The big four banks are a reasonable bet for investors over the next 12 months with NAB the standout pick, says veteran fund manager Geoff Wilson.
But Wilson, who oversees more than $2 billion in funds under the Wilson Asset Management portfolio of listed investment companies, said it's likely to be a tough next 12 months for stockmarket investors overall.
He predicts the ASX 200 may be about 5 per cent lower by late 2017 compared with its current level of around 5300 points because of "headwinds" from rising bond yields, and with valuations in many stocks having been pushed beyond sensible price earnings multiples in the wake of the flood of cheap money and low interest rates of the past few years.
He said the share prices of the big infrastructure stocks including Transurban and Sydney Airport were likely to continue to move lower over the next year because of the shift in bond yields, and he lumps Telstra into that category because it is now a company with similar characteristics as the big infrastructure players.
"Short-term it's over. I think it's going to be very difficult for the infrastructure stocks to perform over the next six to 12 months," he said. "Even before Donald Trump won, the shift was underway"
But the big banks, which were out of favour three or four months ago, are likely to deliver for investors, as bad debts didn't appear to be getting too much worse.
"The big banks look slightly cheap on a relative PE basis," he said. "I think they'll probably perform pretty well."
The Reserve Bank is struggling to gauge the strength of the labour market and its implications for inflation while house prices on the east coast accelerate.
At the same time, the RBA said in minutes of its November meeting that the risks to the global inflation outlook "were more balanced than they had been for some time." That follows a rebound in commodity prices and faster forecast growth in major advanced economies.
"Considerable uncertainty remained about the strength of labour market conditions and the implications for labour cost growth," the RBA said after leaving the cash rate at a record-low 1.5 per cent. It added "the overall assessment was that the risks around the inflation forecast were broadly balanced."
Australia is struggling with weak inflation that policy makers only expect to reach the bottom of their 2-3 per cent target at the end of 2018. While unemployment has fallen, most of the jobs growth has come from part-time work and the jobless rate of 5.6 per cent is flattered by falling participation.
"Members observed that there was uncertainty about the degree of spare capacity in the labour market and how this might ultimately affect inflationary pressures," the RBA said.
Concern about inflation prompted the central bank to cut rates twice this year, sparking renewed strength in some property markets, even as prices in Perth receded.
"Assessing conditions in the housing market had become more complicated," the RBA said. "Housing price growth had picked up noticeably in Sydney and Melbourne."
The rebound in the terms of trade, or export prices relative to import prices, hasn't been matched in full by the currency, although it is up 10 per cent in the past 10 months. The central bank reiterated that an appreciating Aussie could complicate the economy's adjustment from mining investment.
We just mentioned the doubts over the sustainability of copper's rally.
But Macquarie believes the metal's prices will remain elevated thanks to an expected increase in both Chinese stimulus and US infrastructure spending and has upgraded its longer-term forecasts by up to 15 per cent.
"On an effectively balanced market next year with supply looking shakier lately and demand robust, we see little trigger for prices to slide back to the previous range," the analysts say, noting that copper prices also shot higher last week because they had been lagging other commodities this year.
Macquarie lifted its 2017 financial year copper price forecast by 12 per cent and 2018 and 2019 forecasts by 15 per cent.
"Further out, we see a little oversupply in 2018-19 moderating prices to the low $US5000s/t, before the incoming deficit at the end of the forecast period should drag prices comfortably back to the low $US6000s/t."
The bank's analysts also note that the improved copper price outlook should translate to a "material improvement" in the short and medium-term earnings outlook for BHP and Rio, upping target share prices for Rio by 6 per cent and for BHP by 4 per cent.
Macquarie also upgraded pure play copper miners Oz Minerals and Sandfire Resources to 'outperform' from 'neutral', saying both stocks offered about 20 per cent upside to its valuations.
"We lift our earnings forecasts for Sandfire by about 50 to 75 per cent over the next three years and our price target by 35 per cent," the analysts say. "OZ Minerals sees even larger earnings upgrades with the company swinging back to profit in 2018 and we lift our price target by 28 per cent to $9.20."
