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The ASX 200 charted a steady course higher through the day as investors piled back into bluechips to put the finishing touches on a post-Fed relief rally that pushed the benchmark index back above 5400 points.
The ASX 200 closed 56 points or 1.1 per cent higher to 5431, bringing the week's gains to 2.5 per cent. Since the big sell-off last Monday, the market has added more than 200 points as global jitters around dwindling central bank support subsided.
The big banks and miners led the index higher today and over the past five days. The major lenders enjoyed a particularly strong day today, as NAB climbed 1.7 per cent, ANZ and Westpac 1.3 per cent, and CBA 0.7 per cent. Macquarie lifted 1.8 per cent. Woolies jumped an impressive 2.6 per cent, but Wesfarmers only added 0.1 per cent. CSL jumped 1.6 per cent and Telstra 2 per cent.
Over the week the gains were broad, as three in four of the top 200 climbed. The worst for the week was TPG, which ended down 23 per cent after issuing guidance below the market's expectations.
As the yield trade reaches exhaustion point, investors should consider jumping before they are pushed, writes one of your Eds:
Nothing lasts forever, and investors are increasingly concerned that the wheel of central bank easing has turned as far as it can this cycle.
"We think central bankers are finally waking up to the limits and the risks of prolonged QE and negative interest rates policy," Alberto Gallo of Algebris Investments says. The recent signals from the ECB and, this week, the Bank of Japan suggest he's right.
So how do you invest when the monetary tide is turning? It's what everybody is trying to figure out – when to jump, and to where.
"Markets are in a transition phase where the 'old' is being questioned at a time when conviction in the 'new' is not high," write Macquarie strategists. This uncertainty is creating "volatility around traditional pockets of strength". In terms of the local sharemarket, those pockets are the stocks that have benefited the most from falling global rates (such as listed property trusts, infrastructure names and utilities) or which have been pumped up by the pursuit of earnings growth at "very nearly any cost".
"Earnings disappointment is generally the death of [expensive] growth stocks," the Macquarie team write. "And [higher] bonds yields are generally the death of [expensive] dividend yield stocks."
Valuations have to matter at some point, and are more likely to weigh on future returns if the stiff tailwinds of recent year have indeed run out of puff.
This is so well-known by now that you'd expect the investment community to be jumping out of assets that have been the main beneficiaries of ever-lower rates to hording cash and maybe gold, and rushing to short bonds and sell their overpriced houses.
Yet little of that is happening.
Gallo believes "markets are complacent about the risks of an end to QE infinity". Investor positioning suggests he is right.
Globally, investors are yet to put their money where their mouth is. The world's most crowded trades remain in those pockets of the market which have benefited the most from the low-growth, low-rates era, Citi's director of equity sales Chris Willcocks says.
For example, in the US investors remain overweight listed property, consumer staples, healthcare and tech, while underweight commodities and financials. More broadly they are also underweight emerging markets. History suggests that this is the opposite way to be positioned heading into a rising yield environment, according to Citi research.
"Investors are actually underweight in all the areas that will, based on historical precedent, do well in a rising yield environment," Willcocks says.
Forget the wealth effect: you're not as rich as you think you are, writes Satyajit Das:
The idea that the world is awash in savings - one factor seen behind the stalling growth in developed countries - is, on the surface, a persuasive one. Too bad it may not be true.
Yes, the postwar generation is wealthier than any before it. But the ultimate value of any investment depends upon being able to convert it into cash and thus generate purchasing power. In fact, the world's accumulated wealth - around $US250 trillion ($327 trillion), according to Credit Suisse's Global Wealth Report - is almost certainly incapable of realisation at its paper value. The headline number thus vastly overstates the supposed savings glut.
Most of these savings are held in two forms: real estate, primarily homes, and retirement portfolios that are invested in shares and bonds.
Both are rising in value. A combination of population growth, higher incomes, increased access to credit, lower rates and, in some cases, limited housing stock have driven up home prices in key markets including Australia; those who got in early have done especially well. Meanwhile, increased earnings and dividends, driven by economic growth and inflation, have boosted share values. So have loose monetary policies designed to counteract the Great Recession since 2009.
Yet the appreciating value of one's own home doesn't automatically translate into purchasing power. A primary residence produces no income. Indeed, maintenance costs, utility bills, council rates and property taxes - which often rise along with home prices - mean that houses are cash-flow negative.
To turn one's gains into real money would require borrowing against the value of the property. Those loans cost money to service and expose owners to fluctuations in property values. The property can always be sold, of course. But much of the profit is likely to be eaten up by transaction and relocation costs - not to mention the cost of a new home, which will also have risen in value.
