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The Australian sharemarket has extended last week's rally, led up by the big banks as investors search for value following the recent sharp dive in stocks.
The benchmark S&P/ASX 200 added 47.68 points, or 0.9 per cent, to 5319.4. The broader All Ordinaries gained 47.23 points, or 0.9 per cent, to 5307.3.
Across the Asia-Pacific region, markets were up after a recovery on Wall Street on Friday where robust US economic data lifted investors spirits.
Japan's Nikkei Index rallied nearly 4 per cent on Monday, posting its largest one-day gain since June 2013. Media reports suggested that Japan's $US1.2 trillion government retirement fund will increase its allocation target for shares to 25 per cent from 12 per cent.
The bounce back on the Australian market was broad-based, with financials leading the way.
Commonwealth Bank of Australia lifted 0.9 per cent to $77.26, while Australia and New Zealand Banking Group jumped 1.6 per cent to $32.45. Westpac Banking Corp rose 1.4 per cent to $33.57 and National Australia Bank pushed 0.9 per cent higher to $33.44.
After the ASX 200 narrowly avoided a correction earlier this month, it was no surprise that the market bounced back a bit, Perpetual head of equities research Matt Sherwood said.
"The market was ripe for a correction anyway given the massive run up we had and we haven't had a correction in over 800 days – that's unusually long," Mr Sherwood said.
Despite amplified volatility over the past month, concerns about global growth. at least in the US, had been overstated.
"[The US doesn't] have indicators of an economy that requires zero interest rates. In the end, I still think that the Fed will move rates higher in the September quarter next year," Mr Sherwood said.
JBWere executive director Mike Kendall agreed the correction was not unexpected and now investors were returning to the market looking for value.
And here are today's winners and losers in a session when there were many more in the former category - three quarters of the top 200, to be exact.
Transfield Services surged on news it had received - and rejected - a takeover offer. Ten jumped on reports the struggling broadcaster had engaged in preliminary merger talks with Fairfax.
Best and worst performing stocks in the ASX 200 today.
Falling real incomes in Australia and global growth concerns are undermining corporate and consumer confidence and put at risk the government's fiscal objectives, a conference heard on Monday.
A panel of experts told delegates to the Commonwealth Bank of Australia's annual Australasian Conference that the economy had been slow to recover from the end of the mining infrastructure boom and lacked any clear drivers of future growth, aside from bigger volumes of resource exports and housing construction.
Sluggish domestic consumption and investments meant the export sector would have to do more of the heavy lifting if Australia was to sustain current growth rates of around 3 per cent.
However, weaker commodity prices and oversupply meant exporters would have to ramp up volumes to maintain income, which could put further downward pressure on prices.
This would further undermine the country's terms of trade, while weak consumer spending would undermine company profits. The two combined meant lower government revenue.
The high Australian dollar was partly to blame for the sluggish transition to non-mining growth, delegates heard.
However, a downbeat assessment of consumer demand and global trading conditions was also dissuading the private sector from investing, according to the CBA's director of equity strategy Tim Rocks.
"If you sit through a company presentation, or a company strategy day, these days, it's all about cost-cutting and not about how you capture the growth outlook," said Mr Rocks.
"So, we actually tallied up and found that about half the listed companies that we cover are in the middle of aggressive cost-cutting campaigns.
"This isn't about getting rid of chocolate biscuits from the kitchen; this is really fundamentally changing their business to try and lower the cost structure," he said.
With growth hard to come by, many Australian companies are making cost cuts that go well beyond the chocolate biscuits in the kitchen, says CBA's Tim Rocks Photo: Natalie Boog
Shares have made it five straight days of gains, with the big banks leading the way.
The ASX 200 added 48 points, or 0.9 per cent, to 5319.4, while the All Ords advanced 47 points to 5307.3.
Most of day's profits were made in the opening session following a strong finish to last week on Wall St.
Westpac was the biggest single contributor, as it jumped 1.4 per cent, while ANZ chimed in with a 1.6 per cent gain and CBA and NAB advanced 0.9 per cent. Macquarie jumped 1.6 per cent.
BHP added 1.3 per cent, and Telstra a more subued 0.4 per cent.
Gold miners lagged, with Newcrest falling 0.9 per cent.
The pay packet of Medibank Private boss George Savvides will more than triple overnight on November 25.
The managing director of the government-owned Medibank, Mr Savvides will be catapulted from one of Australia's highest paid public servants, on $1.2 million, to a total pay package of $3.99 million, under a contract which runs until July 2017.
Governance experts said Mr Savvides' pay packet was in line with other top 50 to 100 ASX companies but questioned the payment of a $750,000 bonus, simply for successfully completing the float.
"It's a kicker for getting the IPO [initial public offering] away but most people would argue that is part of his job," Ulysses Chioatto, former executive director at Institutional Shareholder Services, said.
A 58-year old trained industrial engineer, Mr Savvides will retain his current $1.2 million salary but also be eligible for a $840,000 annual bonus, in addition to the $750,000 IPO bonus, if the listed insurer achieves a forecast $250 million profit.
A former chief executive of Sigma Pharmaceuticals, Mr Savvides will also be granted performance rights worth $1.2 million in the company, as part of a $3 million pool of performance rights granted to the executive team.
Martin Lawrence, director of government advisory firm Ownership Matters, said while Mr Savvides' job title remained the same, he and his executive team would bear more responsibility and face greater scrutiny.
"It is going to be much more challenging, because they're going to have to deal with a lot more shareholders," he said.
Poll: The Medibank prospectus is out, flagging a share price of between $1.55 and $2. Will you invest?
