected.
“Business owners have also shared the physical and mental health impact of the bushfires, including describing the unsettling effects of having to send employees home and sending customers away due to poor air quality,” Mr Healy said.
Owners of utility and wholesale trade businesses expect to be most affected over the next three months, at 81 per cent and 79 per cent respectively.
Approximately 75 per cent of both the transport and storage sector and agricultural businesses say they expect to be feeling the effects of the bushfires for at least 12 months.
11.34am: Is gold still a safe haven?: RBC
Gold prices declined Friday by more than any day since April 2013, a move that’s hitting local miners in Monday’s trade.
That’s after a one-month tear, but RBC notes that the selling is more likely due to investors need to cover losses and meet margins in other markets.
“We do not view this as a loss in faith in gold’s role as a ‘perceived safe haven’ or a fundamental shift in the attitude towards gold,” commodity strategist Christopher Louney says.
“Rather, risk overlay positions in gold are being monetised to cover moves elsewhere in
investor portfolios. To be clear, gold’s gains are likely not over and, as we alluded to in our recent weekly comments, the question is around durability rather than simply the direction.”
Gold names are among the hardest hit in morning trade – Resolute Resources lis down 9pc to 92.7c, Silver Lake Resources is down by 10.8pc to $1.43 and Regis Resources is down 8.7pc to $3.68.
Ben Wilmot 11.25am: Charter Hall cut amid virus threat
The potential for the coronavirus to strike at volumes in the commercial property market has prompted a downgrade for property funds group Charter Hall from broker JPMorgan.
The David Harrison-led business is renowned for its deal making across a wide range of sectors with a focus on long leased properties but JPMorgan analyst Ben Brayshaw downgraded his target price on the stock by $1.70 to $12.50, and lowered his rating from overweight to neutral.
“Charter Hall is a strongly performing business but commercial property transaction volumes in Australia will likely to slow in response to travel restrictions, and uncertainty on asset values will potentially increase across all property sectors, until the impact of COVID-19 is better understood,” JPMorgan said.
The analyst said its concern was that if vendors were not willing to take assets to market, Charter Hall’s asset under management growth will likely moderate.
“However, this backdrop could also present opportunities for Charter Hall, at least knocking out the marginal offshore buyer typically from Asia, and possibly channelling more capital into Australia away from other jurisdictions more adversely impacted,” JPMorgan said.
Charter Hall may come through unscathed, but then again, these may be powerful headwinds, the analyst said.
CHC shares last traded lower by 5.4pc to $11.81.
11.08am: RBA to cut on Tuesday: Westpac
Westpac chief economist Bill Evans now predicts the RBA will cut rates 25bps on Tuesday.
Mr Evans also predicts the Federal Reserve will cut 50bps in March.
This follows calls today from JP Morgan and Goldman Sachs for back-to-back rate cuts by the RBA. And it also comes after BofA and GS predicted a 50bps cut by the Fed.
Aggressive rate cuts might spark a bounce in equities in the short term.
But they will warn of an impending financial crisis that could cause a bear market given limited scope for effective monetary stimulus.
10.59am: ASX down 13pc from record
Australia’s S&P/ASX 200 share index has dived 2.9pc to a 10-month low of 6253.9.
It came as abysmal China PMI data caused a 2pc plus fall in S&P 500 futures and traders anticipated margin call related selling at 11.00am.
The Australian sharemarket is now deep into correction territory, having fallen as much as 12.7pc from the record high close of 7162.6 on February 20.
Meanwhile the Australian dollar bounced to 0.6525 after falling 0.8pc to 0.6525.
AUD/USD bounced alongside USD/JPY as Market News International said the BoJ was poised to take action to stabilise financial markets. The mooted BoJ moves included special loans to expand bank lending.
It comes alongside heightened expectations of cuts by the RBA and Federal Reserve, both Goldman Sachs and JP Morgan predicting back-to-back rate cuts from the RBA.