Jobs growth may be slowing but UBS has lowered its forecast for the unemployment rate to 5.7 per cent at the end of this year, from around 6 per cent, and to 5.5 per cent by the end of 2017.
But it's not all good news as UBS sees a "soft underbelly" to the jobs market: "the fall in unemployment significantly reflects falling participation, while jobs growth has been driven by part-time rather than full-time, seeing downward pressure on hours-worked & household income earned."
Gold stocks may have given back some of yesterday's supercharged gains, but local miners can't complain about a lack of interest from US investors.
The bulk of ASX listed mid-tier gold producers have seen an increase in the percentage of their register held by North American investors over the past 12 to 18 months.
In the year to June 30, Newcrest Mining said its North American holding jumped 5 per cent to about 38 per cent.
The chunk of mid-tier player Saracen Mineral Holdings' register held by US investors has increased to about 22 per cent from about 9 per cent over the past 12 months while Evolution Mining's has jumped from about 15 per cent to about 26 per cent and St Barbara has recorded an increase from 15 per cent to 35 per cent.
And the buying is continuing.
Global Mining Research managing director David Radclyffe said based on the positioning of more than 20 top global gold funds, the weighted average holding to Australia had increased to 10.1 per cent from about 8.8 per cent at the end of March.
Radclyffe said the move was "driven by the outperformance of Australian gold companies and buying in Australian equities such as Newcrest", with Newcrest among the top additions across the funds over the past three months.
The VanEck Vectors Gold Miners ETF, the world's largest global gold equities ETF, had a weighted holding to Australia of 12 per cent as at the end of August. One of the largest shareholders in nine ASX-listed gold companies, it increased its holdings this week in Northern Star Resources, St Barbara, Resolute Mining and Newcrest.
IFM Investors and AustralianSuper have made an unsolicited approach to buy Ausgrid, NSW's biggest electricity network company.
NSW Treasurer Gladys Berejiklian said the government would give the proposal full consideration but was preparing to re-launch the Ausgrid auction as planned.
It comes as NSW prepares to run an auction for Ausgrid, after failing to sell a 50.4 per cent stake in the business earlier this year.
Sources told the AFR's Street Talk column that the two investors, who are proposing to buy the stake as part of a consortium, had approached the government soon after the Ausgrid auction failed, and firmed up its interest more recently.
The up-for-sale Ausgrid stake is expected to be worth more than $10 billion.
It would be highly unusual - although not unprecedented - for a government to sell such as asset without going to auction.
Goldman Sachs has sharply raised its price forecasts for coking coal for the next two years, after this year's frenzied rally fuelled by a shortage in China that should revive idled mines from Mozambique to the United States.
China's push to tackle a coal glut by imposing a 276-day cap on domestic coal mines earlier this year created a significant deficit, lifting the country's coking coal imports by 18 per cent over January to August.
The spot price of Australian premium hard coking coal has surged 164 per cent this year to $US206.40 a tonne yesterday, making the commodity the best performing among those covered by Goldman.
Goldman has increased its 2017 forecast for premium hard coking coal from Australia's Queensland by 64 per cent to $US135 a tonne. It raised its 2018 estimate by 47 per cent to $US125.
"In our view, the impact of Chinese government policies on the global market will continue long after production volumes have recovered," Goldman analysts Christian Lelong and Callum Bruce said in a report.
While Chinese policy makers will eventually have to relax production limits, supply-side reforms aimed at ensuring the survival of domestic miners should result in a higher equilibrium price for seaborne coal, they said.
"The main beneficiaries of higher-than-expected seaborne demand are the United States, Australia and Mozambique."
Bank of Japan governor Haruhiko Kuroda's mission to control government bond yields is faltering just days after he announced it.
Japan's 30- and 40-year bonds have jumped and yields tumbled, which is the opposite of what the central bank wants. Kuroda announced Wednesday he plans to control bond levels, yet he failed to convince traders he has the tools to achieve the goal.
Japan led a global bond rout prior to the announcement amid speculation the BoJ wants to increase the gap between short- and long-term yields, known as a steepening of the curve. Friday's bond rally raises concern Kuroda's latest effort to support the economy and head off deflation is already off to a weak start.
After 3 1/2 years of his unprecedented monetary policy, the inflation gauge monitored by the central bank is stuck below zero.
"People may fear the BoJ cannot control the yield curve," said Yoshiyuki Suzuki, the head of fixed income in Tokyo at Fukoku Mutual Life Insurance. "I believe the BOJ desires a steeper yield curve, but they can't guarantee it."
