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China's yuan has dropped to its lowest level in nearly eight years as the US dollar continues to climb on expectations of higher interest rates under President-elect Donald Trump.
The yuan broke through 6.86 per US dollar in morning trade, its weakest since December 2008 and taking its losses so far this year to more than 5 per cent.
Traders say the People's Bank of China (PBoC) has been taking a hands off approach in the past few days, using the opportunity to release depreciation pressure on the yuan as the dollar rises. But they do not think Beijing will allow the yuan to fall too sharply in the near-term and risk a political row before Trump is even sworn into office.
On the campaign trail, Trump repeatedly accused China of devaluing the yuan to make its exports more competitive and threatened punitive tariffs on Chinese goods.
"We haven't seen central bank intervention for quite some time and that's also why the yuan fell so much recently and broke through key levels easily," said a trader at a big Chinese bank in Beijing.
The PBoC also did not try to press down dollar/yuan midpoint and let the market decide it, which showed it was still comfortable with market movements, the trader said. The People's Bank of China set the midpoint rate at 6.8495 per US dollar prior to the market open, weaker than the previous fix 6.8291.
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The federal government should consider slowing its path to budget balance and instead spend more on growth-friendly infrastructure projects, IMF staff said in their annual check-up on the economy.
The International Monetary Fund report also recommended the Reserve Bank keep monetary policy stimulative, given that risks to the economy and inflation remained on the downside.
"Ensuring the return to full employment under weak global conditions will need continued accommodative monetary policy and quality infrastructure spending, which will also boost long term growth potential," IMF staff wrote in their regular assessment.
While Australia was transitioning from a mining boom with strong growth and relatively low unemployment, it had not been immune to symptoms of the "new mediocre", the report said.
Business investment outside of mining had disappointed, underemployment remained high and wage growth sluggish, said the organisation.
The report recommended the conservative government of Malcolm Turnbull slow efforts to balance its budget on a five-year horizon.
"In IMF staff's view, the pace of targeted fiscal consolidation under the baseline should be more gradual and some of the growth-friendly spending should be ramped up."
In particular, plans to tighten fiscal policy aggressively in 2017-18 could prove counter-productive, the report said. Rather, the government should consider spending more on infrastructure, a hot-button topic in Australia.
!['The new mediocre': underemployment remains too high.](/web/20161115041327im_/http://www.theage.com.au/content/dam/images/g/s/p/p/i/x/image.related.articleLeadwide.620x349.gsppkd.png/1479181708508.jpg)
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Some economist reactions to the RBA minutes released earlier today (there were no major surprises, not least because the bank had already revealed its latest thinking in the quarterly monetary policy statement released just days after the November board meeting):
Tapas Strickland, NAB:
With the final para of the Minutes broadly the same as the Governor's post meeting Statement, it seems very unlikely that the Bank will make a change in monetary policy in December. The course of employment growth in coming months seems key to us, although a balanced assessment is difficult given still persistent monthly volatility in recent times. NAB expects the RBA to remain on hold until later in 2017, before further easing policy in anticipation of weaker housing construction in 2018, though that is still a long way off as far as the markets are concerned.
Janu Chan, St George:
In the minutes of the November board meeting, there was a similar sense of optimism that was presented in earlier RBA commentary. They did not appear to add a significant amount of new insight into RBA thinking. The RBA's relatively upbeat stance suggests that further rate cuts are unlikely in coming months, unless incoming data diverges significantly from its forecasts. However, in our view, the downside risks to the RBA's growth and inflation forecasts continue to suggest that further monetary easing will be on the cards over 2017.
Paul Brennan, Citi:
The minutes note uncertainties about China's outlook and how that could affect commodity prices, and also uncertainties about the strength of the labour market and the housing market. At this stage neither appear substantial enough by themselves to alter the outlook for monetary policy in the foreseeable future. The election of Mr Trump creates bigger uncertainties for the outlook but, as we have noted previously, there is no need for the RBA to rush to judgments on how the global economic and financial backdrop might change and what that might mean domestically.
