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Some late buying wasn't enough to offset another pretty dismal day on the boards, which added up to a bad week, as the ASX 200 shed 147 points or 2.7 per cent, over the five sessions to 5284. Only one in eight of the big names managed to end the week in the green.
The week's poor performance was capped today by a 9 per cent drop in AMP. Fellow bluechip Wesfarmers sunk close to 9 per cent over the five days. Both were punished for disappointing earnings updates, and the market is obviously not in a forgiving mood. Macquarie climbed 1.7 per cent today after releasing interim profit figures.
Banks were a drag - with NAB the only one of the Big Four to record a gain after its solid annual profit number on Thursday. Next week we Westpac and ANZ report their full-year earnings.
Climbing bond yields around the world have spooked stocks which in recent years have been prized for their incomes. Sydney Airport fell 8.3 per cent this week, Scentre Group 5.2 per cent, Transurban 4.2 per cent and Westfield 4.7 per cent.
Resources, especially iron ore miners, were the big gainers as bulk commodity prices climbed. Rio added 5.5 per cent over the five sessions, Fortescue 7.6 per cent.
And there were plenty of winners and losers thrown up by a busy period of annual meeting and trading updates, while Ardent Leisure was the week's worst performer following the fatal accident at its Dreamworld theme park.
The $120 billion Future Fund nailed its timing around the reduction of some key listed property exposures in 2015-16, with its portfolio disclosures showing that Stockland, Federation Centres and Goodman exited its top-100 holdings ahead of a steep correction in property stocks, making way for American names.
Its wise moves in Australian property do not represent a departure from the sector altogether. New property interests include United States real estate investment trusts Equity Residential, SL Green Realty, Simon Property Group and Vornado Realty Trust. It also added India's Housing Development Finance Corp and maintained stakes in Scentre Group, Mirvac and GPT Group.
The Future Fund's biggest equity interest, Commonwealth Bank, remains on top, but the value of its stake fell to $780 million from $832 million during the 12-month period.
Nestle unseated Samsung as the Future Fund's single largest global listed investment. That being the case, the Future Fund has more money allocated to global equities than it has to Australian shares, at 15.2 per cent of its assets versus 6.3 per cent. Because of the concentration in the domestic market, local names dominate its portfolio. A further 7.3 per cent is in emerging markets stocks.
High-flying property stocks endured a torrid September and October after what some argue marks the end of the decades-long bull market in bonds. A rise in bond yields preceding a change in Bank of Japan stimulus and expectations of higher interest rates in the United States has fanned fears that yield stocks have peaked.
This chart shows how the ASX 200 has bounced off its 200-day moving average - hopefully setting up a stronger performance next week.
A lot may hang on tonight's first take on the US third quarter GDP growth number. If it comes in hot then yields could be heading higher, and that hasn't really been a great set-up for our market.
Weak underlying inflation in Q3 suggests to ANZ's economics team that the RBA will retain its easing bias at next week's policy meeting and beyond as consumer price growth looks set to stay weak.
"This bias points to the risk of a rate cut," they write. "But we still think that the RBA will keep rates unchanged given: 1) solid activity; 2) a modest improvement in the labour market; and 3) a strong housing market.
"Importantly, we also believe that the RBA's new, more flexible monetary policy framework allows it to tolerate inflation remaining below the 2-3 per cent target band for longer."
But the ANZ team reckon the central bank would be "uncomfortable" with a dollar that, on ANZ's calculations, looks high in a trade-weighted basis. (See charts.)
"The exchange rate continues to be a complicating factor in the RBA's deliberations," they write. "The trade-weighted index has been on a rising trend for over a year and is now at its highest level since May 2015."
"While higher commodity prices would be supporting the currency, our calculations suggest the real Aussie TWI would be about one standard deviation above the RBA's measure of fair value at present."
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Murray Goulburn has apologised for the burden on farmers caused by the dairy processor's surprise cut to its farmgate milk price, and will review its board structure and the way its milk prices are set.
The weeks and months after the April's shock price cut, and accompanying profit downgrade by Murray Goulburn, had been tough, chairman Philip Tracy told the company's annual general meeting on Friday.
"Every member of the co-op has been affected and everyone has had to make adjustments, sit at kitchen tables and run figures, look for savings, put off staff, cull herds - it's been extremely challenging," he said.