One of the few views almost every investor is aligned with is that markets are heading for bouts of higher volatility. What some investors cannot understand is why volatility is not higher already.
When three of Australia's top regulators convened last week, the consensus was that the election of Donald Trump as US president and the sensational reaction which followed could be a sign markets are entering a rocky period. "The one trade advice I would give is I wouldn't necessarily be selling a hell of a lot of volatility protection, not cheaply anyway," Guy Debelle, the Reserve Bank of Australia deputy governor, said.
The world's main reference point for volatility, the CBOE SPX Volatility Index or vix, is at 14.48. Since 1990, the average for the index is 19.76, for the past 12 months it has lingered at 16.46 and that includes the spike for Brexit and the pre-election activity.
"The world in which we live in, there are a lot of uncertainties out there and it's probably been surprising to a number of us that volatility – particularly in the post-Brexit retracement – returned to historically reasonably low levels given what's out there," Steve Miller, head of fixed income at BlackRock, said.
This expectation of heightened volatility comes at a time when reliable correlations between asset classes are slipping, almost everything is expensive, and inflation appears to be breaking out of its slumber. Equity market valuations are closer to normal than bond valuations, which is to say shares are cheaper than bonds.
And it's true that the equity market is vulnerable to higher bond yields – especially property and infrastructure stocks – but at a point, equities rally with rising bond yields as long as it's associated with stronger profits.
"To paraphrase Donald Rumsfeld, there's a lot of known unknowns out there," Miller said. Italy holds a referendum in December followed by elections across Europe next year. "The circumstances in Syria are quite opaque, we've got the South China Sea. It's curious that volatility hasn't been at least recently higher."
The direction of the market moves looks right, but the scale over the top, writes the WSJ's James Mackintosh:
It has taken markets just four days to price in four years of President Donald Trump. The verdict of investors isn't just clear, but comes with a remarkable degree of certainty: More inflation, a little more growth, and no nasties such as a damaging trade war or a diplomatic disaster.
Such certainty ought to worry those thinking of buying in to the idea of a Trumpian reflation of the US economy.
All of this of course assumes Congress passes a new spending bill and tax cuts swiftly after Mr. Trump takes office on Jan. 20. And even then the markets seem to be assuming a lot.
Consider just some of the price shifts since the election. Shares in companies which should benefit from infrastructure spending have soared. US Steel is up 23 per cent, the price of copper leapt 7 per cent and the FTSE USA construction and materials sector had its biggest two-day jump since the Obama stimulus spending was getting under way in April 2009.
Markets could still get a lot further ahead of themselves, as traders who missed out try to join in. Investors have made a bigger bet on inflation than growth; inflation-linked 10-year TIPS yields leapt Monday to 0.335 per cent, but are up by much less than ordinary Treasury yields and still half what they were at the start of the year.
The rest of the Trump trade is already stretched, though. Moves based on hope are particularly vulnerable to any sign that they might be wrong, and the bigger the move, the more vulnerable they become.
This has been a really big move in a very short time, and the risk is growing that comments by Mr. Trump will be taken badly by investors. A 10-year Treasury yield of 2.26 per cent may not be appealing to hold for the long term, but it is the highest this year and would provide a handy cushion when, and if, hopes of a Trump boom take a knock.
Read more at the Wall Street Journal ($).
The meteoric rise of copper since Donald Trump's victory in the US presidential election last is not justified by fundamentals and the metal used mostly in power and construction is due to retreat, analysts say.
Copper prices took off late last week, briefly surging to an 18-month high above $US6000 a tonne on speculation that Trump will boost domestic spending on infrastructure, which would be supportive for the metal.
The price has since come back to $US5569 a tonne, but is still more than 10 per cent higher than early last week.
"A Trump-related rally in the price is not credible at all. We have to wait until he takes office and see how many of his plans will go through," said Capital Economics senior commodities economist Caroline Bain, adding that copper was due for a pullback as it had risen too fast.
"Admittedly, there have been some supply disruptions and stocks have fallen, but the bigger picture is that the market is comfortably supplied."
