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Telstra once again led the sharemarket higher, but overall the ASX still posted a small loss for the week as the initial Trump exuberance waned.
The S&P/ASX 200 index added 21 points or 0.4 per cent on Friday to 5359 points, as the benchmark eased 11 points over the five sessions.
Telstra was once again the standout performer on Friday, adding 1.9 per cent to $4.93, bringing the week's gains to 4.5 per cent as it bounced off three-year lows.
Over the week some of the hardest hit stocks in the post US-election rally, including the big telco as well sectors especially vulnerable to higher bond yields such as listed property and utilities, reversed some of their losses. Toll road operator Transurban climbed 3.6 per cent and Westfield 6.2 per cent.
Selling in US and Australian government bonds moderated, but yields still ticked higher over the week to reach 10-month highs on Friday of 2.73 per cent as investors continued to digest the potential for higher inflation under a Trump presidency.
"There's a big shift from monetary to fiscal policies, the question is the matter of degree and what does that mean for real interest rates and then what that mean for the valuation of all assets," UBS Asset Management head of fixed income Anne Anderson said.
"The market is trying to figure out where it's going to settle, so it's always going to overshoot," Anderson said.
Among the blue-chip names, the major banks were generally higher, aside from Westpac which fell 3.1 per cent as it traded ex-dividend during the week. ANZ Bank, which also traded ex-div, added 1.8 per cent, while Commonwealth Bank climbed 1.4 per cent and NAB gained 2.4 per cent.
Some of the heat came out of the mining sector, however, as BHP Billiton dropped 3.4 per cent, Rio Tinto dropped 3.7 per cent, while Fortescue lost 7.8 per cent and South32 a hefty 8.5 per cent.
Trumponomics has duly delivered some fascinating, even schizophrenic, financial market responses – while equities and floating-rate bonds have rallied, fixed-rate debt has been murdered, writes the AFR's Chris Joye:
One optimistic cohort – shareholders – has focused on the growth upside associated with Trump's commitment to expansionary fiscal policy, his desire to deregulate banks and his affinity for Wall Street advisers (ironic given his blue-collar support base).
Characteristically more pessimistic fixed-rate bond investors have been spooked by the prospect of higher future interest rates, which has pummelled the value of the AusBond Composite Bond Index by 2.7 per cent since August 31. Fixed-rate AAA rated government bonds have fared worse, losing 3.7 per cent of their value over the same period.
It's not like there is any certainty Trump will precipitate an inflation break out. It is more a case of "low-rates-for-long" duration lovers waking up to the likelihood that their nirvana of perpetually cheap money is a myth.
Finally, anyone holding variable-rate debt, which pays interest that moves up and down with cash rates, has been insulated from these gyrations with the AusBond Floating Rate Note Index up 0.53 per cent since August.
The puzzle in the conflicting equity and debt reactions is that there is significant embedded interest rate risk, or "duration", in stocks. While the numerator in valuation models (projected corporate earnings) might have nudged up, this could be more than offset by a higher denominator (the opportunity cost of capital as proxied by future interest rates) which is used to discount a company's forecast cash flows back to the present when figuring out what it is worth.
For the time being, stock jockeys are convinced the earnings boost will trump the interest rate effect. On this note, fixed-income traders currently impute a 100 per cent probability of a December rate increase from the Federal Reserve, which was ruled out by many "experts" immediately after Trump's ascendancy.
Spot iron ore prices are headed for their first weekly loss in six, as sliding futures and signals of slower Chinese demand for the steelmaking raw material pulled the commodity away from a two-year high.
Chinese iron ore futures have fallen nearly 16 per cent from Monday's 33-month peak as speculators pulled out of commodities markets after exchanges hiked trading costs to rein in recent sharp gains.
"There's a bit of cooling off in speculative trading and when things settle down, people will look at fundamentals," said Argonaut Securities analyst Helen Lau.
Further, China's efforts to address overcapacity in its bloated steel sector suggests limited demand for iron ore going forward, Lau added.
