That's it for Markets Live today and for the week.
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The Reserve Bank has warned bank shareholders to brace for possible cuts to dividends as profits are squeezed by higher levels of regulatory capital. The central bank has also cautioned banks against taking on extra risk to maintain their historical levels of profitability.
In its semi-annual health check of the financial system, the RBA said banks are expected to "steadily accumulate capital" as the Australian Prudential Regulation Authority finalises the framework for building "unquestionably strong" banks, the standard set down by the financial system inquiry in 2014.
APRA head Wayne Byres told a parliamentary committee that he is waiting for clarity from the Basel Committee on Banking Supervision, expected by the end of this year, before finalising calibration of the capital rules for Australian banks in 2017.
With earnings growth subdued, the RBA said banks "may need to reduce their dividend payout ratios if they want to increase capital ratios without issuing new capital. An increase in capital could also exert downward pressure on the banks return on equity."
ANZ cut its interim dividend in May but Morgan Stanley analyst Richard Wiles said on Friday "the other majors' payout ratios are still increasing, so the risk of dividend cuts remains".
He reckons CBA, NAB and Westpac will need to raise $16 billion in additional capital by the end of the 2018 financial year.
The Australian sharemarket ended the week underwater, led down by mining and bank stocks as investors prepare for an interest rate hike in the US and investment banks turned negative on miners.
News from the US, including a fiery presidential debate between candidates Donald Trump and Hillary Clinton as well as the release of minutes from the Federal Reserve that points to an imminent rate hike influenced the market, as well as local pessimism towards the prospects for resources and energy stocks' rallies.
The S&P/ASX 200 Index finished the day marginally lower at 5434.0. posting a 0.6 per cent loss for the week, its first loss in four weeks.
Resources stocks were the biggest drag this week, with BHP Billiton the worst hit among the big caps, falling 3.3 per cent, while Rio Tinto lost 1.8 per cent
It came after analysts for Citi and UBS downgraded the biggest resources stocks, which have outperformed the broader market this year.
"The big story in the back half of the year will be the weakness in the resources stocks, they've run very hard and ahead of fundamentals," Aurora Funds Management portfolio manager Hugh Dive said.
Energy stocks were also lower. On Friday Credit Suisse downgraded Oil Search and Santos to "underperform" in a broader note which said the valuations of the entire sector looked stretched. Brent crude oil eased a little from its high of $US53.14, fetching $US52.09 a barrel on Friday.
Dive said both iron ore and oil were also approaching seasonally weak periods, and more weakness in the stocks is expected.
The big four banks were also among the biggest drags, with ANZ down the most, falling 2.6 per cent over the week, followed by NAB, down 1.5 per cent. Commonwealth Bank however finished the week in the green.
Dive shrugged off the weakness, which he attributed partly to the rising expectations of an interest rate hike in the US, and said the banks tend to do well in rising interest rate environments.
"We're moving into reporting season and the banks tend to outperform in October," he said. "Overwhelmingly the bad debt numbers that will come out in October and November won't be as bad as people are expecting."
Telcos, led by a strong week from Telstra, and consumer staples - led by Woolies - were the best performing sectors for the week.
Telstra gained 1.4 per cent and Woolies ended the week 1.6 per cent higher.
A $400 million bid for Australia's largest landholder S.Kidman & Co from a fund backed by up to 50,000 ordinary superannuation funds through the ASX-listed Equity Trustees is to be lodged later this month.
Steve Burgin, an ASIC licensed adviser with Melbourne-based financial planning group Interprac, issued a statement confirming the group has 50,000 clients pre-registered to commit part of their super funds to direct agricultural interests.
"There's no doubt the Kidman sale has opened many ordinary people's eyes to the opportunity of being part of Australia's pastoral industry via their superannuation funds, and we are keen to progress our plan to see that happen for as many of them as possible."
The attempt comes days after Australia's richest person Gina Rinehart and her Chinese joint venture partner Shanghai CRED launched a $365 million bid which could be approved within six weeks following vocal support from politicians.
Other late bids are also expected with family syndicate BBHO - representing family names Brinkworth, Buntine, Harris and Oldfield - also said to lodge a bid later this month which could see a break up of Kidman's 10.1 million hectares.
However, the legitimacy of these bids is questioned especially given how late they have come and how sophisticated their structure and funding is for such a major investment.