Michael Workman, CBA:
The election of a pro‑growth US President could be relatively positive for Australia's commodity prices and share markets in the short term. But the medium term uncertainty around a return to more protectionist global trade policies presents possible downside growth risks for exports. We still see a reasonable chance that the RBA may cut the cash rate again in mid‑2017. The wages and labour market data over the next few days, we believe, are likely to support the view that low inflation will continue. Higher wages and inflation outcomes are required in coming quarters to change that view.
Jo Masters, ANZ:
Importantly, the assessment of risks around the inflation outlook appears more balanced, with the minutes suggesting to us emerging confidence that the disinflationary pulse has peaked. While the policy framework can accommodate periods of undershoot, rising confidence that inflation has stabilised – even if it is expected to rise only gradually – would be a welcome development. We continue to see the RBA on hold with the cash rate steady at 1.5 per cent over our forecast horizon (to end 2018).
Su-Lin Ong, RBC:
The minutes confirmed an RBA on hold, with developments over the last week consistent with this. We await further policy details from the new US administration, but some upside risk to the US growth trajectory near-term and implications for the Fed temper the RBA's already mild easing bias all else being equal. We leave a final 25bp cut in our profile next year to capture risks to housing amid still subdued inflation but remain of the view that we are close to the end of this protracted easing cycle.
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![Tenants market: residential rents are barely budging.](/web/20161115041327im_/http://www.theage.com.au/content/dam/images/1/m/8/x/b/6/image.imgtype.columnistThumbnail.60x60.png/1440644111173.jpg)
Motivated by a weakening yuan, surging domestic housing costs and the desire to secure offshore footholds, Chinese citizens are snapping up overseas homes at an accelerating pace.
They're also venturing further afield than ever before, spreading beyond the likes of Sydney and Vancouver to lower-priced markets including Houston, Thailand's Pattaya Beach and Malaysia's Johor Bahru.
The buying spree has defied Chinese government efforts to restrict capital outflows and shows little sign of slowing after an estimated $US15 billion of overseas real estate purchases in the first half. For cities in the cross-hairs, the challenge is to balance the economic benefits of Chinese demand against the risk that rising home prices spur a public backlash.
"The Chinese have managed to accumulate very large amounts of wealth, and the opportunities to deploy that capital in their own market are somewhat restricted," said Richard Barkham, the chief global economist at CBRE Group, the world's largest commercial property brokerage. "China has more than a billion people. Personally, I think we have just seen a trickle."
![What $US1 million buys you.](/web/20161115041327im_/http://www.theage.com.au/content/dam/images/g/s/p/n/n/4/image.related.articleLeadwide.620x349.gspno1.png/1479179635166.jpg)
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The sharemarket's strong post-US election performance is sending a false signal to investors with rising bond yields setting the expensive ASX up for a plunge amid political upheaval, Watermark Funds Management's Justin Braitling warns.
Braitling, chief investment officer of the Sydney-based hedge fund, said 2016 would prove a turning point in the prevailing economic order that will have disastrous consequences for sharemarkets.
"The bond markets have almost certainly turned, we're now in a bear market for bonds, and we think sharemarkets will follow," he said.
The surprise election of Donald Trump was just the beginning of a wave of populist leaders taking office, with elections in Europe next year potentially following the suit that began with Brexit in June.
Braitling said Trump's election was a "political watershed", that would have profound consequences for all asset classes.
"We are seeing that most poignantly in the bond markets," he said.
But investors continue to push shares higher, chasing their next "sugar hit" – the prospect of a lift in growth and inflation on the back of fiscal stimulus from Trump's infrastructure and tax cutting platforms.​
"The rally in shares will probably last through Christmas, with the typical Christmas rally, but we think it will prove to be a sucker's rally," he said.
"The backdrop for sustainable growth weakens while uncertainty is clearly on the rise. This is a less than favourable development in the risk/return trade-off for shares. Given elevated valuations, risks are accumulating in shares."