In the US, Bank of America and Goldman Sachs have predicted a 50 basis point cut from the Fed this month.
10.52am: RBC bring forward RBA cut forecasts
Central banks are firmly in focus this week, after comments from the US Fed on Friday that it would step up its support of the economy. That’s prompted RBC economist Su-Lin Ong to bring forward her call for cuts, to 25bps at the RBA’s meeting tomorrow and again at its April meeting.
“Given imminent Fed action, likely monetary easing elsewhere, and a market that is fully priced tomorrow, we are bringing forward these RBA cuts … Such action is entirely consistent with a global shock and global co-ordination,” she notes, adding that fiscal response from the government was also likely – first through targeted assistance to sectors, then through likely tax cuts and business incentives in the May budget.
“We are mindful of a number of risks to our revised view – a still reluctant RBA with likely reduced transmission as key lenders fail to fully pass on RBA cuts, diluted policy impact, a larger and faster fiscal response – especially in rapidly changing circumstances,” she adds.
“Nevertheless, as we quickly approach the effective lower bound, we expect the QE discussion to intensify as markets and investors prepare to move into unconventional territory.”
AUDUSD last at US65.18c.
10.49am: Share slide extends to 2.7pc
The local market is extending its daily fall to 2.7 per cent, as economists raise their expectations for cuts from the RBA at its meeting tomorrow.
Shares were down 2.1 per cent early, but are now lower by 174 points or 2.7 per cent at 6267.2.
Bega shares are hardest hit, down 11.9pc after handing down their first half results this morning, while Fortescue is down 10.1pc as it trades ex-dividend and Resolute winds back by 8.3pc.
10.41am: European virus cases surging
Coronavirus cases surged in Italy, and France closed the world- famous Louvre Museum on Sunday as the deadly outbreak that began in China sent fear rising across Western Europe, threatening its tourism industry.
The number of countries hit by the virus climbed past 60, and the death toll worldwide reached at least 3,000.
New fronts in the battle opened rapidly over the weekend, deepening the sense of crisis that has already sent financial markets plummeting, emptied the streets in many cities and rewritten the routines of millions of people. More than 88,000 around the globe have been infected, with the virus popping up on every continent but Antarctica.
Australia and Thailand reported their first deaths Sunday, while the Dominican Republic and the Czech Republic recorded their first infections.
Italian authorities announced that the number of people infected in the country soared 50pc to 1,694 in just 24 hours, and five more had died, bringing the death toll there to 34. France raised its number of reported cases to 130, an increase of 30 from the day before, and said it has seen two deaths.
AAP
10.31am: Couche in the Caltex box seat: RBC
Caltex says its open to continue negotiations with EG Group after declining its takeover bid this morning, but RBC analyst Ben Wilson notes original bidder Couche Tard remains in the “box seat”.
He says the complexity of the EG Group bid made it less attractive than Couche’s all cash bid.
“It is hence unsurprising in our view that the EG bid fell short in comparison to Couche Tard, despite the Couche bid reducing by any dividends paid until potential scheme clearance (including last week’s 51cps dividend),” Mr Wilson says.
“In our view Couche remains in the box seat despite Caltex indicating it would continue to engage with EG in relation to a potential deal.
“We would note though that this likely reduces the likelihood of a further Couche bid absent any further proposals from EG or other competitors.”
CTX last down 2.8pc to $31.77.
10.27am: ASX hits 10-month low
Australia’s S&P/ASX 200 share index dived 2.2pc to a 10-month low of 6299.5 as global markets react to China’s extremely weak PMI data over the weekend.
S&P 500 futures have dived 2.7pc in early trading, pointing to a bad day for Wall Street despite the increasing prospect of Fed support after chairman Powell’s emergency statement on Friday.
The Australian market is also anticipating a wave of selling at 11am today related to uncovered margin calls that went out on Friday. Some veteran traders are asking if we are looking at the start of the next global financial crisis.