Foreign inflows into Australian equities remain disappointing, hovering at six-year lows, according to Deutsche which has analysed the latest ABS Financial Accounts data.
But the bank's analysts say this could change, considering the ASX is the highest-yielding developed market and as resource stocks rebound.
"Foreign inflows have tended to pick up after weakness in the currency and the market," strategist Tim Baker says. "After years of being out of favour for several years, resource stocks are performing which may attract foreign money."
Baker adds that foreign investors could start covering some of their record underweights in the banks at some point.
"This is likely to require a receding of regulatory risks and an easing of housing correction fears. Perhaps a story for 2017."
The big banks' share prices are up by around 10 per cent since June, but Morgan Stanley analysts don't see any reason to change their downbeat view on the sector.
The banks' weak outlook has not "materially changed", despite the price rises, the analysts say, who point to a witch's brew of downside risks.
"Our negative stance does not reflect a single source of downside risk," they write. "Instead, we see a combination of falling margins, rising loan losses and ongoing capital build. This weighs on the outlook for earnings per share, dividend and return on equity and justifies absolute and relative trading multiples below the long-run average."
In what would be of major concern to many a bank shareholder, the broker sees risks ahead for the precious dividends.
"While ANZ has adopted a 'more conservative and sustainable' dividend, the other majors' payout ratios are still increasing, so the risk of dividend cuts remains," the analysts write. "The best case outcome looks to be 2-3 years of flat dividends, with an ongoing EPS and ROE drag from dividend reinvestment plans. In our base case, we forecast a dividend cut at NAB [in the 2017 financial year]."
Well that's the bad news. More optimistically, the Morgan Stanley team think "a better economic outlook in 2017 and more certainty on capital requirements are the two main upside risks".
They like ANZ the most, assigning it an overweight rating: "We think the new institutional bank strategy can work, the risk of a capital raising has receded, the dividend outlook is better than that of the other majors and the 2-year EPS downgrade cycle is ending.
"In our view, these factors can drive a re-rating versus peers."
They are equalweight Westpac, and underweight CBA and NAB.
Their chart below showing bank performance versus bond proxies is unrelated, but it's a good 'un.
Shares are on track for a weekly loss of 0.5 per cent, their first drop in four weeks.
The main drag on the index is BHP, which has slumped more than 3 per cent over the week, accounting for roughly one-third of the ASX's weekly fall.
The losses come after the big Australian hit a 2016 high of $23.87 just on Tuesday, and follow drops in commodity prices as well as a number of downgrades by analysts saying the stock has run too hard.
Other major losers over the week are ANZ (-2.3 per cent), NAB (-1.4 per cent), Oil Search (-4.9 per cent) and Iluka (-11.4 per cent).
Some of the big winners are Telstra (+1.6 per cent), Woolies (+1.9 per cent) and Newcrest (+2.5 per cent).
Housing bubble watch, dispatch #374: Australia's house prices have hit new record highs, but valuations remain below a number of countries, UBS says.
Housing "exuberance" clearly accelerated in the first half of this year, UBS says using data made available by the Dallas Federal Reserve (yep), with valuations having risen 23 per cent over the past four years, the second fastest of the 23 country data set.
Despite this, Australia's house prices remain below those of Canada (by 16 per cent), Norway and Israel (both 9 per cent higher), Belgium (3 per cent), Switzerland, Sweden and New Zealand (all 2 per cent higher), according to the data.
"Indeed New Zealand has moved above Australia in the first half of 2016 for the first time in nine years," economist George Tharenou says.
And when looking at price/income ratios, capturing potentially stronger income in a country, Australia only ranks seventh (the top two being Canada & Italy), "remaining well shy of any 'bubble trigger' as far as recent momentum goes", he adds.
"Despite this, while price momentum looks stretched, Dallas Fed calculations don't currently reveal 'bubble like' exuberance in real per capita house valuations," economist George Tharenou says.
Shares in SinoChem, the state-run chemicals group, have leapt by the daily trading limit in China amid reports the company will be merged with its peer ChemChina, reports the FT.
The speculation comes relatively hot on the heels of ChemChina, which is unlisted and also state-owned, recently agreeing to buy Syngenta, the Switzerland-based seed supplier and pesticides producer, in a $US44bn deal that is still subject to final regulatory approval.