Meanwhile, the Nikkei has also run out of puff, after rallying nearly 2 per cent on Wednesday following the Bank of Japan's decision (yesterday was a public holiday).
Profit taking in bank shares, which had led Wednesday's rally, has pulled the Nikkei down 0.1 per cent. A strengthening in the yen agains the US dollar also isn't helping.
But the rise in the currency may be only temporary, as the market responds to the shift in the BoJ's inflation target from 2 per cent to above 2 per cent, said Goldman Sachs.
"We expect the rally in the yen to reverse, as this policy shift should help address market concerns about the scarcity of JGBs, thus increasing the sustainability and credibility of continued monetary accommodation," said Goldman Sachs head of macro research Francesco Garzarelli. "The 'inflation overshoot' language is also a fundamentally dovish shift."
There is inflation out there, it's just not in the real economy. Unfortunately the chart makes no mention of Australian house prices, which are up more than 50 per cent since January 2009 (and more than 80 per cent in Sydney).
The Bank of Japan may have held fire this week, but that doesn't mean that this year's wave of monetary easing is slowing.
Both Indonesia and Turkey yesterday slashed rates again in an effort to spur growth in their respective economies.
Indonesia's central bank, moving while inflation is the lowest in years and as the Federal Reserve stood pat, escalated efforts to spur lending by cutting its benchmark interest rate for the fifth time this year.
Bank Indonesia (BI) trimmed the 7-day reverse repurchase rate, its benchmark since last month, by 25 basis points to 5.00 per cent, and Governor Agus Martowardojo indicated more easing might be ahead.
"Subdued inflation, along with stability in both the current account deficits and exchange rates, has created policy space for rate cuts," said Weiwen Ng of ANZ, adding that there could be more easing ahead.
Earlier in the day, Turkey's central bank cut its overnight lending rate by 25 basis points to 8.25 per cent, setting aside concerns about inflation and possible ratings downgrades after repeated calls from President Tayyip Erdogan for cheaper credit.
"The tone of the (central bank's) statement is dovish, so they are likely to continue easing," said Erkin Isik, a strategist at Turk Ekonomi Bankasi. "Given the supportive global backdrop after BoJ and Fed meetings, the market is likely to price-in further cuts," so short-term yields will probably decline towards the one-week repo rate, he said.
Despite the cut and the dovish tone, the Turkish lira climbed 0.5 per cent against the US dollar following the move.
A total of 57 monetary authorities around the world have now eased policy since the beginning of last year in the face of slowing growth and inflation. Indonesia's cut was the 199th easing step in that period.
German economic growth is set to slow, but spending on refugees is buffering the slowdown, Morgan Stanley says in a report.
Citing external headwinds, the note forecasts German GDP growth will slow from 1.5 per cent this year to just 1 per cent next year, no longer outperforming the wider eurozone. Morgan Stanley data said the last time that occurred was 2009.
"A likely shortfall in foreign demand and the profound uncertainty on the future of the EU created by the UK vote to leave (Brexit) will likely hit the trade-oriented, cyclical German economy harder than others," the note reads.
Domestic demand is deemed to be the main source of growth across the remainder of 2016.
"For now, the refugee-related spending and a 5 per cent increase in pension benefits on July 1 add to the domestic demand momentum.
"However, next year rising headline inflation, higher welfare taxes, lower immigration flows and rising unemployment rates will likely limit the momentum."
The following chart shows Morgan Stanley's estimates of how much spending on (as well as spending by) refugees will contribute to Germany's GDP over the coming years.
While the impact of additional government spending is largest this year, next year the main contribution to growth comes through labour market effects, as refugees satisfy the economy's demand for cheap and in some cases skilled labour,
The ASX has blamed a "complex" and "unprecedented" hardware failure for its outage on Monday that forced the early close of trading.
One of the biggest sources of interest is determining why the ASX couldn't rely on its back-up site in Bondi when its primary site failed.
The ASX said its disaster recovery system (DRS) was tested as recently as July 27. Monday was the most serious failure by the ASX's systems since its outage of October 27, 2011, which coincided with an options expiry day. The failed hardware was replaced on Monday night and the market re-opened on Tuesday.
ASIC to investigate ASX meltdown
Treasurer Scott Morrison has announced an ASIC review of the technical glitch that hit the ASX this week.
Oil has pared gains as rival OPEC members Saudi Arabia and Iran met in Vienna for a second day before the wider group gathers in Algiers to discuss action to stabilise the market.