Deutsche Bank analyst Franck Nganou agrees that investors may be overestimating the impact of possible US infrastructure stimulus, noting that Chinese consumption is much more relevant to copper prices than America's (see chart).
"Any US fiscal infrastructure spending will be helpful at the margin, but still small relative to China."
Shares have taken a hit in early trade, as some of the Trump trade leeches out of the equity market even as bonds continue to sell-off sharply.
The ASX 200 is off 29 points or 0.5 per cent at 5317 with all sectors in the red, but led by falls in utilities and healthcare. Aussie bond yields have bumped another 4 basis points higher to 2.69 per cent, up nearly 50 basis points, or half a percentage point, since the US election. The dollar is at 75.6 US cents.
There are some signs of fatigue in the selling of gold miners, with producers of the precious metals recovering after yesterday's heavy losses. Newcrest Mining is up 1.8 per cent.
Elsewhere is resources, energy names are getting no support from the late bounce in oil prices overnight, with Woodside off 0.6 per cent. A breather in the iron ore price has also undermined the likes of BHP and Rio, which are around 0.5 per cent lower, although Fortescue has managed a 0.3 per cent gain, so it may not be iron ore related selling in the big two. South32 is off 2.4 per cent.
CSL is off 1.2 per cent and the big banks are all lower, by between 0.2 and 0.7 per cent. The supermarket owners Woolies and Wesfarmers are down 0.8 per cent, while Telstra is off 0.5 per cent.
The morning's worst performer is OFX, down around 10 per cent after posting interim profits - more on that soon.
Ahead of the market open, here are the overnight market highlights:
- SPI futures are down 0.1 per cent or 6 points to 5345.
- AUD is flattish at US75.56¢
- On Wall St, Dow +0.1%, S&P -0.01%, Nasdaq -0.4%
- In Europe, Stoxx 50 +0.3%, FTSE100 +0.3%, CAC 40 0.4%, DAX 0.2%
- Spot gold -0.04% to $US1225.04 an ounce
- Brent crude -0.1% to $US44.70 a barrel
- Iron ore -2.6% to $US77.77 a tonne
Today's agenda:
- RBA November meeting minutes at 11:30am AEST, RBA governor Philip Lowe speaks tonight
Corporate news:
- Bega Cheese names Paul Van Heerwaarden as CEO, effective Feb 1
- Incitec Pivot trades ex-div
- National Storage REIT raised to overweight at JP Morgan
- Nine Entertainment holds AGM
- OFX Group reports half-year profits
- St Barbara scheduled to host business update call and analyst briefing
Emerging markets extended losses overnight, threatening the best annual rally since 2012, as the US dollar's strength cut demand for riskier assets in the wake of Donald Trump's US presidential election victory.
The Turkish lira, Russia's ruble and the Colombian peso helped lead declines among developing-market currencies and a gauge of equities retreated for a fourth day amid speculation the US is headed for an era of rising interest rates and protectionist trade policies.
Trump's victory spurred a rout in developing markets as investors rushed to haven assets, wiping $US1.2 trillion off the value of bonds worldwide, on speculation the president-elect's promises to usher in protectionist trade policies and broaden spending on US infrastructure will fuel inflation.
The plunge in currencies was mirrored in the equity and bond markets where investors withdrew $US1.72 billion from US exchange-traded funds that buy emerging-market stocks and debt, the largest losses since May.
"The selloff in emerging markets will continue as long as US rates keep climbing," said Guillaume Tresca, a senior emerging-market strategist at Credit Agricole CIB in Paris who recommends buying the Turkish lira against the South African rand.
"One could say the current levels are attractive but given the good year so far and with the end of year coming, I don't see reasons for investors to take long emerging-market positions."
The MSCI Emerging Markets Index declined 1.2 per cent to 838.96, the lowest level since July 8. The gauge pared its 2016 rally to 5.6 per cent, more than half of the gains recorded at the beginning of September.