Shares in SinoChem were up 9.2 per cent higher at Rmb10.49, but soared as much as 10 per cent, the daily price limit, in China, following reports of the possible tie-up by Bloomberg citing sources close to the deal.
There has been speculation a number of major Chinese companies within key industries were ripe for consolidation, particularly those suffering from severe overcapacity. In September Baoshan Iron and Steel took the first step in subsuming Wuhan Iron and Steel, a takeover that will produce the world's second-largest steelmaker by volume that is part of a renewed push to end dominance of the sector by small private firms accounting for half of China's output.
In 2014, Beijing announced it would merge its two largest train manufacturers, CSR Corp and China CNR, with the aim of creating a global champion that could compete more effectively against rivals in Canada, Europe and Japan.
Carefully spoken Platinum Asset Management co-founder Kerr Neilson has a few choice words for investors: forget bonds, forget US equities and if you're feeling lucky, have a punt on Deutsche Bank.
Speaking a conference in Sydney, Neilson outlined his optimistic global growth future and thinks if you focus on solid cash flow, there are plenty of opportunities to make some serious money.
"We don't think [Deutsche Bank] will go bust, simply because it's got about $200 billion free assets and it's a liquidity squeeze," said Neilson. "They get damaged by people like us saying, do we want the embarrassment of this important counterparty holding our assets or making our margin calls? So we reduce our amount of business with Deutsche Bank and it sustains heavy damage."
"But in terms of a company selling at 75 per cent discount to book, my inclination is to have a punt," said Neilson. "But size it by how much I'm prepared to lose. If you think about it in those terms, you could make some good money."
Neilson also outlined his disgust at the current bond market, saying it has absolutely reached the end of its 30-year bull run.
"Now if you want to keep betting on that, go ahead," he said. "I have no interest in buying bonds that are yielding me nothing. I'll take my chances with well run interesting investments every day, rather than put in the hands of governments who are doing their damnedest to debase our money, and get us out to spend."
Neilson also points to US equities trading on 20 times earnings as a concentration of risk and sees plenty more opportunities outside. The MSCI Index is weighted 53 per cent in favour of the US market, which only accounts for 16 per cent of world output.
"Whereas poor old India and China, who simply produce a quarter of the world's stuff is only about 3 per cent of the index," said Neilson. "This kind of weighting does not even get close to reflecting the profit pools or the economic significance of these other areas. The US looks stretched to us."
The finalisation of the December quarter price for soft coking coal - $US130 a tonne up from $US74 a tonne last quarter, up some 56 per cent - signifies just how big an injection of liquidity coal miners will receive, enabling them to get their balance sheets into shape following a lean few years.
It comes as some analysts are already advising clients to take money off the table following the surge in coal prices over the past few months.
Few expect the price rise will be sustained, as more marginal production hits the international market, from both Australian and Indonesian producers, for example, as the big users - the large steel mills of north Asia - seek to encourage more supplies in a bid to drive down the price next quarter and beyond.
The December quarter price for hard coking coal - which is the better quality coal exported mostly from central Queensland, was reportedly fixed at around $US200 a tonne. In the spot market it had been trading around $US210 a tonne prior to the settlement, with the expectation the price would be fixed at $US180 a tonne or so.
"The rapid rebound in coking coal prices is a timely reminder of the tightness of the market for this key ingredient for steel making," Stanmore Coal managing director Nick Jorss said. "The coking coal market has been significantly underinvested over recent years in response to low price signals and lacks a pipeline of advanced projects to address the depleting supply of what is essentially a scarce resource."
New Hope shares are ahead 4 per cent at $2.01, Whitehaven 3.3 per dent at $2.85 and Stanmore Coal 11 per cent at 83c.
Malabar, which has been linked with a purchase in the Hunter Valley gained another 16.7 per cent to 35c.
Staying on the "Ooh, isn't the US sharemarket expensive" theme from earlier (see post at 1:10), this week Bank of America-Merrill Lynch analysts pointed out that the average S&P 500 stock is trading near tech bubble levels.
The chart below tells the story, but here are the analysts' words:
The S&P 500 median P/E is currently at its highest levels since 2001 and suggests that the average stock trades a full multiple point higher than the oft-quoted aggregate P/E. This puts it in the 91st percentile of its own history and just 14 per cent from its tech bubble peak.