Decisive action from central banks, including the RBA and possibly even the Fed, is possible this week amid liquidity concerns. That could spark a sharp bounce in risk assets but concern about the economic hit from the virus may continue for months.
The Materials, Financials, Energy and Real Estate sectors are underperforming, while Consumer Staples, Communications, Health Care, Tech, Industrials, Utilities and Consumer Discretionary are outperforming.
The major banks are down 2.4pc to 2.9pc, BHP is down 2.9pc, CSL is down 2pc and Fortescue is down 11pc ex-dividend.
Index last down 2.2pc at 6301.
10.13am: Shares tumble 2.1pc
The local market is lower by 2.1 per cent early, as US futures continue to tumble – after weak Chinese manufacturing data.
The benchmark ASX200 is lower by 136 points or 2.1 per cent at 6305.1 at the open.
10.04am: VGI relentless on Corporate Travel short
VGI Partners has levelled a new short-sell attack on Corporate Travel Management, raising issue with the group’s latest first half results.
The beef between the two dates back to October 2018, when VGI accused the company of inflating its results through accounting trickery.
In a note to the market this morning, Corporate Travel points out that VGI has a “vested interest in promoting market uncertainty with respect to CTM”.
It responded to five issues raised in VGI’s latest report – saying it had not “blamed” coronavirus for its results but that it was “referred to in the context of FY20 guidance which related to 2H20 impacts”.
“CTM remains focused on managing the performance of the underlying business during this
period of disruption to the travel sector and supporting team members, customers and stakeholders,” it said.
CTD shares opened down 9.5pc to $12.62.
9.56am: Caltex declines EG Group bid
Caltex Australia has declined a takeover offer from Britain’s EG Group but wants to continue discussions about a sale.
The refinery and petrol station operator says the offer undervalues the company and does not represent compelling value for shareholders.
EG Group, or Euro Garages, in February offered $3.9 billion in cash for Caltex’s convenience store business and separate shares in a new, listed infrastructure and refinery company made up of Caltex’s remaining assets.
In a statement on Monday, the Caltex board said it took advice from financial and legal advisers and considered feedback from shareholders. Despite its decision, the board said it was in shareholders’ interest to continue discussions with EG and has offered to do so.
Eli Greenblat 9.53am: Radio Rentals profit evaporates
Consumer and business finance company Thorn Group, the parent of Radio Rentals, has warned its promised small profit for the full year has evaporated as rising arrears in its business finance arm trigger a spate of write offs.
The embattled Thorn, whose shares have collapsed following a string of profit downgrades, a class-action lawsuit and enforceable undertakings flowing from its treatment of consumers, advised this morning that the previously announced guidance of a “small net profit after tax at the trading level, i.e. before significant items” will now not be met.
It blamed the missed earnings on rising arrears in its business finance division prompting higher write-offs and bad debt impairment provisioning than previously expected.
The company said that debts outstanding for over 30 days have increased from approximately 5 per cent to approximately 8 per cent, partly as a result of Thorn transitioning its collections activities for the expected future growth in Thorn’s receivables.
9.51am: Don’t rule out 50bps cut tomorrow: Goldmans
Goldman Sachs Australia chief economist Andrew Boak is one of at least two major private-sector forecasters predicting back to RBA rate cuts starting this month.
Mr Boak has again cut hits 2020 growth forecasts for Australia, this time by 80bp to 1.3 per cent, to incorporate a more elongated drag from Chinese demand, the impact of disruptions to global economic activity and supply chains, and confined disruptions to domestic activity. “While we don’t expect technical recessions in either Australia or NZ, in both economies this is now a very close call,” Mr Boak says.
“We expect both the RBA and the RBNZ to ease by 50bp in Q2, with back-to-back 25bp rate cuts starting in March.
“We note that a 50bp rate cut by the RBA at this Tuesday’s meeting cannot be ruled out.”