The most-traded January iron ore on the Dalian Commodity Exchange was down 1.6 per cent at 554.50 yuan ($US80) a tonne by midday. Those losses could weigh on the spot iron ore benchmark which stood at $US73.55 a tonne on Thursday.
The spot iron ore benchmark has lost nearly 8 per cent so far this week. It gained a record 23 per cent last week to touch $US79.81 on November 11, its highest level since October 2014.
In a bid to fight pollution, China has ordered industrial plants including steel mills to suspend production. The country is focusing its efforts in the northern region where the top steel producing province Hebei is located.
Lau said Hebei will suspend production of steel, coke and cement for several days to combat pollution.
The Aussie dollar remains under pressure, hitting a new multi-month low as the greenback continues to bulk up ahead of a now overwhelmingly expected US rate rise in December.
The Aussie fell as far as US73.79¢ a few moments ago, breaking a key support level just above US73.80¢, which in the eyes of some traders sets the currency up for further drops.
"The combination of pending Trump policies and strong US data has finally knocked the AUD," said Matt Simpson, senior analyst at ThinkMarkets, adding traders had also taken signals from weak employment data and soft wages growth number out earlier this week.
The Aussie was among the best performing major currencies this year until the US election, thanks to carry trades where investors borrow in safer assets to buy riskier, high-yielding currencies. Over the last eight sessions it has nearly erased its 2016 gains to stand only 1.4 per cent up for the year so far.
"Fed rate hikes could effectively kill the yield differential which had supported the AUD, leaving it vulnerable to further losses, especially if domestic inflation doesn't pick up and employment data continues to concern," Simpson added.
Meanwhile, Aussie bonds are resuming the sell-off that was briefly interrupted over the past two sessions, with the 10-year yield rising 15 basis points to 3.719 per cent, not far from the 10-month high of 2.737 per cent hit earlier in the week (bond yields and prices move in opposite direction).
Earlier this week, financial markets were for the first time in two years pricing in a higher chance of a rate rise over the next 12 months than a rate cut.
That's since reversed, with Credit Suisse data currently showing a 4 per cent chance of a rate hike over the next 12 months, but one economist who believes the RBA will start tightening in 2017 is Annette Beacher from TD Securities.
Beacher is looking for above-trend economic growth of 3 per cent in 2016, followed by an even stronger 3.25 per cent next year.
But she admits that despite the solid growth outlook, a rate rise is still not a sure thing: "The RBA is neutral with a laundry list of uncertainties to monitor in 2017. We see a 25 basis point hike in the fourth quarter of 2017, but many hurdles to jump before we get there."
Among the risks she cites: the buoyant housing construction cycle is not spurring consumption as debt levels reach saturation point, while the terms of trade upswing courtesy of rising commodity prices is not guaranteed to last.
Beacher is the only economist in Bloomberg's regular survey to predict the RbA will start hiking rates next year. Most of her peers expect the bank to either stay on hold or cut up to two times.
This is just breaking: nearly 30 people have been injured, six with serious burns, in a fire at a bank in Springvale, in Melbourne's south-east.
A man set fire to the Commonwealth Bank branch at Springvale Central about 11.30am, police said.
People were carried from the bank on Springvale Road on stretchers, as paramedics and firefighters treated more than a dozen others on the footpath.
Fire at Springvale bank
Witness video of a fire at Springvale Commonwealth Bank on Friday morning where six people suffered serious burns.
Emerging markets shares have been dumped by investors over the past week and a bit, copping the brunt of the recent selling, copping a double whammy of rising US yields as well as fears of trade wars under sparked by a Trump
Higher US rates reduce the allure of high-yielding emerging market assets, possibly triggering outflows, while Donald Trump has threatened to slap Chinese imports into the US with a 45 per cent tariff, spooking many EM investors.
But the asset class is still well ahead for 2016, rising as China's economy stabilised and commodity prices recovered.
The MSCI Emerging Markets index fell more than 6 per cent in the wake of the US election, trimming its gains for the year to 6.7 per cent.