- Yes. It's a strong company and the pricing is attractive enough.
24%
- Maybe. Need to get more information about the business.
35%
- No. It's overpriced and won't fly.
41%
Total votes: 771.
You will need Cookies enabled to use our Voting Feature.
Poll closes in 2 days.
Disclaimer:
These polls are not scientific and reflect the opinion only of visitors who have chosen to participate.
Australia’s looming legions of elderly need to accept they will work longer, RBA assistant governor Christopher Kent said, signaling support for a government plan to raise retirement to the highest in the world.
“What we need to do is look forward into our futures as best we can” and make adjustments, Kent, assistant governor responsible for economic forecasts, said in response to questions after a speech in Adelaide today. One important change “is to work longer into life if that’s what you need and are able to do.”
The ratio of working-age Australians to those over 65 is expected to decline to 3:1 by 2050 from 5:1 in 2010. In Japan, it’s already below 3:1 and in Germany it’s close to that level, the International Labor Organization says. Treasurer Joe Hockey wants to raise Australia’s retirement age to 70 to prevent a gray time bomb caused by the growing army of pensioners draining state coffers.
Under the government’s plan, Australians born in 1966 or after will have to work until they are 70, from 65 now, before they can draw their government retirement allowance.
Challenges to the economy from aging include relatively fewer workers, more demand for services, pressure on public spending and potentially insufficient savings to fund retirement as the average lifespan increases, Kent said in his speech to the Leading Age Services Australia National Congress.
There are also opportunities as people enjoy healthier lives, are able to work longer, save more and still enjoy more years in retirement, he said.
A longer working life also gives people the opportunity to take risks in a venture like a business, and in the unfortunate event it failed they could make up for it financially.
Reserve Bank Assistant Governor Christopher Kent Photo: Sean Davey
Here's what's most likely to determine the path of global markets until the end of the year, according to Deutsche Bank:
Japanese shares are soaring, pushing the the Nikkei up 3.5 per cent, boosted by media reports the country’s $US1.2 trillion retirement fund will increase its allocation target for shares to about 25 per cent from 12 per cent.
The Government Pension Investment Fund will also lift its holdings of foreign bonds and stocks to about a combined 30 per cent from 23 per cent, while reducing domestic notes to the 40 per cent level from 60 per cent, the Nikkei newspaper has reported.
Investors are awaiting any word from the GPIF on its new allocations after a government-picked panel advised it to reduce bonds to boost returns. Takatoshi Ito, a member of the panel, said his personal recommendation is to increase the target for Japanese and foreign stocks to about 25 per cent each and cut notes to around 35 per cent.
The fund can adjust its share allocation to six percentage points higher or lower than the target, meaning that after the change it will be able to hold about 30 per cent at most in domestic equities, the Nikkei reported.
Ito said that the GPIF would be “stupid” to announce its new investment strategy before adjusting asset allocations. Publishing targeted weightings in advance would move markets, forcing the fund to buy at highs and sell at lows, he said in an interview last week.
The fund’s asset review could come as late as December, as GPIF officials, members of its investment committee and the health ministry have different views on the best timing and approach, Ito said.
After bringing you some relatively upbeat views on the banks from Deutsche Bank and UBS this morning – ahead of bank earnings season at the end of the month – here’s a more cautious one courtesy of analysts at CIMB.
For the major banks reporting (ANZ, Westpac and NAB), the broker’s team estimate total cash earnings per share fell 6.6 per cent over the second half of their 2014 financial years against the previous corresponding period. They expect dividends per share to have grown 6.2 per cent against the prior period.
Key areas of focus in the earnings announcements will include: the outlook for mortgage competition; corporate loan spreads; and capital commentary, they write.
“We have an underweight stance on the sector as we believe yield stability is no longer enough to offset increased regulatory risk, low growth and lower sustainable returns.”
“In our view, the Australian bank sector remains overvalued despite its recent correction. We estimate that the sector trades 15 per cent above intrinsic fair value on a [price/net-tangible-assets] and [price/earnings] basis.
“We think higher capital targets will lower structural returns and constrain growth. Yield-based buying from offshore should offer less support as the Australian dollar falls.”
Their order of preference: ANZ (Add), NAB (add), Westpac (hold), and CBA (reduce). That “reflects ANZ and NAB’s relative valuation discounts and greater scope to use asset sales to boost capital in response to higher target ratios,” they say.
Coming to a headline near you: Aussie deflation fears, writes BusinessDay columnist Michael Pascoe:
This wouldn't help the government sell its proposal to index age pension increases to the CPI: one bank's economics team is tipping Wednesday's consumer price index will show no increase at all in the September quarter.
That's definitely a minority opinion, a rather lonely outlier in the Bloomberg survey of 26 economists.
But coming from NAB, it's a possibility that deserves to be considered seriously.
With zero movement for the September quarter, the CPI would have increased by just 1.9 per cent of the year. The median forecast in the Bloomberg survey is for growth of 0.4 per cent for the quarter and 2.3 per cent for the 12 months.
Factors arguing for a low (or no) CPI score include lower petrol, fruit and veg prices, plus the impact of scrapping the carbon tax – if anyone noticed that.
NAB will look like geniuses if proven correct, but it's a brave call straying so far from the pack.
On the other hand, TD Securities runs its own monthly inflation count, trying to copy the Australian Bureau of Statistics, and is tipping the median 0.4 per cent for the quarter.
Outside the small world of economist's boasting rights, NAB being right would result in plenty of headlines about inflation being so low, the lowest it's been in five years.