9.34am: Investors brace for rocky session
Monday has been volatile so far with big drops in bond yields as markets price multiple RBA rate cuts starting Tuesday after record low China PMI data released over the weekend.
Futures had priced in a 0.6pc fall in Australia’s S&P/ASX 200 share index to a 6-month low of 6400 as of Friday, but that’s likely to be a sharper drop after Fed Chair Jerome Powell’s “emergency” statement about potential policy support saw the S&P 500 close down 0.8pc after a 4.1pc intraday fall.
Investors need to allow for a further hit from the China PMI data and will likely stay nervous before US ISM manufacturing PMI data tonight.
There will also be some heavy selling at 11am as retail brokers shut down uncovered margin calls that were made on Friday.
Still, on any sharp fall of around 2pc today, expect strong buying in anticipation of RBA rate cuts and Fed easing, possibly starting Tuesday.
Jared Lynch 9.29am: Bega hit amid legal battle, milk prices
Bega Cheese’s underlying half-year profit has curdled 21 per cent to $15m, with legal costs from its peanut butter labelling stoush, a cut in milk supply and a softening of the Chinese infant formula market weighing on earnings.
The company, which emerged from a trading halt on Monday after a data error delayed the release of its half year results, maintained its full-year earnings guidance of $95m-$105m.
Bega’s revenue rose 14 per cent to $741.2m in the six months to December 31, while underlying earnings before interest, tax, depreciation and amortisation fell 16 per cent to $48.5m.
Executive chairman Barry Irvin said reduced milk supply and margins in the dairy industry particularly in Northern Victoria had hit earnings.
“A softening in Chinese infant formula demand has resulted in a reduction in volumes at Tatura further reducing earnings,” Mr Irvin said.
The result also included one-off costs of $9.2m in legal fees and a management systems upgrade.
9.17am: RBA to cut tomorrow: JPM
JP Morgan Australia chief economist Sally Auld predicts the Reserve Bank will cut rates 25 basis points on Tuesday and again in April – or as much as 50 basis points of easing tomorrow.
Her comments come after the US Fed on Friday issued an emergency statement saying they would support the economy, and amid rising global and domestic risk with financial markets pricing in a nontrivial chance of global recession.
Ms Auld also says the RBA could use other tools, such as liquidity-related measures.
Markets this morning have more than fully priced in a 25 basis point cut in March with an implied cash rate of 0.43pc versus the current rate of 0.75pc.
Markets have also priced in a 0.34pc cash rate by April, implying they are more than half way toward pricing in two 25 basis point cuts in the next two meetings.
The terminal rate forecast has downshifted to 0.13pc in November, implying a significant chance it will be cut to zero.
It comes as Australia’s 10-year bond yield falls as much as 14bps to a record low of 0.699pc and 3’s dive 17bps to a record low of 0.33pc.
AUD/USD dropped as much as 0.8pc to an 11-year low of 0.6460 before bouncing to 0.6481, after extremely weak China PMI data over the weekend
What a difference 72hours makes, this wasnt even remotely a possibility even as close as last Wednesday #RBA #ausbiz #AUD #NZD pic.twitter.com/ADgbbsQdtW
— Evan Lucas (@EvanLucas_INV) March 1, 2020
Bridget Carter 9.06am: Industrials likely in PE sights
DataRoom | The trend for deals this year has always been tipped to involve private equity funds rummaging through the industrials sector to find undervalued takeover opportunities and some say that BlueScope Steel could meet the criteria.
The steel producer, worth $5.98bn, has seen its share price suffer sharp falls this year — from $16 in January to $11.82.
While the Australian operations may not have been faring well of late, its US-based North Star business is considered one of the most profitable mini steel mills in the US, where manufacturing activity is about to ramp up.
For the six months to December, BlueScope generated $185.8m of net profit, which was down 70 per cent on the previous corresponding period.
9.02am: What’s on the broker radar?