Defying the emerging markets rout, Kazakhstan's central bank cut its key policy rate by 50 basis points to 12.0 per cent, citing lower inflation, but signalled it was getting to the end of its easing cycle by saying further cuts would be harder to justify.
Donald Trump is in effect doing the work of the US Federal Reserve by raising inflation expectations and triggering a big spike in interest rates around the world.
Investors are ditching the safe haven asset and betting "Trumpflation" - massive fiscal stimulus - will force interest rates higher over the months and years ahead.
The Fed has been yearning for years for fiscal policy to play a large role in stimulating the US economy to allow it to exit its ultra-easy monetary policy setting.
The move higher in US yields has also seen a repricing of Fed rate hike expectations with the market now assigning a 95 per cent probability to a December hike, up from 83 per cent yesterday, NAB says. Another hike is now more than fully priced next year.
RMG Investment Management chief investment officer Stewart Richardson said Trump is "rightly seen as reflationary by the markets, and this should exaggerate the moves in bond markets in the period ahead".
Fed vice-chair Stan Fischer said on Friday the economy could "to some extent exceed our employment and inflation targets," in remarks that could be viewed as implying some tolerance for overshooting its goals to coax out more investment and hiring.
Broker upgrades usually come and go without too much fuss from fund managers.
But when multiple brokers start moving on the same stock, fundies' ears can prick up, particularly if there is no real news around.
And so it is at Premier Investments, with both Citi and Credit Suisse in the market with upgrades on Tuesday morning.
Both houses upgraded the stock to "neutral" from "underperform" or "sell" following a fall in its share price.
"Premier Investments' share price has fallen recently," Citi analysts told clients. "We feel the balance of risks is now appropriately reflected and lift our rating to neutral.
"Our target price remains $13.80 per share. Near-term softer sales feedback presents a downside risk, but the Smiggle UK rollout should make a meaningful earnings contribution in FY17e."
Credit Suisse were similar, noting trading headwinds in Australia were stronger than expected.
But they also pointed to Smiggle's ramp-up in the UK to help earnings.
"Offshore expansion appears to be progressing in line with expectations," Credit Suisse analysts told clients.
"Smiggle has a high enough gross margin that depreciation in the British pound is unlikely to have a significant influence on cost of goods. Smiggle UK is likely to begin contributing significantly to profit from 1H18."
Fundies will be watching to see whether other brokers follow suit.
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IG strategist Chris Weston ponders: is it time to do the opposite of what feels right?
This would involve fading the US dollar move and buying longer maturity fixed income instruments, which also means fighting a powerful tape. However, there are some signs that we may see some reversion to the mean in the short-term, although this should just provide better levels for traders to express the clear macro trade – short US treasuries, long US dollars, long US (and global) banks and short gold and emerging markets (I have been promoting the iShares Emerging Markets ETF, or EEM ETF).
So it could be a pivotal session ahead, as it looks as though we could have seen something of a blow-off top in US bond yields, with the 10-year treasury reaching 2.30 per cent, before coming back to 2.22 per cent, although it is still up 7 basis points on the session.
It's not every day you see the benchmark bond trade 59 basis points higher in close to three days, so some exhaustion in the selling must be kicking in. The 30-year treasury traded to 3.06 per cent before settling below 3 per cent. While yields have come firmly off their high the US dollar is still king and has rallied a further 1 per cent, with the USD index (DXY) trading through the 100 barrier for the first time since December 2015. Pullbacks should be bought and again watch US fixed income, as a move lower in yields could offer a more attractive entry point.
The broader Aussie market is likely to open some 15 points lower, so given the call on BHP one suspects we may see banks modestly weaker, with energy holding in. Watch the fixed income market as a guide, because if traders start to fade the recent sell-off we may see some profit taking in the Nikkei, financials and some easing back in long USD positions.
Oil prices staged a sharp rebound overnight after plumbing three-month lows to end the session largely steady on a report saying that OPEC members were seeking to resolve their differences on a deal to cut production ahead of a meeting later this month.