WTI futures dropped as much as 1 per cent and are currently at $US45.90 a barrel after rising 2.2 per cent overnight, while Brent is down 0.7 per cent at $US47.32.
Officials from the two countries, whose rivalry derailed an oil supply accord earlier this year, are yet to reach an agreement, a person who was briefed on the discussions told Bloomberg.
Now is the right time for a deal, according to Falah Al-Amri, Iraq's governor to OPEC. Prices were unlikely to climb above $US50 a barrel unless the group reduces production, he said.
Oil has fluctuated since August's rally on speculation OPEC and Russia will agree on ways to stabilise the market when they meet next Wednesday.
While Venezuelan President Nicolas Maduro said members are close to a deal, all but two of 23 analysts surveyed by Bloomberg said an agreement to limit production is unlikely. Freezing output was proposed in February, but a meeting in April ended with no final accord.
Property firm Charter Hall Group's shares have slumped as much as 8.6 per cent to $4.92, after billionaire retail landlord John Gandel offloaded his stakes in the property manager and its retail trust, worth $500 million.
Gandel Group sold 79.2 million stapled securities, or 19.18 per cent, in CHG at $5.00 a share, and also offloaded its 5.65 per cent interest in Charter Hall Retail REIT at $4.02 a share.
Charter Hall shares are down 6.6 per cent at $5.025 after coming out of a trading halt they had been placed into yesterday, while the trust"s securities fell 0.8 per cent to $4.135.
Gandel was invested in Charter Hall for many years and had backed the group's retail wholesale fund to boost it to its current $1.8 billion value.
"Gandel is undertaking the sale as part of its broader corporate planning, including focusing its capital and resources on Vicinity Centres and Australia's flagship shopping centre, Chadstone, where combined Gandel has approximately $4.5 billion invested, as well as other interests and philanthropy," the company said.
Talking about RBA chiefs, CMC chief market analyst Ric Spooner reckons that global markets have taken a lead from former governor Glenn Stevens' playbook.
He reportedly left only one item in his office for the incoming Governor – a coffee cup labelled "half full", Spooner says.
"This week's Fed meeting has triggered a risk on move for global markets but the Australian stock market has opened with a surprisingly tepid rally this morning."
One of the impacts of the current low interest rate environment is that it has shortened the market's time horizons when it comes to risk, Spooner notes.
"A Fed rate hike looks likely in December but that's months away and is not standing in the way of the market's half glass full stance at this stage.
"Perhaps more importantly the latest Fed meeting gave investors' confidence that the pace of US rate increases is likely to be very slow next year as well. This potentially leaves the Goldilocks environment for stock markets in place for some time to come."
Despite this morning's subdued open, it seems likely that the ASX 200 index will ultimately retrace more of its recent losses even if there are some pull backs along the way, he predicts.
"Recent dips have created value and now that upward momentum has been re-established buying could continue for a while yet."
For a quarter-century, Philip Lowe and a small band of like-minded peers pressed the need to manage credit growth and asset prices, sometimes to incredulous colleagues.
Now, as the RBA's new governor, his theory has more sway. In his first testimony to a parliamentary committee yesterday, Lowe emphasised the signature issue he's developed since the early 1990s, which has found a more receptive audience in the wake of the 2008 financial crisis.
Sure, the RBA could probably return inflation to target faster with more rate cuts, Lowe acknowledged, but doing so would risk igniting a new round of borrowing among already debt-laden households.
"We have considered that a very quick return of inflation to the 2 to 3 per cent range, at the cost of a material deterioration in the health of private-sector balance sheets, was unlikely to be in the public interest," Lowe said in Sydney.
Just three days earlier, he renewed an accord with the government that for the first time made an explicit link between monetary policy and financial stability.
In the formal agreement between the Treasurer and the RBA governor, which is renewed every three years, financial stability was added as an objective for the RBA.
Lowe bolstered his argument by making clear the inflation target was extremely flexible, pointing out that since its inception consumer-price gains have been outside the range almost half of the time - equally divided above and below.
"We have not been what some have called 'inflation nutters,"' he said. Most important is that the community has confidence that inflation on average will be "2-point-something," he said.
By "linking policy directly to financial stability -- read asset markets -- he has allayed much of my concern" on excessive easing, said Westpac chief economist Bill Evans. "Markets are likely to eventually scale back prospects for further rate cuts given these developments."
The AFR's Chris Joye has taken another shot at the RBA, accusing the central bank of trying to distract from the housing bubble it's stoking with rate cuts:
There's been debate about housing data quality after the Reserve Bank of Australia managed to hoodwink folks into focusing on this furphy while its May and August rate cuts have blown an even bigger housing bubble.