Cue stories about deflationary fears and the Reserve Bank needing to cut interest rates. Someone might even mistakenly mention that it's the RBA's job to keep inflation in the 2 to 3 per cent band.
But annual CPI growth of 1.9 per cent wouldn't really matter much to the RBA – our central bankers trim off the wilder swings of the CPI to get a core figure and they look through one-off factors such as imposing or removing the occasional tax.
The upward trend for Australian inflation over the past two years will begin reversing with Wednesday’s Q3 CPI, says NAB.
Bowser prices went up last week, despite world oil prices plunging to multi-year lows.
According to the Australian Institute of Petroleum, the national average Australian price of unleaded petrol rose by 5.2 cents a litre to 149.0 cents a litre in the week to October 19, CommSec says.
Meanwhile, the key Singapore gasoline price has hit a 27-month low of $US100.40 a barrel, down almost 9 per cent in the past three weeks. And the national average wholesale (terminal gate) unleaded petrol price stands at 132.9 c/l, a 17-month low and down 5.2 cents over the past week.
So why haven't prices at the bowser come down too?
CommSec reckons the discrepancy has to do with the discounting cycle in many capital cities, and that the global situation points to cheaper fuel prices ahead.
‘‘The real driver of last week’s lift in the national prices has been the turning point in the discounting cycle,’’ CommSec economist Savanth Sebastian notes. ‘‘After an unusually long discounting cycle, pump prices in Sydney, Melbourne and Brisbane lifted by 10-15 cents over the past week and inflated the national average price.’’
He adds:
- Motorists certainly have no reason to complain at present. Not only are pump prices likely to fall further than the recent 15-month lows, but the discounting cycle has been more prolonged in recent times.
- The world is well supplied with oil and cheaper fuel prices should leave households with additional savings in the household budget.
Where local stock picking legend John Sevior is invested now. Source: Smart Investor
The crew at Smart Investor have put together a great interactive graphic profiling six hotshot fund managers and where they are investing now.
The names include global stars such as Warren Buffett and Bill Gates's investments advisor, Michael Larson, as well as local luiminaries such as John Sevior and Hamish Douglass.
Sevior's top five holdings are IAG, Caltex, Dick Smith, Flight Centre and Henderson Group.
And here's our poll on the Medibank float - will you invest?
Poll: The Medibank prospectus is out, flagging a share price of between $1.55 and $2. Will you invest?
- Yes. It's a strong company and the pricing is attractive enough.
24%
- Maybe. Need to get more information about the business.
35%
- No. It's overpriced and won't fly.
41%
Total votes: 771.
You will need Cookies enabled to use our Voting Feature.
Poll closes in 2 days.
Disclaimer:
These polls are not scientific and reflect the opinion only of visitors who have chosen to participate.
Hold your horses if you're thinking about the Medibank Private float, SMH Money columnist David Potts writes:
There's no rush because it doesn't officially close until November 14 and governments never pull the plug early on privatisations. It looks somehow unseemly.
By waiting you'll also have a better idea of how much the shares are going to cost. And better still, where the market is going.
The government has set an "indicative price range" of $1.55 to $2 although it's admitted it won't go any higher, at least for mum and dad investors. Trouble is it isn't offering a carrot to them either unless the final price does go over $2.
Otherwise there's no discount, unlike previous privatisations. And the only benefit for policyholders is they can buy more shares if they want to. Gee, thanks.
Using the suggested price range the dividend yield is 3.5 to 4.5 per cent, or 5 to 6.4 per cent after the 30 per cent franking credit.
Remember the true price won't be revealed until a week after you've posted your cheque.
With what we have, though, Medibank is priced about 17 times its earnings. This compares with, say, a bank stock of about 13 times, with a bigger dividend to boot, so it's not cheap.
Not cheap: Medibank Private
Over the past weekend, China's central bank committed a 200 billion renminbi liquidity injection into five or six listed banks to keep liquidity ample and support the slowing Chinese economy, according to local media.
The injection follows signs that Chinese investors are beginning to bet that the People's Bank of China (PBOC) is going to reduce the official deposit rate, now fixed at 3 per cent.
And it came after a 500 billion-yuan injection the PBOC made into China's top banks last month via its standard lending facility (SLF) in the form of three-month loans.
The effect of SLF is similar to cutting the reserve requirement ratio (RRR), but the tenor is much shorter (normally less than 3 months), says ANZ chief China economist Liu Li-Gang
- While the SLF leaves the central bank with some policy flexibility when it matures, we believe that the impact is much smaller than a permanent RRR cut.
- The new SLF injection, plus lowering of 14-day repo rates last week, suggests that the PBoC has eased monetary further in order to arrest economic slowdown.
- The timing of the liquidity injection ahead of China's Q3 GDP data release tomorrow morning could mean a lower-than-expected Q3 GDP growth.
- In our view, the monetary policy actions taken as far have not delivered the expected results. The cost of funds facing enterprises has remained elevated. Rising credit risks and non-performing loans have intensified risk aversion among Chinese commercial banks. Overall, we believe the SLF will only have limited impact in boosting growth in Q4.
At this stage, the markets expect that China's economy will grow 7.2 per cent year-on-year (ANZ: 7.1%), the slowest pace in six years.