- ANZ Bank raised to Buy – Morningstar
- Blackmores raised to Buy – Morningstar
- Boral raised to Buy – Morningstar
- Charter Hall Group cut to Neutral – JP Morgan
- Costa raised to Market-weight – Wilsons
- GrainCorp raised to Buy – Morningstar
- Harvey Norman raised to Neutral – JP Morgan
- Iluka raised to Buy – Morningstar
- NAB raised to Buy – Morningstar
- Perenti raised to Buy – Moelis
- Premier Investments raised to Hold – Morningstar
- QBE raised to Hold – Morningstar
- Qantas raised to Hold – Morningstar
- Sonic Healthcare raised to Hold – Morningstar
- Star Entertainment raised to Buy – Morningstar
- Super Retail raised to Hold – Morningstar
- Valmec raised to Buy – Argonaut
8.51am: $A sell-off continues
Weak Chinese economic data and suggestions of as much as a 50 basis point rate cut from the Federal Reserve are pulling the Aussie dollar below 65c.
Ahead of the local stock market open, AUDUSD is down 0.62 per cent to US64.69c, after touching as low as US64.57c late on Friday.
That’s the lowest level since 2009 and a sharp drop considering this time last week the dollar was trading at US66.18c.
In an emergency address from the US Federal Reserve, chairman Jerome Powell said coronavirus posed “evolving risks to economic activity” and that the board would “use our tools and act as appropriate to support the economy”.
His comments have market pundits expecting a 25bps, or as much as 50bps, cut at its next meeting on March 18.
Even the US dollar index is under pressure, the DX Y down 0.4pc at 98.13.
8.13am: Qld tax holiday for virus
The Queensland government will give businesses hit by the coronavirus outbreak a holiday from paying payroll tax.
Treasurer Jackie Trad will detail the government’s payroll tax deferral scheme on Monday.
The move is designed to help traders whose incomes have been hurt as the virus continues to spread around the world, landing a king hit on tourism, seafood production and many other state industries.
AAP
Bridget Carter 7.53am: PEP in pole position for Laureate
DataRoom | Pacific Equity Partners is being tipped as the likely party to win the auction for Laureate Education.
The suggestion comes after its Australian rival BGH Capital left the race before making a final bid at the weekend. Final bids are due on Monday.
Baring Private Equity and Kohlberg Kravis Roberts were also in the contest.
PEP is advised by Jefferies.
The company generates between $45m and $50m of annual earnings before interest, tax, depreciation and amortisation.
Based in Baltimore, Laureate is selling its Australian and New Zealand operations through Goldman Sachs.
It owns and operates universities, with more than 150 campuses in ten countries last year.
In Australia, it owns Torrens University and Think Education, along with the Media Design School in New Zealand.
PEP has invested in the education sector in the past.
It sold part of Academic Colleges Group in 2018 to Inspired Schools in Britain for about $600m.
The sale consisted of the secondary schools within the business, and the remaining part of the operation consists of the tertiary education arm, which has been rebranded Up Education.
PEP bought Academic Colleges Group in 2015 for at least $NZ500 million and had plans to roll out the business internationally once it had grown further across the Tasman.
7.38am: Shares set to slide, new blow for $A
Australian stocks are poised to slide when the market opens as the coronavirus spreads.
The SPI200 futures contract was down 40 points, or 0.63 per cent, at 6,334 at 0700 AEDT on Monday, pointing to a moderate fall when the local market opens. But IG market analyst Kyle Rodda says that doesn’t taken into account new coronavirus news, nor the Chinese economic data, received over the weekend. “Italy, Iran and South Korea reported another spike in coronavirus cases, with several countries announcing an expanding travel-black list,” he said. “The first death from the disease was reported in the United States, and in Australia.
“And in what’s probably the most impactful news from a markets perspective, China released its latest PMI surveys, with the data showing business activity in the Chinese economy fell to an all-time low last month.” The Australian dollar was buying 64.66 US cents at 0700 AEDT on Monday, down from 65.22 US cents as the market closed on Friday.