"I want to take this opportunity to again express how deeply sorry I am that MG suppliers have had to endure such a heavy burden."
Mr Tracy said he was ultimately accountable for Murray Goulburn's performance, and it was time for the co-operative to transition to a new chairman.
He said he would remain in the role for as long as needed to make an orderly transition, and then retire.
Murray Goulburn's board will also review its structure and composition, with the help of four new directors elected on Friday, to determine the best way of serving the co-operative of farmers.
The company is still searching for a new managing director, Mr Tracy said, after former boss Gary Helou lost his job due to the farmgate milk price cut and profit forecast downgrade.
There has been significant interest in the position, and interim chief executive David Mallinson is a very strong candidate, Mr Tracy said.
In addition to board changes, Murray Goulburn will review its process of determining the price it pays farmers for milk, and look at ways to improve Australia's pricing transparency, he said.
The bond market rout is showing no signs of waning as Australian 10-year yields rise to their highest since May.
The 10-year yield has climbed another 3.6 basis points to 2.373 per cent, rising above the level it was at before the Brexit shock referendum in late June, which sparked a big rush into the safe haven of government bonds.
But over the past weeks the combination of rising inflation and speculation that key central banks are moving closer to reining in stimulus has led to a huge selloff in bonds (prices move opposite to yields), in turn sparking a drop in yield-sensitive stocks.
Haven assets including the yen and sovereign bonds are also losing ground on growing belief the global economy is becoming strong enough to withstand a shift away from ultra-easy policies.
The probability of a Fed rate hike this year climbed 5 percentage point this week to 73 per cent in the futures market and data on Friday are forecast to show US growth gathered pace in the third quarter.
Faster-than-expected expansion in the UK virtually killed off any prospect of the Bank of England lowering borrowing costs and Bank of Japan governor Haruhiko Kuroda warned Thursday that longer-term yields may rise.
"We are seeing a shift, with global central banks unlikely to provide additional stimulus and that's driving bond yields higher and is strengthening the US dollar," said Niv Dagan, executive director at Peak Asset Management. "We've had plenty of cautious outlook statements from companies and investors are adding a bit more defensive exposure in their portfolios and taking some profits off the table."
Here's more on the topic at the AFR: Investors unnerved by spike in global bond yields ($)
The ASX may be on track for its biggest weekly slide since February, but unlike then the materials sector clearly isn't the driver, as commodity prices continue to firm.
Spot iron ore is on course for its biggest weekly gain in six months amid firm demand for high-grade cargo, with Chinese futures extending a rally to their strongest level in more than two years on Friday.
But the rapid price increase is spurring caution among Chinese mills. While buyers sought high-grade iron ore this week so they can use less coal amid surging prices of the fuel, steel prices have lagged the gains in the raw material.
Iron ore for delivery to China's Qingdao port slipped 0.05 per cent overnight to $US63.04 a tonne, a day after scaling a six-month peak. For the week, the spot benchmark has risen more than 7 per cent, the most since January.
The strength in iron ore futures helped push up trades on physical iron ore cargoes this week. On Friday, the most-traded iron ore on the Dalian Commodity Exchange rose as far as 493.50 yuan ($US73) a tonne, its loftiest since August 2014. It's now up 3.3 per cent at 491.50 yuan.
But physical trades slowed down on Thursday after brisk sales in the early part of the week.
"From the traders' side they just want to insist on the prices while steelmakers are becoming cautious," said Wang Di, analyst at CRU consultancy in Beijing.
Steel futures have made smaller gains compared with iron ore.
"I don't think iron ore prices will go crazy (high). The high-grade became extremely tight this week, but if you look at overall iron ore supply, it's still sufficient," said Wang.
The appetite for high-grade iron ore was spurred by the recent strong rally in prices of coking coal and coke, which resumed their uptrend on Friday.
It's Melbourne Cup day on Tuesday - and that means the RBA board gathers to make its November rate call.
While markets are pretty much ruling out a rate cut this time around, pricing in a just 4 per cent chance of a move, economists are less sure.
Six out of 27 economists - or 22 per cent - surveyed by Bloomberg reckon the RBA will cut next week, and the main reason they cite is stubbornly low inflation.
Yes, third-quarter CPI did come in ahead of expectations, but that was just the volatile headline number thanks to a probably one-off spike in fresh fruit prices.