Monetary policy actions by China's central bank haven't delivered the desired results, ANZ says. Photo: Reuters
Markets across the region are rallying, after Wall Street roared back to life on Friday, with Japan leading the way:
- Japan (Nikkei): +3.4%
- Hong Kong: +0.65%
- Shanghai: +0.3%
- Taiwan: +1.5%
- Korea: +1.5%
- ASX200: +0.9%
- Singapore: +0.7%
- New Zealand: +1%
Japanese traders say investors are scooping up recently battered stocks after the Nikkei tumbled 5 per cent last week hit by concerns about global growth and the stronger yen.
"Selling in some of the stocks was overdone. Investors are buying them on the dips," a trader at a Japanese brokerage said. But some analysts still stay cautious against negative catalysts which battered the market earlier this month.
"With Halloween just around the corner, the market was spooked by 'ghosts' and these ghosts will probably stick around longer," said Hiroyuki Nakai, chief strategist at Tokai Tokyo Research Centre. "The ghosts are European economic concerns, worries on what could happen after the Fed ends tapering, and fears about Ebola."
Nakai said that these fears still linger in the market, and the rebound may be short-lived.
The collapse in iron ore prices may have further to run as global supply increases and steel-demand growth slows, according to Moody’s, which said it may reduce ratings on producers.
About 300 million metric tonnes of new and expanded supply will come on stream over the next few years, analysts say in a report. Global steel-production growth in 2014 remains muted with China, the key driver of consumption, continuing to slow, Moody’s said.
Iron ore tumbled 40 per cent this year after companies including Rio Tinto, BHP Billiton and Vale raised low-cost output in Australia and Brazil, spurring a global glut. The market is in the midst of a transition without precedent in recent commodity history as supply surges and some higher-cost mines are displaced, according to Macquarie.
‘‘Iron ore prices have collapsed,’’ Moody’s said in the report. ‘‘With slowing global steel- production growth rates, iron ore prices remain vulnerable to the downside and we expect continued volatility.
‘‘Downward rating actions for iron ore producers could result as Moody’s reassesses the impact of a protracted pricing weakness,’’ it said.
Beijing: The Australian Federal Police are poised to seize assets of corrupt Chinese officials within weeks, in an unprecedented joint operation with its Chinese counterparts.
In an exclusive interview with Fairfax Media, Commander Bruce Hill, the manager of the AFP's operations in Asia, has confirmed Australia has agreed to assist China in the extradition and seizure of assets of corrupt officials who have fled to Australia with illicit funds running into the hundreds of millions of dollars.
The joint operation will make their first forfeiture of assets within weeks, having agreed on a priority list of alleged economic fugitives who have taken residence in Australia – identified by Beijing as one of the most popular outlets for corrupt Chinese money.
Among the suspects identified by the AFP are naturalised Australian citizens and permanent residents who for years have laundered money under the guise of being genuine investment or business migrants from China.
China is seeking Australia's help in arresting citizens on corruption charges - but questions remain. Photo: Bloomberg
It has taken more than a decade but NSW has re-emerged as Australia's strongest state economy.
NSW leads the nation's economic pack having edged out the minerals-rich Western Australia, which has held the number one spot for the past three years, a quarterly review of the states by Australia's biggest bank has found.
The key factor in NSW's economic resurgence has been the strength of the housing sector. New dwelling commencements in NSW were more than 36 per cent above the decade average, said the "State of the States" report by the Commonwealth Bank's stockbroking arm, CommSec.
More than 52,000 dwellings were approved in NSW in the 12 months to July, the highest level since May 2000.
It is the first time NSW has been in the top spot since CommSec started its state rankings in 2008. The last time NSW was the nation's clear economic leader was in the early 2000s following the Sydney Olympics.
Rates have been at 2.5 per cent for a year now, and the song from the RBA is likely to remain the same in tomorrow’s release of policy meeting minutes: “On present indications, the most prudent course is likely to be a period of stability in interest rates.”
Of the 27 economists surveyed by Bloomberg, 26 expect rate hikes next year. But bond markets are pricing in the chance of the opposite (see chart).
And in the wake of this week’s turmoil economist, Guy Bruten at Alliance Bernstein lists four circumstances (aside from GFC II) that may prompt the RBA to cut, rather than, hike rates next year:
- Angst around the commodities downturn would have to rise further. Bruten gives this scenario a tick – recent falls in the iron ore price are driving down long-term forecasts “with the obvious consequences for capital spending, government revenue and so forth”.
- There will need to be an awareness that housing construction will soon start to lose momentum, says Bruten, pointing out that leading indicators such as housing finance and building approvals are now levelling out. “Come mid-2015, the lion’s share of the upswing will be done."
- The “key barometer” to the previous scenario is the labour market. The employment trend is central to gauging the transition from mining-led growth dynamic to a non-mining one. Too early to tell on this one, “but it is difficult to argue that we’re on the cusp of a major improvement,” writes Bruten.
- Finally – is there enough inflation to justify an easing? Third quarter CPI out on Wednesday will likely be “on the low side” – allowing “plenty of headroom for a rate cut”.
“So at this stage, two out of the four factors look like getting a tick," sums up Bruten. "While an easing is by no means a base-case scenario, its probability is rising. And given the surprise that this would represent to consensus expectations, developments in those other two factors are worth watching closely.”
Market pricing of a rate move in the coming 12 months - a negative number implies the chance of a rate cut.
On Friday, some of the country's most successful entrepreneurs and rich-list families backed an equity raising of taxi booking and payments app goCatch in the race to "break apart" the country's powerful $5.4 billion taxi industry.
Some of the backers of the business include billionaire family the Kahlbetzers, the Millner family, fund manager David Paradice, Malcolm Turnbull's son, Alex, and Square Peg, a technology venture capital firm backed by James Packer, Seek co-founder Paul Bassat and the billionaire Liberman family.