7.35am: Oil sinks again
Oil prices slumped for a sixth day in a row on Friday to their lowest in more than a year, causing futures to drop by the most in a week since 2016, as the spread of coronavirus stoked fears that a slowing global economy would hit energy demand.
The coronavirus spread further, with cases reported for the first time in six countries across three continents, battering markets and leading the World Health Organisation to raise its impact risk alert to “very high.” The most active Brent future for May delivery fell $US2.06, or 4.0 per cent, to settle at $US49.67 a barrel, its lowest since July 2017.
Brent futures for April delivery, meanwhile, lost $US1.66, or 3.2 per cent, to settle at $US50.52 a barrel, while US West Texas Intermediate crude fell $US2.33, or 5.0 per cent, to settle at $US44.76. That is the lowest closes for both Brent and WTI since December 2018.
For the week, Brent lost almost 14 per cent, its biggest weekly percentage decline since January 2016, while WTI fell over 16 per cent in its biggest weekly percentage drop since December 2008.
Coronavirus panic also sent global stock markets and industrial and precious metals prices tumbling, with losses amounting to $US5 trillion. Benchmark Brent crude’s slump should focus minds on next week’s meeting between the Organisation of the Petroleum Exporting Countries and allies including Russia, collectively known as OPEC+.
Several key OPEC members are leaning towards a bigger than previously expected oil output cut, four sources with knowledge of the talks said. OPEC+ is due to meet in Vienna over March 5-6.
Reuters
Alan Kohler 7.22am: This time, we’re vulnerable
It’s hard to imagine a bigger week for the Australian economy: China’s manufacturing index has fallen off a cliff because of the coronavirus, we have the RBA meeting Tuesday and December quarter national accounts on Wednesday.
China’s manufacturing PMI fell to a record low of 35.7 in February, from 50 in January, and the non-manufacturing PMI fell even more – from 51.1 to 29.6.
Australia’s major trading partner has come to a standstill so exports to it have too. Wednesday GDP won’t record that, but everyone knows what’s coming when March quarter GDP is published in June – it will be negative. The only question to be answered is whether it will be two quarter negative quarters, and therefore a recession, and it’s hard to see how that can be avoided.
China has become the fulcrum of the global trading system and it’s not just its demand that has collapsed, but its supply as well. Global businesses selling almost any product are running out of stock. And as other countries shut up shop in response to their own coronavirus cases, a global recession becomes more and more inevitable.
On Tuesday the Reserve Bank board meets in the midst of a maelstrom that has come out of nowhere and has changed everything.
They must cut interest rates again, probably by 0.5 per cent.
That’s because what the national accounts will show the following day is that Australia came into this viral black swan in a weak, vulnerable condition. The economy is simply not robust, unable to withstand a shock like this, and we’re not talking about something that might happen in the future – it’s happening now.
6.38am: Markets showing ‘resilience’: BIS
Markets worldwide have seen dramatic drops over the past week amid coronavirus fears, but thanks to reforms following the global financial crisis, they are proving “resilient”, the Bank of International Settlements’ chief economist said Sunday.
Presenting a quarterly review of the Basel-based BIS, considered the central bank for central banks, head of the monetary and economic department Claudio Borio acknowledged that “markets had a rude awakening last week”.
He pointed out that after an “initial, short-lived shock” last month, when the COVID-19 epidemic was exploding in China, “market participants had taken a rather benign view of the impact of the coronavirus on the global economy”.
But all of that changed last week as the global spread of the virus picked up, sending stock markets plunging to their lowest levels since the 2008 global financial crisis over fears that the disease could wreak havoc on the world economy.
The virus has now killed nearly 3,000 people and infected over 87,000 worldwide, with an increasing number of new cases being reported each day.
“Acute concerns and uncertainty gripped market participants, as the expectation of a rapid V-shaped recovery now appeared grossly unrealistic,” Borio said.