OPEC kingpin Saudi Arabia and fellow exporters Iran and Iraq have been at odds over how to rein in supply to reduce a glut in global markets. The lack of agreement within the Organisation of the Petroleum Exporting Countries following a tentative deal in September has put pressure on benchmark prices.
Qatar, Algeria and Venezuela were leading the push to overcome the divide between the group's biggest producers ahead of an output policy meeting on Nov. 30 in Vienna, according to a Bloomberg report.
Saudi Arabia, Iraq and Iran are still at odds over how to share output cuts, the report said.
Brent crude futures settled at $US44.43 per barrel, down 0.7 per cent, after falling to as low as $US43.57. US crude ended the session down 0.2 per cent at $US43.32, after hitting a low of $42.20. Both benchmarks' session lows were the weakest since Aug. 11.
"Record OPEC production clearly has the market nervous about a potential deal, but we believe that most OPEC producers are already producing flat out as much as they can," said Michael Tran, director of energy strategy at RBC Capital Markets in New York.
OPEC said on Friday its output hit a record 33.64 million barrels per day in October, and forecast an even larger global surplus in 2017 than the International Energy Agency.
The risk of US production growth in the event OPEC cannot reach a deal is also a factor weighing on crude markets, given that producers hedged aggressively last month when prices spiked north of $US50, RBC's Tran said.
US shale producers are redeploying cash, rigs and workers, cautiously confident the energy sector has turned a corner after Donald Trump's US presidential election victory and OPEC's recent signal that it plans to curb production.
Trump's surprise win in last week's election boosted the dollar and stocks but undermined oil.
"In our view the oil market has not yet attempted to fully factor a Trump presidency into prices," Standard Chartered said in a note.
"We think that market views on the effect of a Trump presidency on oil have yet to firm up, beyond perhaps a loosely defined feeling that Trump might provide a further boost for the US dollar and for the prospects of US shale oil."
Routs in global bonds intensified, while the US dollar climbed as investors positioned for the wave of US fiscal stimulus that President-elect Donald Trump has pledged to unleash.
The yield on 30-year Treasuries rose to the highest since January, with last week's record debt selloff bleeding into overnight trading and weighing on credit markets. The Bloomberg Dollar Spot Index advanced to a nine-month high as the US currency strengthened against most major counterparts. American stocks were little changed and shares in developing nations sank to a four-month low. Copper climbed, while oil fell with gold.
"Trump has introduced so much uncertainty -- around the fiscal outlook, the outlook for foreign demand for Treasuries given his protectionism and his views on China, uncertainty around the outlook for the Fed," said John Davies, an interest-rate strategist at Standard Chartered in London, which adjusted its forecast for 10-year Treasuries yields to 3 per cent in the end of 2017 from below 2 per cent previously. "There's an uncertainty premium, rather than just expectations of much more Fed tightening," being priced into Treasuries, he said.
"We think there's room for this to continue."
"We are reaching a paradigm shift in the bond market," Matt Eagan, a money manager at Loomis Sayles. "Trump's policies, at least taking them at face value right now, are inflationary at a time when the slack in the economy is actually tightening and we have very aggressive monetary policy."
Traders assign about a 92 per cent probability to a Fed interest-rate increase in December, according to data compiled by Bloomberg based on fed funds futures, up from 84 percent on Nov. 11.
Benchmark German 10-year bonds posted their longest losing streak since May, and those on similar-maturity Italian debt climbed to the highest since July 2015. UK 10-year gilts extended their slide to a sixth day.
Government bonds also extended losses across the Asia-Pacific region. Thailand's 10-year yield jumped by the most since May after foreign investors pulled a record 27 billion baht ($1 billion) from the nation's bond market on Friday, while similar-maturity debt in China dropped for a seventh day, the longest losing streak in three years.
Good morning and welcome to the Markets Live blog for Tuesday.
Your editors today are Jens Meyer and Patrick Commins.
We're keen to hear your thoughts on the blog and suggestions on how you think we could make it better. Send us an email at jmeyer@fairfaxmedia.com.au or p.commins@fairfaxmedia.com.au.
This blog is not intended as investment advice.
Fairfax Media with wires.
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