In a confidential presentation, goCatch's goal was simple: to capture a "dominant share" of the taxi market. It was a shot across the bow to incumbents. The company told investors: "goCatch is breaking apart the Cabcharge network model and redefining how the industry works."
It is big talk for a company that is still a minnow, valued at $19 million, compared with Cabcharge's market capitalisation of almost $600 million.
goCatch founders Andrew Campbell and Ned Moorfield. Photo: Rob Homer
Deutsche Bank says concerns around higher capital requirements for banks resulting from David Murray’s Financial Services Inquiry have been dramatically overplayed and equity raisings are unlikely.
Analyst James Freeman said a large increase in capital requirements would be difficult to justify and an uptick of around $5 billion to $10 billion for the sector over three to four years looked more realistic.
“This level of capital increase can be easily met through organic capital generation and will not require equity raises, nor will it impact ROE (return on equity) estimates,” Mr Freeman said in a research note to clients.
“As such with the stocks already discounting the risk of material equity raisings, we believe that the sector looks attractive at this point.”
Meanwhile, UBS analysts are "warming" to the banks, after being among the most vocally negative in the past on the sector, and expect "a strong" reporting season, which begins October 30 with NAB, followed by ANZ the next day and Westpac Nov 3.
"Revenue should be the highlight," they write, expecting an aggregate increase of around 5.8 per cent, "the strongest since the post-GFC bounce".
"Net interest income is the driver, with solid balance sheet growth and modest [net interest margin] compression."
They are also sanguine on the risks to the Big Four from the Murray Inquiry, saying "the likely impacts are quantifiable".
"Following the correction we are less concerned with valuations provided lead indicators for asset quality remain benign," they write.
"The Australian banks do not look cheap. However, unless the economic situation deteriorates, we think the case for a material underweight stance in the banks now appears harder to justify."
Australia's richest person Gina Rinehart will not relinquish her 10 per cent stake in struggling free-to-air broadcaster, Ten, despite planning to step down from the company's board.
It is understood that Rinehart, who is Ten's second biggest shareholder, is pulling back her non-mining investments as she focuses her energies on completing the construction of her $US10 billion ($11.43 billion) Roy Hill iron ore project. The mine in Western Australia's iron-rich Pilbara region is scheduled to start exporting in September 2015.
Rinehart's partners and colleagues insist that the project is profitable despite the iron ore price tumbling 40 per cent to $US80.82 a tonne since the start of this year.
Fairfax Media understands that Rinehart is still interested in her Ten investment and that her intention to stand down from the board is merely a practicality. Rinehart has relied on alternates – John Klepec and fellow Ten director Jack Cowin - to attend all 11 board meetings for the broadcaster in the financial year just ended.
It is believed that Rinehart will nominate Klepec, who is Hancock prospecting's chief development officer, to be her permanent representative on Ten's board at the network's upcoming annual meeting.
The network's shares have dived more than 83 per cent to 21 cents since Mrs Rinehart acquired her stake in November 2010. They're up 3.7 per cent to 21.25 cents today, extending last week's rally.
Gina Rinehart plans to step down from the Ten board to focus on the Roy Hill iron ore project. Photo: Bohdan Warchomij
Expect Aussie volatility to continue this week ahead of a big week for domestic and Chinese economic news, says OZForex chief currency strategist Jim Vrondas:
- Three RBA officials are due to speak - Assistant Governor Christopher Kent (has spoken today on aging population), Deputy Governor Philip Lowe and Governor Glenn Stevens) in addition to monetary policy minutes (tomorrow) and inflation data (Wednesday).
- It's no coincidence that Glenn Stevens goes last as he may need to clarify any comments made earlier in the week should the market react in an unexpected manner (or too aggressively)
- AUD/USD has been trapped between 0.8650 and 89 cents, it's sitting in the middle of it now but if Stevens and company err on the dovish side then we could test 0.8650 again this week
- On the domestic data front we're expecting both headline and trimmed mean CPI to soften also weighing on the AUD
- China's GDP (out tomorrow) is expected to show further decline to 7.2% or possibly lower, we also have Industrial Production with a rebound from 6.9% to 7.2% forecast. Thursday's flash manufacturing PMI could also increase some volatility
- This week is likely to see some downward revision to the People's Bank of China's growth targets as well. Markets have priced in 7% growth at the bottom end.They could set a range target instead of one number. If they do and the bottom of the range is in the 6% area then this would also weigh on the Aussie dollar
The government will reap up to $5.5 billion from the sale of Medibank Private when it lists on November 25, the health insurer's prospectus has shown.
The document, which was lodged with the corporate regulator this morning, showed that the shares would be priced between $1.55 and $2.00.
The indicative share price range suggests a market capitalisation of between $4.3 billion and $5.5 billion, which would place Medibank as one of the market's top 100 companies.
The valuation suggests a price to earnings ratio of between 16.5 to 21.3 times.
Medibank shareholders will receive a fully franked dividend for the seven months to June 30, 2015 of 4.9¢ a share, according to forecasts contained in the prospectus. That implies a 2015 financial year dividend yield of between 4.2 and 5.4 per cent.
Medibank provided a final sweetener to the Coalition by delivering a dividend worth $238.8 million. The dividend included a $42 million final payout for the 2014 financial year and a $196.8 million special dividend.
Finance Minister Mathias Cormann said the initial public offering would include a price cap of $2 a share for retail investors, even if the final price is set above the indicative range. The cap will apply to the first $250,000 allocated to individual applicants under the retail offer.