That said, the BoA-ML spreadsheet jockeys do note that while US stocks look expensive against history, they look cheap versus bonds:
The S&P 500 aggregate forward P/E compressed slightly in September (to 16.7 from 16.9), as the index was little-changed but EPS expectations ticked up. This is 10 per cent above its historical average P/E. The market remains stretched vs history on most measures we track, with the exception of normalised P/E (our preferred valuation measure) and price-to-free-cash-flow.
Relative to other asset classes, the case for stocks is most compelling vs bonds, where the risk premium remains elevated and the S&P 500 dividend yield trades near a 60-yr high vs the 10yr Treasury yield. Meanwhile, oil still looks cheap vs stocks, and the S&P trades in-line with history relative to gold and small caps.
The surprise annual rise in Chinese producer prices is likely due to the recent surge in commodity prices such as coal, but should still ease any lingering deflation concerns.
Domestic coal and steel prices have rallied in recent months due to tighter supplies brought about by the closure of some production to reduce surplus capacity and from sector restructuring.
Capital Economics China economist Julian Evans-Pritchard says he expects PPI will continue to rise given a more flattering base for comparison from the drop in commodity prices late last year.
"That said, persistent oversupply in large parts of industry means that significant price pressures are unlikely to develop."
China's factory prices have been falling since March 2012, and more than four years of producer price deflation have squeezed industrial companies' cash flow and impaired their ability to service their debts.
Corporate China sits on $US18 trillion in debt, equivalent to about 169 per cent of gross domestic product, according to the most recent figures from the Bank for International Settlements. Most of it is held by state owned companies.
Industrial profits have improved in recent months due to stronger prices for commodities, giving the economy a much-needed boost. Construction-related firms also have seen a surge in business thanks to a government infrastructure building spree and housing boom.
"It is a very good sign," Credit Agricole strategist Dariusz Kowalczyk said of the rise in producer prices. "It tells us that the profitability of Chinese companies is likely to continue to increase."
Is the US sharemarket about to plunge dramatically, a la 'Black Monday' in October 1987?
Citi has taken a look at the S&P500 chart then and sees some remarkable similarities to today's development (see attached chart).
The bank's analysts note the recent slide in bond yields, the slump in gold as well as the crazy action in currency markets, which were spooked by the pound's flash crash last week and wonder if the S&P500 "is the next shoe to drop".
The chart is a few days old and Wall Street has shown a bit more volatility since then, but it's not yet fallen off the cliff. Then again, Black Monday was October 19, so there's still a few days to go...
Keep in mind that juxtaposing a current chart of the sharemarket with previous performances is a favourite pastime of market bears looking for patters to repeat. But they seldom do.
However, other chart gazers agree that a level of 2119 in the S&P, or around there, is something to keep an eye on.
"A closing break of 2116 and I would expect stronger downside risks at a time when US corporates are not allowed to buy back stock," says IG strategist Chris Weston.
The Chinese inflation numbers immediately jolted the local market out of its midday slumber, boosting the Aussie dollar and even stocks, while bonds resumed their sell-off.
The Aussie dollar broke through US76¢ on the data, but has since come back a bit trading at US75.93¢, up
Shares extended their small early gains, with resources stocks trimming losses and the big banks starting to move into the black.
Meanwhile, bonds sold off again, after earlier in the day extending yesterday's rise, with the yield on the 10-year government bond rising to 2.268 per cent. Local bonds had sold off.
Is inflation finally back? That may be a tad early to claim, but China has just released some surprising data showing prices rising more than expected.
The country's consumer prices rose 1.9 per cent in September from a year earlier, stronger than the 1.6 per cent rise economists were expecting.
Even more remarkable producer prices rose in September for the first time in nearly five years, also beating market expectations.
Producer prices edged up 0.1 per cent from a year earlier, the National Bureau of Statistics said on Friday, compared with the previous month's fall of 0.8 per cent. It marked the first growth in PPI since January 2012.
Analysts had predicted producer prices would fall 0.3 per cent on an annual basis.
Given a close link between the country's factory-gate costs and its export prices, the swing to positive may ease disinflationary pressures in Australia, Europe, the US and other big buyers of China's wares.
"It is a very good sign," said Credit Agriocole strategist Dariusz Kowalczyk. "It tells us that the profitability of Chinese companies is likely to continue to increase."
The risks of oversupply the Brisbane and Melbourne apartment markets are "coming to the fore", the Reserve Bank warns.