Robert Talevski, investment director at Activus Investment Advisors, believes the investment case for emerging markets remains intact - as long as Donald Trump doesn't actually implement protectionist trade policies..
"As it stands, emerging markets have a price-to-earnings ratio of 14 which is lower than developed markets that have a PE of 17. It is therefore in our opinion that there is still room for further growth as emerging markets are showing consistency in terms of their performance."
Talevski points out that some emerging markets have single digit PEs, showing that they are not a homogenous group and that some emerging economies have further room to grow than others.
"Furthermore, with commodity prices appearing to have bottomed out and others almost near the bottom, it is good news for emerging markets as they can see stability returning and volatility reducing."
One emerging market continuing to feel the pressure is Mexico, where the peso dipped another 1 per cent despite a 50 basis point rate hike by the central bank on Thursday. Investors had been speculating the bank would do more to stem the slide in the currency, sparked by Trump's threats to build a wall and tear up a free-trade agreement with the country.
Gold stocks are really getting hammered this week as the precious metal's price heads closer to the $US1200-level following the rise in the US dollar.
Spot gold has dropped another 1 pre cent to as low as $US1205 an ounce, on track for a weekly fall of 1.5 per cent, which comes after last week's 5.9 per cent plunge.
The fallout is much bigger among gold mining stocks, with the All Ords gold index down 3 per cent today and on track for a whopping 9 per cent fall over the week.
The main reason for the drop is the rise in bond yields on expectations that a Trump stimulus will fire up inflation, which has in turn boosted the greenback - gold is highly sensitive to interest rates. Gold turned lower as the US dollar rose to the highest since 2003 against a basket of six major currencies.
"With the move up in the US dollar, that will continue to pressure gold prices," said Dan Heckman, national investment consultant for US Bank Wealth Management. "Looking beyond today, we think that perhaps the dollar is starting to peak out a little bit in the near term and we might get a little bounce here in gold."
Of the 20 stocks in the index, just three are posting small gains for the week: Newfield, Oceanagold and Ramelius Resources.
Leading the losses are Saracen, -16.7% for the week, Beadell Resources, -16%, Resolute, -15.2%, Northern Star, -13.6% and Evolution, -13.6%.
Australia's biggest gold miner, Newcrest, is down 2.9 per cent for the day and 7.6 per cent for the week.
It's clearly a retailers' day: Kogan has upgraded its guidance by up to 30 per cent and tipped a "strong Christmas trading period" at its first annual general meeting as a listed company.
Kogan, which listed on the sharemarket in July, told shareholders it now expected to report pro forma earnings before interest, tax, depreciation and amortisation of between $8 million and $9 million this financial year.
This is up from the $6.9 million EBITDA forecast in the prospectus for the 2017 financial year.
The company's prospectus forecasts net profit rising from a $300,000 loss in 2015 to a profit of $400,000 in 2016 and $2.5 million in 2017 from $241 million in sales.
Shares are up 2.1 per cent at $1.48 - but that's still well below its listing price of $1.80/
Should the federal government join the Trump bandwagon, or at least its proclaimed plans, and cut company taxes? The Business Council of Australia is all in favour, as it would be, but Michael Pascoe, says the BCA's claim that a cut in the corporate tax rate would lead to rising wages is 'hilarious':
The BCA and federal government continue to cling to dubious Treasury modelling that claims half the benefits of corporate tax cuts eventually flow to workers. This is a prime example of a little economic theory failing the common sense test, of one part of a puzzle being seized upon as ideal without considering the overall picture.
The theory is reasonable enough – lower tax rates encourages investment which results in more jobs which increases the competition for labour which pushes up wage rates. Too bad it doesn't actually hold water and has been effectively trashed upon review.
The reality is particularly different in a time of technological change and extreme global competitiveness. The first instinct of business is to maximise profits for shareholders (and executive bonuses) and minimise costs, not to pay workers more.