Medibank's financial performance for the year ended June 30 is also revealed officially for the first time, despite the numbers having found their way across the desks of institutional investors in pre-marketing research in the past weeks.
Shares is Ausdrill have been crunched upon its return to trading, dropping 10.9 per cent to 77.5c after lowering its earnings guidance for the financial year and flagging potential impairment charges in a tough environment for mining servcies..
In an announcement to the ASX, the contract drilling rig provider said that it was revising its 2014/15 financial year earnings forecasts "in light of the group’s results for the first quarter to September 2014 and prevailing market conditions".
The company said it now expects to report EBITDA for FY15 of between $150 million and $160 million, before the effects of impairment charges, on revenues of approximately $840 million.
By way of comparison, Ausdrill reported operating EBITDA of $173.7 million on revenue of $826.3 million for the financial year ended 30 June 2014
The company also said that "as a result of the expected underperformance" in this financial year that it "will be required to test its business units for impairment".
"This will be carried out as soon as practicable. A further update will be provided in relation to impairment at the appropriate time and, until this work is completed, no estimate is available on the likely impairment provision."
The company added that "the business remains and expects to remain in full compliance with its debt covenants".
Managing director Ron Sayers said: “The company remains in a stable financial position. We certainly do not consider that our forecast result is acceptable, even in these challenging times, and every member of our team is working hard to achieve the returns necessary for a company of our size.
“In addition, the deleveraging plans we are pursuing will ensure that the group will be well placed to benefit from any upturn and opportunities that arise in the mining industry.”
Shares in Transfield Services have jumped as much as 29 per cent after the company said it had received an indicative offer from Spain's Ferrovial valuing it at around $1 billion.
Shares in Transfield hit a high of $1.94 and last traded up 26 per cent at $1.89, compared to the $1.95 per share approach that Transfield said undervalued the company.
Health insurer Medibank Private is seeking to raise between $4.3 billion to $5.5 billion in its IPO.
Medibank plans to sell up to 2.75 billion shares in a range of $1.55 to $2.00, the company said in its prospectus, lodged with authorities this morning.
Analysts had expected the IPO for 100 percent of Australia's biggest health insurer to raise between $4.1 billion and $5.7 billion.
Medibank Private is expected to start trading on Nov. 25.
Here's the official announcement.
The government has announced a planned IPO price range for Medibank Private of $1.55 to $2.00 Photo: Glenn Hunt
Steel and mining group Arrium reported record iron ore shipments for the September quarter, but a collapse in iron ore prices and market sentiment hammered the group’s margin per tonne of ore.
Arrium said on Monday that it shipped 3.45 million tonnes of iron ore from its Whyalla port in South Australia, up almost 300,000 tonnes on the prior quarter.
But total sales were down slightly at 3.29 million tonnes and Arrium’s average realised price plunged $US12 a tonne to $US73 a tonne.
“Market sentiment during the quarter was impacted by changes in the balance between iron ore supply and demand, which significantly raised the level of uncertainty over the outlook for iron ore prices, including the extent and timing of recovery,” the company said.
Last month, Arrium launched a shock $754 million equity raising to pay down debt as iron prices crashed to five-year lows and sentiment deteriorated.
The company said it cut its average total cash cost per tonne to $68.40 dollars for the three months to 30 September, down from $73 dollars a tonne.
In Australian dollar terms, the total cost per tonne at $68.40 a tonne and total realised price of $78 a tonne ($US73) underscores the pressure the price collapse is putting on the company.
Arrium, formerly known as OneSteel, said it is focused on cutting costs and improving efficiency in its supply chain.
The company’s mining consumables business is steady but Arrium is grappling with the weakness in iron ore while its steel business remains under pressure.
The Anti-Dumping Commission is investigating claims by Arrium that steel exporters are dumping steel rebar products in Australia at basement prices and injuring the nation’s steel industry.
Arrium shares are 3 per cent higher at 34.5c.
Arrium shipped a record amount of iron ore - but was forced to cut prices. Photo: Reuters
Shares have surged higher at the open in a broad-based rally, with heavy hitters in the banking and mining sector driving the market.
The ASX 200 is 68 points, or 1.3 per cent, higher at 5339.4, while the All Ords is 66 points up at 5326.1.
The big banks are sharply higher: Westpac is up 1.7 per cent, ANZ 1.9 per cent, CBA 1.2 per cent and NAB 1.8 per cent.
BHP is 1.4 per cent higher, while Rio has gained 0.6 per cent. Telstra and the supermarket owners are also up.
Ten Network is up 4.9 per cent on reports Fairfax held merger talks with the struggling broadcaster.
Only 10 stocks are trading lower in early trade, including Iluka, down 1.3 per cent amid talk of a takeover of a smaller miner.
Speculators added bullish gold bets for the first time in nine weeks as concern that global economic growth is slowing whipsawed equity markets.
The gain in the net-long position in New York gold futures and options snapped the longest run of reductions since 2010. Prices rose for a second week as global equities retreated to an eight-month low.
More than $US3.2 trillion ($3.65 trillion) was wiped from the value of world shares this month as the International Monetary Fund cut its outlook for global growth in 2015. Federal Reserve policy makers identified slowing foreign economies as a risk to the US, spurring the fastest purchases of gold held through exchange- traded products since July.
"In the last couple of weeks, it has become a lot clearer that when money is flowing out of all asset classes, it does not seem to be flowing out of the gold market," said Eric Zoldan, a New York-based certified investment management analyst with JHS Capital Advisors, which oversees about $US4 billion. "As the news flow continues to come out that the global economy and demand for things is deteriorating, it leads investors back to the asset class of gold."