The RBA in its semi-annual health check of the financial system, says the financial system is in good shape overall, particularly with home price growth slower than a year ago, tighter lending standards and slower credit growth to households.
However, the central bank says the risks from apartment oversupply in some markets are now starting to show.
"These risks appear greatest in inner-city Brisbane and Melbourne, where new supply is largest relative to existing dwelling stock," the Reserve Bank said in its Financial Stability Review.
"Developers face the risk that off-the-plan sales of apartments in these areas fail to settle due to tighter lending standards for buyers (particularly non- residents or those relying on foreign income) and valuations at settlement below the contract price."
The RBA said there were already signs that some settlements were coming in below their contract price, though the number of settlement failures was low.
The review said banks had recently restricted lending to borrowers relying on foreign income, which could further trim demand for inner-city apartments.
Australians in aggregate were 2 ½ years ahead on their mortgage payments, but that masked significant differences across individual borrowers – many of whom had little or no buffer, especially "the newest borrowers" and those "with lower wealth and income or higher leverage."
The RBA appeared relatively relaxed about house price rises in Sydney and Melbourne which it noted had "nudged higher" while auction clearance rates increased.
The central bank also noted that local banks had recently boosted their capital, in line with new standards, but reduced their focus on lower-return activities to meet their return-on-equity expectations over the medium term.
"These behaviours need to be watched closely to ensure any behavioural changes do not materially increase systemic risk," the review noted.
Meanwhile, the central bank sees the high level of debt in China, despite slower growth and signs of excess capacity in some areas, as the most pronounced global risk.
"While authorities in China have the levels to support growth, using many of them would likely entail a further increase in debt that could increase risks to long-term reform and stability," the RBA added.
Bond prices may have stabilised for now, but the AFR's Christopher Joye reckons the selloff hasn't nearly ended:
The biggest deal in financial markets right now is the high-stakes battle between bond bulls and bears over the right level for long-term, risk-free interest rates, colloquially known as "duration".
The savage "sell-off" in duration has intensified in October: the value of a portfolio of ostensibly "defensive" AAA-rated Australian government bonds declined 0.39 per cent in September and has slumped another 1.8 per cent in the first 12 days of October (or by 2.2 per cent in total). That's more than a two standard deviation sell-off – and I expect worse is to come.
Current yields appear incongruous juxtaposed against an exceptionally strong four-year-long boom in house prices, the 5.6 per cent jobless rate (in line with its average over the past 16 years), real economic growth of 3.3 per cent that is above the 3 per cent trend since 2000 and Australia's trade-weighted exchange rate, which is on par with its average over the past decade and a half.
Indeed, the RBA's interest rate policies look positively irresponsible considering they have inflated the national house price-to-income multiple to a record level of 5.7 times (compared with just 4.2 times in 2000) and the household debt-to-income ratio to an equally unprecedented 186 per cent (up from 127 per cent in 2000).
The only variable that argues in favour of yields trading at 38 per cent of their historic marks is core inflation, which as a result of the sharp decline in commodity prices in 2015 and benign wages growth, has slid below its trend level to 1.5 per cent in the year to June 2016.
Here's more, including why super funds should be required to report risk ($)
Iluka Resources is one of the biggest losers on the ASX today, after Deutsche cut its price target to $5.00 due to weaker than expected zircon prices.
Shares have fallen as much as 7.8 per cent to an eight-month low and are currently down 5.45 per cent at $5.55.
Iluka stock was already under pressure on Thursday, after the miner said it expects a 10 per cent drop in mineral sands output in the September quarter.
Fantastic shares are soaring after the discount furniture retailer agreed to a "compelling" takeover valuing it at $361 million from the acquisitive South African owner of the Freedom and Snooze furniture chains.
Shares are up 42 per cent at $3.48, close to Steinhoff Asia Pacific Holdings' $3.50-a-share bid. It has the support of Fantastic's two key shareholders, which own just over half of the company, and the board in the absence of a superior offer and subject to an expert's report, Fantastic said in a statement to the ASX.
Steinhoff Asia Pacific already owns furniture and homeware brands Freedom, Snooze, POCO and Bay Leather Republic in Australia, as well as mattress manufacturing business, Selectopedic.
It was recently speculated to also be interested in Woolworths's discount department store chain Big W, as well as The Good Guys, which was bought by JB Hi-Fi.
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