Unless labour is scarce, extra profits from lower taxes are more likely to go to higher dividends and share buybacks. The only employees picking up bigger wage rises are in the executive suite.
The wave of artificial intelligence that is about to wash over us threatens do to white collar jobs what automation has done to many blue. There is not going to be a shortage of people looking for work and, therefore, there won't be upwards pressure on wages no matter how low our tax rate might be.
In less-good news, Kathmandu shares have dropped nearly 7 per cent after the retailer said it it expects profit for the first half of the current financial year to match last year's, amid pressure on sales growth.
For the 15 weeks to November 13, the company reported a 2.8 per cent increase in sales, on a constant currency basis, compared to a year earlier. Same store sales rose only 1.4 per cent, compared to 4.8 per cent a year earlier.
"In response to the strengthened US dollar, we have been less promotional in the first quarter. Combined with a higher mix of clearance and cycling UK store closures, this has impacted on sales in the first 15 weeks," chief executive Xavier Simonet told the company's annual general meeting.
Kathmandu upgraded its full-year profit guidance in July by as much as 16 per cent. The company said at the time it expected profits to rise as much as 71.5 per cent this year, even though the warm start to winter had forced most apparel retailers to heavily discount stock.
Shares are down 4.2 per cent at $1.695, after earlier slumping 6.8 per cent.
Myer shares are still among the biggest winners on the ASX this morning, up nearly 8 per cent after posting solid same-store sales growth, but investors doubt the big gains are justified.
Bruce Smith, portfolio manager at fund manager Alphinity, said he was not sure "if the reaction is people buying the recovery stock or a few worried shorts covering a bit."
Myer is one of the ASX's most shorted stocks.
"Sales look less dire than they have been, a little better than [department store rival] David Jones' numbers recently implied it might be, but when it comes down to it I'd have thought 0.6 per cent first quarter sales growth would be cause for only minor celebrations," he said.
Talking NBN, Telstra gave analysts plenty to think about yesterday when it said that, "Over the next 6-12 months we will review our capital allocation strategy taking into consideration the long term business and financial profile of Telstra."
That means how to make the best use of one-off and long-term payments from NBN Co.
Telstra is to receive payments for leasings its network to NBN Co up until 2046, with the possibility for an even longer period.
Analysts were quick to point out that Telstra could securitise the NBN payments, offering them to investors as a government-backed annuity stream.
"We have considered a hypothetical theory the recurring infrastructure payments through to FY46 could be securitised by TLS," UBS told clients on Friday morning.
"Given these payments are also guaranteed by the federal government, they could be viewed by some investors as a government-backed annuity (i.e. valued using discount rate nearing the 10-year government bond rate, plus some sort of spread / premium)."
UBS reckons the infrastructure payments will be worth about $940 million a year by the 2022 financial year.
Applying a 4 per cent discount rate - which is higher than the 2.6 per cent on offer for 10-year Australian government bonds - the value of the securitised NBN recurring revenue would be $12.8 billion, based on UBS numbers.
Credit Suisse analysts agreed that securitising the NBN Co revenue was an option. Also up for review is Telstra closely-watched dividends policy.
"Telstra could consider a relatively radical capital management strategy that involves securitising, and effectively pulling forward, future NBN infrastructure receipts," the analysts told clients.
"It could use the proceeds to either support the dividend or to fund a large one-off capital return to smooth the transition to a lower underlying dividend."
Either way, investors are liking the speculation, adding another 1.9 per cent to the shares, following yesterday's rally.
Low-cost carrier Amaysim and data centre provider NextDC are the two stocks earmarked by fund manager and former telco boss James Spenceley as the biggest winners from the NBN, which has levelled the playing field at the expense of bigger providers.
In Spenceley's first investment letter to MHOR Asset Management clients, obtained by Fairfax Media, he argues that the NBN's structure offers no advantages for size or scale, and it is the most efficient operators that will reap the biggest rewards.
"It's very rare for a sector to have an external event of such scale as NBN, and unheard of for that event to level the pricing playing field for all industry participants; this is unchartered waters for any industry," he said.