Investors are betting on higher gold prices amid concern about the strength of the global economy. Photo: Eddie Jim
In other corporate news, Sydney’s wealthy Salteri family has sold contractor Tenix to Downer EDI for $300 million, according to an announcement sent to employees on Monday.
Tenix chairman Paul Salteri said: “The decision to sell the business to Downer Group has been difficult for shareholders, as we believed the business is well positioned in its markets to take advantage of exciting growth opportunities. Our decision to change from our strategy to raise external capital funding via either an equity sell-down or IPO was a difficult one but ultimately in the best interests of the company and the employees”.
“Downer Group is a leading Australia player in the engineering and services sector, and it is my understanding in discussions with their CEO that they will be looking to Tenix as a strategic growth platform into the power, gas & water sectors. Accordingly this will create exciting opportunities for all Tenix staff,” he added.
Downer chief Grant Fenn said Tenix fitted Downer’s strategy of acquisitions that “are strategic, grow our capabilities and the right price”.
“Tenix is a leader in the electricity, gas and water sectors in Australia and New Zealand. There is little overlap between the two companies and Tenix will be foundation for a new core utilities business for Downer.”
The deal will be funded through a $300 million committed bank debt facility.
Downer says its on balance sheet gearing is projected to be 10 per cent at June 30, 2015 as a result of the deal.
Mr Fenn said the deal would be earnings accretive in the first year.
The board of contractor Transfield Services has advised shareholders to take no action in response to a cash takeover bid of $999 million for the company from Spanish infrastructure firm Ferrovial Servicios.
Ferrovial Servicios has offered $1.95 for each share, the company said in a statement this morning.
“The Board of Transfield Services has considered Ferrovial’s proposal with the Company’s advisers and has formed the view that the price of $1.95 per share does not reflect the underlying value of Transfield Services shares,” chairman Diane Smith-Gander said.
Transfield said it is willing to give Ferrovial “limited due dligence on a non-exclusive basis”.
“"Transfield Services will advise shareholders of the outcome of the discussions with Ferrovial as soon as practicable. The process may take some time and there can be no certainty that an acceptable proposal will eventuate.”
Shareholders will also be given a financial update at the company’s November 5 annual general meeting.
The company’s shares closed at $1.50 on Friday, giving it a market capitalisation of $769 million.
Transfield Holdings, a privately held company owned by the contractor’s founding family, last month sold its 11.3 percent stake in Transfield Services for more than $90 million.
Cliffs Natural Resources, the largest US iron-ore producer, has warned it expects to take a writedown of about $US6 billion on its seaborne iron ore and metallurgical coal assets after commodity prices slumped.
The after-tax non-cash impairment will be taken for the third quarter, the Cleveland-based company said. The move doesn’t affect cash flows, and its domestic iron-ore business is more stable, Cliffs said. The shares fell 8 per cent to $US8.74 on Friday in New York.
Iron-ore prices have dropped by more than 40 per cent this year as Vale, Rio Tinto and BHP Billiton boost output even as global steel demand slows. Metallurgical coal, another steelmaking ingredient, has declined to a six-year low.
The news “essentially confirms, subject to an upturn in seaborne iron ore and met and thermal coal prices, that the vast bulk of the company’s investments in the last decade prior to the appointment of new CEO Lourenco Goncalves was misspent,” Tony Robson, an analyst at BMO Capital Markets in London, said in a note.
“The company is likely to continue to face difficult times given depressed bulk commodity prices,” Robson said. “Much will rest on how successful – or not - Mr. Goncalves is in selling assets and reducing debt.”
Investors borrowed a record amount of money to buy US equities during the bull run, a risky strategy now casting a shadow over the S&P 500 amid market turbulence.
An upsurge in market volatility as US stocks dropped 6.2 per cent from last month’s record peak has put the spotlight on those investors that borrowed money – known as margin trading – to help boost returns.
Peaks in margin trading have been a precursor to bear runs in the past, notably in March 2000 and July 2007.
Recent wild swings in asset prices have been blamed already in part on brokers cutting margins for those investors whose investments were approaching losses. Forced sales by those investors helped fuel the market rout.
William Strazzullo, chief market strategist at Bell Curve Trading, said years of near zero interest rates and large central bank bond purchases – accompanied by an extended period of low volatility – had encouraged investors to take on more risk and accumulate larger holdings of equities.
“A lot of risk needs to be wrung out and it’s no coincidence that the market rally has ended with the Fed looking to complete its latest round of QE [quantitative easing],” he said, adding that the S&P 500 could easily test the 1,750 level as positions unwind. The index closed at 1,885 points on Friday.
“We are getting into a period of higher volatility in the stock markets and one problem is that a lot of investors become emotional in response to big swings,” said JJ Kinahan, chief strategist at TD Ameritrade.
“They tend to be either ‘all in’ or ‘all out’ when it comes to risk, and this is not a good approach when you think in terms of leverage and margin trading.”
Historically high level of margin debt on the US shaermarket is exacerbating market volatility. Source: dshort.com
Australian shares are expected to rally from the start of trading although any gains are unlikely to follow a smooth upward trajectory with many experts betting on renewed fear in financial markets as worries about global inflation come to the fore.
The benchmark S&P/ASX 200 is expected to jump 68 points (1.3 per cent), according to the SPI Futures for December.
The ASX 200 rose 0.3 per cent on Friday to close at 5271 points.