Recall that when the RBA recently lowered its cash rate to new lows, it argued (incorrectly) that it could do so because housing conditions were cooling.
The problem with this narrative is that the house price index the RBA has preferred over the last decade – the quality-adjusted "hedonic" benchmark produced by the world's biggest real estate data company, CoreLogic – has reported consistently strong capital gains in 2016, which have gathered pace over the past three months.
This trend has been confirmed by the cruder ABS median price index, which pointed to robust 2 per cent capital gains nationally in the June quarter after none in the first. Melbourne and Sydney homes recorded even sharper price appreciation of 2.7 per cent and 2.8 per cent, respectively, over the three months to 30 June.
These results are entirely consistent with boom-time 80 per cent auction clearance rates in Sydney and Melbourne which, contrary to the RBA's claims, are above – not below – levels registered 12 months ago.
The RBA also incorrectly stated in August that house prices had fallen in July when they had clearly increased. Whereas the RBA used to categorise auction clearance rates as one of the best real-time indicators of housing dynamics, it now talks them down.
The only signs of weakness the RBA can hang its hat on are its repeated reference to a drop in sales volumes or "turnover" in Sydney and Melbourne and the soggy conditions in Perth, where prices have undoubtedly been declining as mining investment contracts.
Yet the allegation that softer sales volumes in Sydney and Melbourne portend a deceleration in the boom is bogus. The evidence is in the volume of listings, or properties that are put on the market for sale.
The RBA's argument that the tsunami of apartments settling will flood the market with new supply is also dubious: most of these homes have been pre-sold and will have limited impact on actual listings.
Shares have opened slightly higher, extending this week's recovery rally as investors cheer signals from key central banks that the era of cheap money is far from over.
The ASX is up 0.1 per cent at 5380.8, on track for a solid weekly gain of 1.6 per cent, its first rise in six weeks.
Financials are leading the market higher, with the big banks gaining between 0.4 per cent (ANZ) and 1 per cent (Westpac). Most other sectors are in the red.
Miners are mixed, with BHP rising 0.4 per cent, while South32 has dropped 1.9 per cent and Newcrest is down 2 per cent after rallying yesterday.
Qube is up 1.75 per cent, benefiting from an upgrade to outperform, from neutral, by Macquarie.
World stock indexes and bond prices climbed, extending gains from a day earlier, when the US Federal Reserve signalled an increasingly cautious approach to future interest rate hikes.
The S&P 500 had its best two-day performance in more than two months, while the US dollar fell to its lowest in 10 days against a basket of major currencies.
"It's a bit of a relief rally," said Chris Gaffney, the president of EverBank World Markets. "Now we are onto the next piece of uncertainty, which is third quarter earnings and, of course, the election."
The Fed said it could hike rates by year-end as the labour market improved further, but scaled back the number of rate increases expected in 2017 and 2018. It also reduced its longer-run rate forecast to 2.9 per cent from 3 per cent.
That left investors feeling that any monetary policy tightening would be leisurely at best. Market pricing for a December move rose only a fraction, to 59.3 per cent from 59.2 per cent, according to CME Group's FedWatch tool.
"Lower for longer is a good thing for the equity markets..." said Paul Nolte, portfolio manager at Kingsview Asset Management in Chicago. "It basically says risk back on."
Big tech names led broad gains on Wall Street, and the Nasdaq closed at a record high for a second straight session.
While the Fed's decision yesterday to leave interest rates unchanged is lifting the broader market, optimism about fourth-quarter earnings is giving technology companies an extra boost, according to Alan Gayle, a senior strategist at RidgeWorth Investments.
"Technology is an easy place to invest in if you're playing a turnaround in corporate profits and potential turn in capital spending," Gayle said. "If you think we've gone through the worst of the profits downturn, which most people believe, the first beneficiary is likely to be technology."
The Dow Jones industrial average ended up 98.76 points, or 0.54 per cent, at 18,392.46, the S&P 500 gained 14.06 points, or 0.65 per cent, to 2,177.18, while the Nasdaq Composite added 44.34 points, or 0.84 perc ent, to 5,339.52, a record closing high.
In the bond market, benchmark US yields hit near two-week lows on revived bets the Fed would raise rates slowly due to weak economic growth and inflation stuck below its 2-per cent goal.
Traders' perception that a December rate hike is far from a sure thing, and that the Fed is on a slow path of rate normalisation, led them to favour longer-dated Treasuries over shorter-dated issues. The move pushed the yield curve to its flattest level in more than a week.
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