By contrast, the more important underlying inflation numbers weakened slightly, keeping the door ajar for more easing by the central bank, which justified this year's two cuts with stubbornly low inflation.
"We expect the RBA to cut the cash rate on Tuesday because the low inflation background gives them sufficient room to provide more stimulus," says CBA chief economist Michael Blythe, admitting that he holds this view "without great conviction".
Citi economist Josh Williamson also thinks there's a good case for further near term easing by the RBA, but like Blythe acknowledges the miniscule market pricing for a move next week.
"But if the RBA passes on a cut, we believe further policy easing will need to be delivered in the first half of next year."
The ASX is back in its role as perennial underachiever, not only over the past week but really since late July.
In the past three months the local benchmark has fallen more than 5 per cent, while the S&P500 is roughly flat and the German Dax is up nearly 4 per cent.
AMP Capital's Shane Oliver offers the following explanations for the ASX's poor performance:
- concerns about the Fed and the US election that seem to be weighing on most sharemarkets at present
- a reversal of the huge bond rally that had helped the higher dividend paying Australian sharemarket and sectors like real estate investment trusts up to mid-year
- a soft patch in consumer spending weighing on retailers; and stock specific issues.
"Of these the turn up in bond yields is perhaps most significant taking a huge toll on defensive high yield sectors like REITs," Oliver says.
The REITs sub-index is down 15 per cent over the past three months, while other yield-sensitive sectors such as telcos (-17 per cent), health (-13.5 per cent) and utilities (13.3 per cent) have also been hit hard.
With the Fed on track to hike again in December and the RBA likely to be on hold for now a further back-up in bond yields is likely into December, Oliver predicts.
"However, while the bond bull market is likely over as global inflation bottoms the back up in yields generally is likely to be gradual as global growth is set to remain constrained, the Fed is likely to remain gradual in raising interest rates and other major central banks including the RBA are likely on hold or skewed to easing further.
"Meanwhile defensive yield sectors are getting very oversold and due for a bounce and cyclical sectors have more upside if as we expect that global and Australian economies continue to see moderate growth."
Bottom line – it's just another correction, he says.
In a world of extreme valuations, Dr Marc Faber, renowned bear nicknamed "Dr Doom" and publisher of the Gloom, Boom & Doom Report, said the share prices of mining companies, and especially of gold and precious metal miners, are "very low relative to everything else", despite their strong rallies this year.
Likewise, emerging markets, while not "cheap cheap", look better value than developed equity markets.
Mr Faber believes that central banks will not be willing or feel able to pull back from their extreme monetary policies. He suggests the US Federal Reserve could potentially push into negative rates. He also believes that should the S&P 500 index drop to 1810 points – its February low – then "the Fed will start buying stocks" – reflecting a determination by central bankers to underpin asset prices – an attitude that Mr Faber believes is deeply misplaced. But it does make it hard to pick when a sharemarket crash might occur.
"It's very hard to short a bubble, because you never know when a bubble will burst. The Nikkei was in a bubble at 25,000 points – then it went to 39,000."
Mr Faber explained how zero and negative rate policies have turned investing on its head, by turning what has always been the safest asset class – cash – into "the worst investment".
"Let's say central banks will continue to print money and keep rates at zero or below, then what is the worst investment? It's cash."
"If you are really bearish about the world, then you don't want to be in cash, you need to invest."
Mr Faber said he was bullish on farmland, precious metals and precious metal equities – "platinum is probably the cheapest precious metal" – while agricultural commodity prices are "very depressed".
He also believes oil may rise significantly in coming years if his fears of further conflict in the Middle East are born out.
"There is a real danger that oil could go up substantially, maybe not immediately, but in the long run," he said.
Perhaps somewhat surprisingly, Mr Faber also said he liked US Treasury bonds.
"Everybody says they hate bonds. The 10-year Treasury yields 1.74 per cent, which is very low, but compared to Japanese and Swiss bonds it's relatively attractive."
"US government bonds still have upside potential, especially if the US Fed continues to implement lower and lower interest rates."
Bell Potter is the latest to downgrade Dreamworld owner Ardent Leisure following the death of four people at the theme park this week.