This week, three key inflation prints will be released by Australia, New Zealand and the US. Australia's quarterly inflation data is expected to show price pressures in goods and services have hardly changed, which will only reinforce the view that the official cash rate will remain on hold at 2.5 per cent for the foreseeable future.
On Tuesday China releases quarterly GDP numbers as well as industrial production figures.
The economics team at National Australia Bank expects inflationary pressures to remain benign and the headline consumer price index (CPI) to be flat in the third quarter, lowering the annual rate from 3 per cent to just 1.9 per cent.
Former PIMCO chief investment strategist and now chief economic adviser to Allianz, Mohamed El-Erian, said in The Financial Times, that speculation was growing in the market that the Fed could delay the end of its QE program or announce more stimulus.
Brent crude extended its rebound on speculation that a 25 per cent drop from this year’s high was excessive. West Texas Intermediate was little changed after falling below $US80 yesterday.
Brent pared its fourth weekly loss. The recent slump in prices was “too much too soon” and the supply glut “is not yet here today,” Goldman Sachs said in a report yesterday. Oil is paring its collapse as banks including BNP Paribas and Bank of America predict the rout may soon be over.
“You’ve probably seen the worst,” said Bill O’Grady, chief market strategist at Confluence Investment Management. For WTI, “my hunch is that we will hold the $US80 level. But I won’t be shocked if we do retest it.”
Brent for December settlement increased 34 US cents to end at $US86.16 on the London-based ICE Futures Europe exchange. Prices touched a four-year low of $US82.60 yesterday before closing up 0.8 per cent. Prices are down 4.5 per cent this week and 22 percent this year.
“Prices have likely overshot to the downside,” Jeffrey Currie, Goldman’s head of commodities research in New York, said in the report. “This leaves us near-term constructive, despite being long-term bearish.”
“In terms of magnitude we now see more upside risk to oil price than downside risk, but we would not rule out another several weeks of price weakness,” Katherine Spector, a commodities analyst at CIBC World Markets, said in a report yesterday.
In a week when stock markets were roiled over concern that the global economy is faltering, US homebuilders had the biggest gain in almost nine months.
The 11-member S&P Supercomposite Homebuilding Index has rallied 6 per cent since Oct. 10, the largest weekly increase since January, as global turmoil fuelled a plunge in mortgage rates and housing starts jumped. The broader S&P 500 Index fell for a fourth week.
“Even when the market was having some pretty bad days this week, the builders outperformed,” said Megan McGrath, a housing analyst with MKM Holdings. “A lot of little things have gotten together to get people maybe a little more optimistic.”
A drop in mortgage rates has the potential to boost home sales and gives builders reason to take on more projects. Average rates on 30-year home loans fell this week to 3.97 per cent, the lowest since June 2013, according to Freddie Mac. The Commerce Department said yesterday that housing starts climbed 6.3 per cent in September to an annual pace of 1.02 million, crossing what McGrath called the “psychologically important” 1 million barrier.
Homebuilders extended gains after reports yesterday that the Federal Housing Finance Agency, which regulates Freddie Mac and Fannie Mae, plans new steps to encourage lending to buyers with less-than-perfect credit scores. The FHFA also is planning an effort that will allow buyers to make down payments as small as 3 per cent of the purchase price, two people with direct knowledge of the matter said.
“That’s good news,” said Jeff Meyers, president of Meyers Research, a homebuilding-consulting unit of Kennedy Wilson Holdings Inc., based in Beverly Hills, California. “The mortgage industry is the No. 1 issue holding up growth in housing.”
The rebound in the housing market boosted homebuilding-related stocks in the US. Photo: Bloomberg
Fresh talk of monetary policy staying easier for longer sparked a solid bounce in global sharemarkets on Friday, setting the stage for a positive start to local trading.
Here’s what you need2know:
• SPI futures up 68 pts, or 1.3 per cent, at 5305
• AUD at 87.41 US cents
• On Wall St, S&P 500 +1.3%, Dow +1.6%, Nasdaq +1%
• In Europe, Euro Stoxx 50 +3%, FTSE +1.9%, CAC +2.9%, DAX +3.1%
• Spot gold down 49 US cents to $US1238.32 an ounce on Friday in New York
• Brent oil up 26 US cents to $US86.08 per barrel on Friday in New York
• Iron ore 50 US cents higher at $US80.82/tonne.
What’s on today:
• Australia: Speech by RBA assistant governor Christopher Kent.
• Medibank prospectus expected at 10am AEST
Stocks to watch:
• Arrium Q1 output
• Iluka confirms talks with Kenmore Resources, says no certainty talks will take place
• Mineral Resources says director Mark Dutton won’t seek re-election
• Resolute quarterly production
• Rio Tinto retracts erroneous iron ore presentation
• Slater & Gordon AGM in Melbourne
• Sonic Healthcare raised to buy v hold at Deutsche Bank, price target $20.50
• Western Areas raised to buy from hold at Bell Potter with PT $5.20; also raised to outperform at Credit Suisse with same price target
• Commonwealth Bank kept an “underweight” recommendation on The Reject Shop, but dropped its price target to $6.90 a share from $7.60 after a trading update showed challenging conditions
• Citi Research maintained a “buy” rating on Fortescue Metals Group, but lowered its target price to $4.50 from $4.70.
• Morningstar raised Computershare to “accumulate” from “hold” with a “medium” fair value uncertainty, a “narrow” moat and a $13 a share fair value.
Good morning and welcome to the Markets Live blog for Monday.
Your editors today are Jens Meyer and Patrick Commins.
This blog is not intended as investment advice.
BusinessDay with wires.
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