He pointed especially to markets in risk assets, which “plunged as if no bottom was in sight: no one wants to catch a falling knife.” Leading European stock markets lost more than 10 per cent in just one week, while Wall Street fell 12 per cent.
Crude oil prices tumbled as well and analysts said central banks, especially the US Federal Reserve, might have to shift into crisis-resolution mode with urgent interest rate cuts.
But despite the sharp drops and widespread “turmoil and anxiety”, Borio stressed that “both market functioning and financial intermediation more generally proved resilient.” “The post-crisis regulatory reforms aimed at strengthening financial institutions are bearing fruit,” he said.
But Borio acknowledged that “uncertainty rules globally (and) the situation remains fluid.” “One thing is for sure,” he said.
“financial markets will continue to dance to the tune of news about the virus and of the authorities’ response.”
AFP
6.28am: Wall St sell-off not over, say analysts
After such a bad week for stocks, the question is whether the worst is over. In the view of analysts of more technical corners of the markets, the answer is: probably not yet.
The S&P 500 had its worst week since the financial crisis, down nearly 12 per cent. But some think it might have to drop by more than 20 per cent from its peak before it will find real support from bargain hunters.
This pessimism isn’t born of expectations that the global economy will crash because of the response to the coronavirus. It has more to do with the extreme valuations and the aggressive ways some fast moving investors had placed their bets coming into this month’s tumult. Furious buying and selling last week was exaggerated by automated traders – action that mum and dad investors might now follow.
So far, many investors sitting on big gains made over the previous months haven’t completely given up and sold those positions. Doing so is known as “capitulation” and often seen as a sign of a market bottom.
“There is not capitulation yet, not at all,” says David Bieber, a Citigroup Inc. quantitative analyst who studies the size and volume of outstanding bets across all kinds of derivatives markets.
He notes that a lot of the fall in prices last week was driven by activity in futures and derivatives markets alongside some selling of exchange-traded funds, more than by outright selling of stocks and bonds.
At the start of the week, as they started to digest the spread of the coronavirus to Europe, hedge funds were using derivatives such as stock futures to cut back their bets on stocks. By Wednesday and Thursday, computerised, trend-following fund managers, known as CTAs (commodity trade advisers), and other systematic investors were jumping on the bandwagon, reinforcing the moves.
Some think this type of selling has more room to run. For instance, investors came into the weekend still sitting on more bets in the futures market for stocks to rise than to fall. Mr. Bieber says for those bets to be fully reversed, the S&P 500 might have to fall to a level of 2600, which would be more than 23 per cent down from its peak 10 days ago.
Dow Jones Newswires
6.26am: US banks make virus plans
U.S. banks are preparing for a worsening coronavirus outbreak by laying plans to move staffers to back-office sites, limiting contact with clients who have been abroad and curbing employee travel.
Morgan Stanley, whose New York City stock-trading floor is the country’s busiest, is preparing a backup site in suburban Westchester County. JPMorgan Chase & Co. has nixed all non-essential international trips. Goldman Sachs Group Inc. is cancelling some conferences and evaluating powering up a parallel trading floor in Greenwich, Conn.
Not since the Sept. 11, 2011, terrorist attacks have Wall Street banks faced a logistic challenge like the one potentially posed by a coronavirus outbreak in the U.S. Sustained quarantines and widespread business closures would hit credit-card and corporate-lending businesses. Further interest-rate cuts, which the Federal Reserve may use to shore up the economy, would crimp profits.
“If planes are not flying in and out of China, if hotels are not being filled — which they’re not at the moment — and if the supply chains are being impacted which I suspect they are, there’s going to be some impact,” Visa Inc. Chief Executive Officer Alfred Kelly said last month.
While technology has made it possible for many to work from home, the multiple screens and compliance systems installed on Wall Street trading floors can’t be easily replicated on a laptop. And investment banking is still a face-to-face business, drummed up by weeks on the road.