![Sucker's rally ... Watermark's Justin Braitling fears shares face a bear market.](/web/20161115041327im_/http://www.theage.com.au/content/dam/images/g/s/b/g/o/8/image.related.articleLeadwide.620x349.gspkly.png/1479179175485.jpg)
![The yield on the Australian 10-year](/web/20161115041327im_/http://www.theage.com.au/content/dam/images/1/m/8/w/x/g/image.imgtype.columnistThumbnail.60x60.png/1475200777471.jpg)
Bonds are the flavour of the day so we should mention another potential crisis looming: Italian bond yields spiked to their highest levels in over a year on concerns that the country will be next in line to face a populist backlash.
Surveys signal opponents spearheaded by the populist Five Star movement could narrowly defeat Prime Minister Matteo Renzi in a referendum on constitutional reform on December 4, potentially triggering an election in early 2017.
Five Star, which wants a referendum on Italy's euro membership, is running neck-and-neck with Renzi's Democratic Party in polls and already seized control of city halls in Rome and Turin this year.
"We're taking Five Star more seriously, we've been looking at their program," said Andrew Cormack, a global portfolio manager at Western Asset Global Management. "The repercussions of Italy leaving the euro area would be huge. And there is a concern over the lack of experience in the Five Star party."
Renzi has recently declined to comment on earlier pledges to resign in the case of a defeat, saying a discussion of his own future deflected attention from the merits of the reform.
But, asked in a radio interview what he would do if the "no" vote won in the December 4 referendum, he said: "If I have to stay on in parliament and do what everyone else has done before me, that is, to scrape by and just float there, that does not suit me."
"If you talk to Italian investors, a lot of them will say that nobody else other than Renzi can govern in Italy. This is the reason why there was a widely held view that Renzi, in the end, would stay on," Natixis fixed income strategist Cyril Regnat said.
Italian 10-year yields rose 18 basis points to 2.15 per cent at one stage, their highest since September 2015, before retreating slightly to 2.079 per cent. The gap between 10-year Italian yields and benchmark German equivalents hit its widest since October 2014.
Upcoming elections in Austria, the Netherlands and France could also bring about major changes in the political landscape.
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Online retailer SurfStitch is bracing for a showdown with spurned suitor Crown Financial, which has fired off a list of more than 30 questions ahead of the annual meeting today.
Crown, part of the Sundell family's Three Crowns Investments group, has sent an open letter to the SurfStitch board, shareholders and media outlets, demanding more detail about the retailer's financial position, inventory levels, brand rationalisation program, asset writedowns and risk management.
Some of the questions relate to about $28 million in writedowns on non-retail assets acquired in the year after SurfStitch's initial public offer.
"We together with other shareholders look forward to hearing your responses to these questions at the AGM and we reserve the right to raise these and other relevant matters from the floor at the AGM if no satisfactory response is provided," wrote Crown Financial managing director Kim Sundell.
The Three Crowns group built up a 10 per cent stake in SurfStitch in September after the collapse of a content deal and approached the board earlier this month proposing a 20¢-a-share takeover offer valuing the company at $55 million.
Three Crowns has also launched legal action over the content deal, changes to which led to a $20.3 million hit to SurfStitch's full-year profits in 2015-16.
The SurfStitch board has rejected the Crown proposal - one of several expressions of interest received - because it does not offer a premium for control and is highly conditional. SurfStitch shares, which were issued at $1 a share in December 2014, are now trading around 19.5¢.
However, Crown is unhappy with SurfStitch's response and has stepped up pressure on the board by going directly to shareholders and the media.
In an interview with The Australian Financial Review last week, Mr Sundell said he wanted to break up the business. He denied the takeover bid was revenge for the failed content deal, but said he would be willing to settle his lawsuit for $3 million.
Mr Sundell also claimed that SurfStitch's co-founder and former chief executive Justin Cameron negotiated a deal last year to buy his business, which includes a portfolio of magazines and websites such as Surfing World, Transmoto, Coastalwatch and Mountainwatch, for $10 million. But SurfStitch backed out of the sale four months later.