"We have elected to assume the Theme Park business re-opens but that attendances decline 20 per cent across fiscal 2017 and then gradually improve with a material adverse impact on margins," Bell Potter's John O'Shea said.
Ardent's stock staged a comeback yesterday after plunging on the Tuesday news, but is another 4 per cent lower at $2.07 today. On Monday it closed at $2.55.
Bell Potter lowered its 12-month price target by 26 per cent to $2.32 due to estimated earnings revisions.
Bell Potter lowered its estimates on Ardent's theme park divisional EBITDA from $34.7 million to $15 million in fiscal 2017 and $36.5 million to $15.8 million in fiscal 2018.
"The net effect of these changes is that our EPS estimates have been downgraded by 27 per cent in FY17 and 23 per cent in FY18
Citi had earlier in the week lowered its price target of the theme park operator to $2.55 following the tragedy. Credit Suisse has also lowered its estimate of the carrying value of the theme park by more than half.
Sales of new homes are continuing their bounce back from a two-year low with a second consecutive monthly rise.
Total sales of new homes were up by 2.7 per cent in September, after a 6.1 per cent recovery in August, according to the Housing Industry Association.
"However, the mix of available indicators suggests that new home building activity has now passed its peak and that the 2015-16 financial year will not be matched in terms of new dwelling starts," HIA senior economist Shane Garrett said.
Meanwhile, CoreLogic's preliminary capital city figures show that house prices rose another 0.3 per cent in October, with rises across most of the major capital states.
"The month-to-date rise has been recorded across each of the major capitals, except Adelaide where values are trending towards a slightly negative end of month result," CoreLogic said.
The early estimates using the first 27 days of October, to be followed with more detailed final figures on Tuesday, suggest annual growth was steady at just over 7 per cent, on average, for the capital cities.
And, in case you've been following, here's Chris Joye's latest diatribe against the RBA's housing market calls ($). Joye reckons the central bank has been recklessly underestimating the most recent boom in prices.
The all-Australian family bidders for S.Kidman & Co have withdrawn from the race to own S Kidman & Co following Gina Rinehart and her Chinese joint venture partner Shanghai CRED's decision this week to up their bid to $386.5 million.
In statement the families didn't explain why they had pulled their bid but noted that their earlier $386 million offer for Australia's largest landholder had been a fair one.
"We are disciplined investors in Australian rural assets and made what we believed to be a full and fair offer," they said.
"After what has been a lengthy and complex sales process we congratulate the Hancock Shanghai CRED consortium for similarly recognising the potential of the iconic Kidman brand."
On Thursday evening, Kidman chairman John Crosby said the board welcomed Mrs Rinehart's increased offer and acknowledged the strong credentials of the company led by Mrs Rinehart.
The decision to pull out of the race for the cattle station operator which has 185,000 head of cattle, comes as the Kidman company submitted its annual financial results showing that it had made a $26 million profit, down from the $50 million profit it made last year.
So much for that rebound. The ASX has slipped back into the red, putting the market on track for a third day of losses and a weekly slide of more than 2.5 per cent.
The selloff is due to a number of factors, says Atlantic Pacific Securities. client advisor Gary Huxtable, citing the US earning season, long-term bond yields rising and a few disappointing local updates.
The main culprit for today's drop is AMP, which is now down more than 8 per cent at a two-year low following this morning's shock announcement of a $668 million write-down of its wealth protection business.
Three of the big four banks are also trading lower, which isn't helping the index, while NAB continues to outperform as analysts reassess the lender following yesterday's solid result.
Also posting gains are the miners, as the rotation from defensives into cyclicals continues. BHP is up 0.9 per cent, South32 is rallying 4 per cent (after a somewhat curious slump yesterday) and Fortescue is up another 1.9 per cent.
"There is definitely a sense of euphoria in the materials space at the moment, with the cycle lows of February now a distant memory, and many investors now sitting on healthy profits," Huxtable says.
If you think the local sharemarket is overvalued, UBS says think again.
Equity strategists Dean Dusanic and David Cassidy have crunched 60 years worth of data and come to the conclusion that equities remain marginally undervalued relative to the long-run trend.
"Additionally, the model is currently predicting a real total return for Australian equities (given current price) of 7.4 per cent per annum over the next ten years," the analysts say in a note to clients.