Spenceley established MHOR with fund manager Gary Rollo in August, starting out in small cap stocks. He resigned from the board of Vocus in October in a highly public exit and disclosures suggest he no longer holds any shares in the telco business he founded in 2007.
Now as a stockpicker, Spenceley favours a challenger brand and a listed data centre business as the best ways to play the NBN.
Amaysim is a mobile virtual network operator (MVNO) which means it leases its wireless infrastructure and "has no NBN downside compared to its fixed listed telco peers," the fund manager says.
Trading at 14 times earnings, which are estimated to grow by 25 per cent, he argues the stock's comparatively low multiple "implies a free option on NBN upside success".
"That gets even more interesting given it is entirely possible [Amaysim] could earn more in absolute dollar margin per subscriber from NBN than from their MVNO business."
Amaysim stock plunged in February after rallying strongly following its 2015 float. The stock is trading at $2.16, up 1.2 per cent today, compared with its low of $1.55 nine months ago and $1.80 offer price.
Myer shares have jumped more than 10 per cent after the department store operator posted strong sales growth and reaffirmed it expects a return to net profit growth in 2017.
Same-store sales for the October quarter rose 1.6 per cent - outpacing growth at arch rival David Jones for the first time in two years - as chief executive Richard Umbers' turnaround strategy gained traction.
Total sales for the 13 weeks ending October 29 rose 0.6 per cent to $719.2 million as sales from new stores offset store closures and refurbishments amid increasing industry wide discounting. Sales per square metre rose 6 per cent and same-store sales at flagship and premium stores, the first to implement elements of the New Myer strategy, rose 2.8 per cent.
Umbers reiterated his forecast for a return to underlying profit growth in 2017 - the first growth in seven years - assuming no significant deterioration in consumer sentiment.
He also confirmed that earnings before interest tax depreciation and amortisation were expected to grow faster than sales this year, in line with the target in his five-year plan.
The latest sales exceeded market forecasts and are likely to boost investor confidence in the New Myer strategy, as the results followed strong growth in the year-ago period.
Myer shares initially jumped as much as 10.6 per cent and are currently up 5.8 per cent at $1.10.
Shares have opened on an upbeat note, with losses in energy stocks offset by gains in miners and banks.
The ASX is up 0.3 per cent at 5355.1, and needs just another 15 points to wipe out the week's losses.
This partly reflects that trading this week has been largely characterised by traders switching between industry sectors rather than taking a directional view, says CMC chief market analyst Ric Spooner.
"Markets have arrived at a point where they need to weigh the risks of being caught out by the potential stimulatory impacts of the Trump administration's policies against the risk of being caught by those policies not being implemented," he says.
Telstra is leading the blue chips higher, adding another 1.55 per cent after yesterday's strong rally, after the telco flagged $1 billion in cost savings over the next years and sparked hopes of a share buyback.
The big banks are all around 0.5 per cent higher, as is BHP, while insurers QBE and IAG have gained by more than 1 pre cent, profiting from rising bond yields.
Isentia is making a strong rebound after yesterday's 27 per cent-wipeout following a profit warning, rising more than 7 per cent this morning.
Leading the losers is Newcrest, which has dropped 1.7 per cent following a slump in the gold price. CSL is fast approaching the $100-mark again, slipping 0.5 per cent.
The US dollar has just reached a five-month high above 110 yen before Japan's Prime Minister Shinzo Abe meets President-elect Donald Trump in New York.
Traders are watching for any comments from Trump, who's accused Japan of currency manipulation. He and Abe are set to meet at 11am (AEDT), according to a Trump adviser.
If he reiterates his stance during his meeting with Abe, it will damage sentiment towards the yen, according to Kengo Suzuki, chief currency strategist at Mizuho Securities. The president-elect has also said Japan wasn't spending enough on US military bases, stirring concern about the bilateral security relationship.