![Bad vibes: Three Crowns managing director Kim Sundell with Australian pro surfer Ozzie Wright.](/web/20161115041327im_/http://www.theage.com.au/content/dam/images/g/s/n/e/r/d/image.related.articleLeadwide.620x349.gspkk6.png/1479175019026.jpg)
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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."
![NAB is Geoff Wilson's favourite pick among the big four.](/web/20161115041327im_/http://www.theage.com.au/content/dam/images/g/s/d/k/r/t/image.related.articleLeadwide.620x349.gspirt.png/1479173618842.jpg)
![The yield on the Australian 10-year](/web/20161115041327im_/http://www.theage.com.au/content/dam/images/1/m/8/w/x/g/image.imgtype.columnistThumbnail.60x60.png/1475200777471.jpg)
![The RBA is grappling with an uncertain jobs market.](/web/20161115041327im_/http://www.theage.com.au/content/dam/images/g/s/i/7/c/4/image.related.articleLeadNarrow.300x0.gspj4i.png/1479172797976.jpg)
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.
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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."
![Macquarie has upgraded Oz Minerals to 'outperform', expecting large earnings revisions.](/web/20161115041327im_/http://www.theage.com.au/content/dam/images/g/r/h/c/c/z/image.related.articleLeadwide.620x349.gspg87.png/1479171191006.jpg)
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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."
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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 ($).
![Dream team: US president-elect Donald Trump has confirmed Reince Priebus as his chief of staff.](/web/20161115041327im_/http://www.theage.com.au/content/dam/images/g/s/p/4/v/6/image.related.articleLeadwide.620x349.gspdx0.png/1479168184647.jpg)
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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."
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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.
![Winners and losers in the ASX 200 early.](/web/20161115041327im_/http://www.theage.com.au/content/dam/images/g/s/p/e/9/n/image.related.articleLeadwide.620x349.gspeox.png/1479166276697.jpg)
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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
![shares down](/web/20161115041327im_/http://www.theage.com.au/content/dam/images/2/b/d/k/t/image.imgtype.columnistThumbnail.60x60.png/1415318866197.jpg)
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.
![The emerging markets rout is deepening, but Kazakhstan still cut interest rates.](/web/20161115041327im_/http://www.theage.com.au/content/dam/images/g/q/b/u/r/8/image.related.articleLeadwide.620x349.gspdn1.png/1479164324417.jpg)
![The yield on the Australian 10-year](/web/20161115041327im_/http://www.theage.com.au/content/dam/images/1/m/8/w/x/g/image.imgtype.columnistThumbnail.60x60.png/1475200777471.jpg)
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.
![Markets are betting the Fed will lift rates next month and at least one more time next year.](/web/20161115041327im_/http://www.theage.com.au/content/dam/images/g/s/h/9/u/j/image.related.articleLeadwide.620x349.gspde6.png/1479163818918.jpg)
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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](/web/20161115041327im_/http://www.theage.com.au/content/dam/images/g/n/n/y/5/t/image.imgtype.columnistThumbnail.60x60.png/1467590219900.jpg)
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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.
![Swimming against the tide can pay dividends, but it's not without risks.](/web/20161115041327im_/http://www.theage.com.au/content/dam/images/g/s/f/x/q/s/image.related.articleLeadwide.620x349.gspcz6.png/1479162664334.jpg)
![Oil is trading at 1 2015 high after another overnight rally.](/web/20161115041327im_/http://www.theage.com.au/content/dam/images/1/m/8/3/m/k/image.imgtype.columnistThumbnail.60x60.png/1444363506474.jpg)
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."
![Investors are not yet sure what Trump means for a potential uplift in US shale activity.](/web/20161115041327im_/http://www.theage.com.au/content/dam/images/g/s/l/z/t/m/image.related.articleLeadwide.620x349.gspcnn.png/1479163239001.jpg)
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