Rather than using standard valuation metrics such as price-earnings multiples or dividend yields, the analysts looked at the real (inflation adjusted) total return (ie, including dividends) of the All Ordinaries index over time relative to its long-run average.
"The rationale here is that long-run equity total returns are 'mean-reverting' around some sort of trend," they explain.
Taking a look at the data they came to the conclusion that the inflation adjusted total return index for the All Ordinaries does follow a linear trend (on a log scale).
"The slope of this fitted line is 6.34 per cent - i.e. the long-run "fair" return of equities is predicted to be around 6.34 per cent (per annum), at least over the last 50 years."
The analysts applied the same methodology to other markets and came to the conclusion that the S&P500 follows a similar linear trend, providing 100 years of data to back up their model.
The deviation from the trend seems to correctly pick major market tops and bottoms they say - and it currently indicates just a slight overvaluation of Wall Street's benchmark index, which - according to their model - is currently predicting a total real return for the S&P500 of 6.2 per cent per annum over the next 10 years.
The analysts admit their model isn't bulletproof as the long-run growth rate of the indices isn't always as constant as it has been in Australia or the US, pointing to Japan where the trend for the Topix has clearly changed over the past 30 years.
BHP Billiton's $US195,000 in payments to former president Bill Clinton and the Clinton family charity have been dragged into the US presidential election brawl, in a politically damaging hacked email that exposes the curious intersection of philanthropy and commercial activities when Democratic presidential nominee Hillary Clinton was secretary of state.
Republican presidential nominee Donald Trump immediately pointed to the leaked memo - which highlighted links between the Democratic power couple and companies including BHP, Coca Cola, UBS, Barclays Capital, Indo Gold, Ericson and Dow Chemical run by Australian expat Andrew Liveris - to claim corporate donors secured pay for access deals.
Wikileaks on Wednesday released the memo, dated November 16, 2011, written by Mr Clinton's longtime confidant Doug Band. The corporate reputational adviser wrote that his New York consultancy, Teneo, arranged for BHP to pay Mr Clinton $US175,000 to speak to the mining company's board in 2012.
Band, a former White House aide and Clinton Foundation executive turned public relations adviser to CEOs of big companies, also elicited a $US20,000 donation from BHP for the Clinton Global Initiative in 2011.
The recent weakness in the sharemarket has pushed the ASX 200 to pretty much where it started the year, but that's not to say there haven't been some sharply divergent performances.
Below is the best and worst performing stocks in 2016. No surprise that mining names feature heavily, but did you know that Webjet's share price has more than doubled this year?
Shares have managed to steady after a couple of days of heavy selling, with solid gains in miners and Woolies supporting the market, while the big banks are mixed and AMP has sold off heavily.
The ASX 200 is up a few points to 5301, so no signs of any bounce and whatever has been spooking investors in recent days looks to still be overshadowing the exchange.
Macquarie is up 0.7 per cent on its half-yearly profits, while AMP is down 5.9 per cent after a negative update on its life insurance business. NAB is up another 0.8 per cent after yesterday's well-received annual profit announcement, but the others are flat to lower. ANZ is off 0.7 per cent after foreshadowing a hit to earnings ahead of next week's profit announcement.
Woolies is the biggest boost to the index overall, as it climbs 2.3 per cent. Wesfarmers inched 0.2 per cent higher.
Investors continue to rotate into mining names as the iron ore and coal prices run hot. BHP is up 1.8 per cent, Rio 1 per cent and Fortescue 1.3 per cent. South32 has jumped 3.3 per cent after selling off heavily yesterday.
So-called "yield stocks" are still under pressure. The likes of Transurban, Scentre Group and Goodman are all lower.
Meanwhile, Carsales is one of the morning's biggest losers, dropping 4.6 per cent after releasing interim profit numbers.
Here are this morning's ratings changes by analysts:
- Beach Energy: Cut to underweight vs overweight at JPMorgan; cut to underperform vs sector perform at RBC
- Crown: Upgraded to outperform from neutral by Credit Suisse
- Regis Resources: Raised to overweight vs neutral at JPMorgan
- Sandfire Resources: Raised to add vs hold at Morgans
- Tox Free Solutions: Raised to buy from hold at Argonaut Securities
Carsales, GWA Group, Regis Healthcare, Star Entertainment and Tassal Group all hold AGMs, while Premier Investments trades ex-dividend
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