The US currency was buoyed after Federal Reserve chair Janet Yellen said an interest-rate hike could come "relatively soon". After her remarks, traders assigned a 98 per cent probability to a Fed boost in December, futures indicate.
"The fact that she didn't push back against market expectations for a December hike is perhaps the most significant takeaway," said Jack Spitz, managing director for foreign exchange at National Bank of Canada in Toronto. "The US dollar is higher as a result."
The dollar rose about 1 per cent to 110.12 yen, the strongest since June. The greenback gained 0.6 per cent to $US1.0626 per euro, touching the strongest since December and overnight the Aussie dipped below US74¢ for the first time in nearly five months. The local currency is currently fetching US74.15¢.
"The biggest nuance in Yellen's comments is a shift from worrying about being ahead of the curve to behind the curve and risks of delay," said Eric Theoret, a currency strategist at Bank of Nova Scotia. This is "bullish" for the US dollar.
Janet Yellen, the head of the US Federal Reserve, doesn't believe that it's her job to boost global share markets, the AFR's Karen Maley writes:
But the upbeat assessment of the health of the US economy that she gave to US lawmakers overnight came as sweet music to investors' ears, strengthening their faith in the "Trump trade" – buying shares and selling bonds.
Investors, of course, have long expected that the Fed would raise US interest rates at its December meeting. Even before Yellen reiterated that a rate hike "could well become appropriate relatively soon", markets had priced in a 90 per cent chance of a rate rise.
But Yellen's view that the US economy had been making "very good progress" towards the Fed's goals of full employment and a 2 per cent inflation, even before Donald Trump's election victory, bolstered investor confidence.
The US share market has rallied strongly, and US bond yields have surged, in the wake of Trump's surprise victory, as investors have bet that $US4 trillion in tax cuts, combined with a massive $US1 trillion infrastructure spending program and lighter regulation, will boost US growth and inflation. (Yields rise as bond prices fall.)
Indeed, Yellen herself appeared to see some merit in the market's reaction. She told US Congress's Joint Economic Committee that the "significant market moves" since Trump's victory reflected the anticipation that widening US budget deficits could have "inflationary consequences", which would force the Fed to raise interest rates.
She also warned that Trump's budget stimulus was coming at a time when the US economy was "operating relatively close to full employment". The risk is US wages could rise sharply, fuelling inflation pressures, if firms have to compete for workers.
Her comments reinforced investors' worries that the Trump administration will be forced to ramp up bond issuance to cover its burgeoning budget deficits, and that an increase in the supply of bonds at a time when demand is weak will push bond yields even higher.
As a result, even as Yellen spoke, investors went rushing back into what's become known as the "Trump trade".
The whole world is still talking about Trumponomics, Trumpflation, Trump, says IG analyst Gary Burton:
Although it is quite possible the Donald received the greatest surprise himself by being elected. Trump talking of lowering the corporate Tax rate from 35% to 10%, and a 10% tax on profits held overseas, this will clearly have an implication for Apple going into 2017.
Janet Yellen commented there is not that much space for Donald Trump and his stimulus. Such are the dynamics of central bank and government.
With this type speculation the Dow remained flat, only being led by the Nasdaq heading into the close up 0.5%.
US housing numbers came in extremely strong at 1.32 million starts, an increase of 25%, the first commentary around this number was it could be an outlier and subject to some form of correction.
But take the view, numbers, all of the numbers are going in the right direction. Including inflation and interest rates and employment with the US 10-year bond yield rising to 2.27% overnight.
The US dollar index value is something every trader will be discussing in t2017, remained firmly over the key 100 level at 100.85 a 13-year high.
Aussie dollar continued its fall overnight settling around US74.09c well below the key 75c level; this will contribute to price support in the commodities sector. The underlying metals receiving a boost with copper higher .56% and iron ore up 1.56%.
Gold coming off $US9.90 will see further falls in the Australian gold sector, Newcrest Mining being the most technically vulnerable close to the key support level of $20.00. The smaller players like Saracen, last $1.05 also looking soft with a key support level at $1.00.
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