Financial firms have drawn up elaborate contingency plans in recent years that they hope will allow them to keep operating smoothly. Just a few weeks ago, Bank of New York Mellon Corp. ran a drill temporarily shutting down its downtown Manhattan headquarters, an executive said.
Dow Jones Newswires
6.18am: Latest virus stats
The latest figures, based on WHO and national counts: – Mainland China: 2,870 deaths among 79,824 cases, mostly in the central province of Hubei – Hong Kong: 94 cases, 2 deaths – Macao: 10 cases – South Korea: 3,736 cases, 20 deaths – Italy: 1,694 cases, 34 deaths – Iran: 978 cases, 54 deaths – Japan: 961 cases, including 705 from the Diamond Princess cruise ship, 12 deaths – France: 130 cases, including one in the French Caribbean island of Guadeloupe; 2 deaths – Singapore: 106 cases – United States: 74 cases, 1 death – Spain: 71 cases – Germany: 66 – Kuwait: 45 cases – Thailand: 42 cases, 1 death – Taiwan: 40 cases, 1 death – Bahrain: 38 cases – United Kingdom: 35 cases, 1 death – Malaysia: 29 cases – Australia: 23 cases, 1 death – United Arab Emirates: 21 cases – Canada: 20 – Iraq: 19 – Norway: 17 – Vietnam: 16 – Sweden: 13 – Netherlands: 10 – Switzerland: 10 – Greece: 7 – Lebanon: 7 – Croatia: 7 – Oman: 6 – Austria: 5 – Finland: 5 – Israel: 5 – Russia: 5 – Mexico: 4 – Pakistan: 4 – Czech Republic 3 – India: 3 – Philippines: 3 cases, 1 death – Romania: 3 cases – Belarus: 2 – Belgium: 2 – Brazil: 2 – Denmark: 2 – Georgia: 2 – Algeria: 1 – Afghanistan: 1 – Armenia 1 – Azerbaijan: 1 – Cambodia: 1 – Dominican Republic 1 – Ecuador: 1 – Egypt: 1 – Estonia: 1 – Iceland: 1 – Ireland: 1 – Lithuania: 1 – Monaco: 1 – Nepal: 1 – New Zealand: 1 – Nigeria: 1 – North Macedonia: 1 – Qatar: 1 – San Marino: 1 – Sri Lanka: 1
AFP
Richard Gluyas 6.16am: RBA set to cut
The likelihood of a Tuesday rate cut by the Reserve Bank has surged dramatically after a torrid week on global markets and indications from the US Federal Reserve that it will slash its benchmark rate later this month.
As local stocks joined in last week’s global rout, slumping 9.8 per cent due to a rapid escalation in coronavirus cases outside China, the market pricing for a 25 basis-point cut in local rates to 0.5 per cent spiked from 18 per cent on Friday to 87 per cent.
Investors were further shaken by a sharp decline in China’s manufacturing PMI, which tracks sentiment among purchasing managers at manufacturing businesses, to a record low.
The 15-year-old PMI index tumbled from 50 in January to 35.7 in February — low enough to indicate the country could have its first economic contraction since the end of the Cultural Revolution.
AMP Capital head of investment strategy Shane Oliver said the Australian economy was likely to shrink in the March quarter due to the impact of the bushfires and the virus, with the RBA’s employment and inflation objectives even further out of reach.
More Coverage
ASX 200 falls on China update; BHP leads mining reversal
Iron ore, copper futures, AUD down after China's underwhelming economic update. RBA's 'step down' in hawkishness evident in September minutes, but deputy governor Andrew Hauser says inflation job's not done yet.
ASX 200 rises on banks; Arcadium top gainer
Rio Tinto's takeover approach lifts Arcadium Lithium appeal. West African Resources drops on Burkina Faso mining concerns. Qantas may avoid second strike after proxy backing.