Australian miners have China to thank for a lucrative administrative oversight, which contributed to this year's amazing rally in iron ore and coking coal prices.
To combat unprofitable thermal coal production, the Chinese government implemented supply-side reforms, which inadvertently applied to coking coal.
In April the National Development and Reform Commission (NDRC) enacted a 276-working-day rule, barring all coal mines from operating on weekends.
Since that month, the price of thermal coal at Newcastle's port has jumped 80 per cent to $US89/tonne, while coking coal has tripled to $US300/tonne.
"They [the government] miscalculated a lot of things and they basically just created a massive shortage," said Brad Potter, head of Australian equities at Nikko Asset Management, who recently returned from a fact-finding trip to China.
"Coking coal was effectively the innocent bystander of the regulatory forces trying to manage price and volume in the 3.2-billion-tonne thermal coal market.
"So it's really nothing to do with fundamental supply and demand, it was based around a policy decision that went wrong."
The spike in prices in coal meant Chinese steel mills went from spending 20 per cent of their total costs on coal to 40 per cent, pushing them in turn to seek higher grades of iron ore to make the steel making process more efficient.
For every 1 per cent increase in the grade of iron ore, the amount of coking coal required is reduced by roughly 2 per cent.
Iron ore prices on Wednesday night jumped to a two-year high above $US82 a tonne, before coming back a bit to $US81.78 last night. Dalian iron ore futures are currently down 1.8 per cent, but still up 6 per cent for the week.
Markets' black swans are rapidly turning grey.
Brexit, the election of Donald Trump, and a faltering bull market in bonds have all helped elevate analysts' 2017 tail risk predictions from the status of colourful festive reading to a cause for sleepless nights.
Analysts at Nomura are the latest to throw their hat in the ring - warning investors to be prepared for "unlikely but impactful events".
"Needless to say, none of them are our base case," the analysts caveat. Of course, investors scarred by the turmoil of 2016 know that doesn't necessarily mean that they won't happen.
Here are Nomura's 10 events that could end up roiling your 2017:
- Russia on the warpath
- A surge in US productivity
- China floats the yuan
- An exit from Brexit
- Capital controls in emerging markets
- Japanese inflation jumps
- A clearing house crisis
- Trump takes fight to the Fed
- Abenomics comes unstuck
- The end of cash
Here's more on each of the 'grey swans'
Treasurer Morrison labelled this week's surprisingly low September-quarter GDP number as a "wake-up call". What he didn't say is that it's a call that's been ringing for three years, Michael Pascoe comments:
Nobody in the government bothered to answer it. Three years is how long mining investment has been tumbling towards the September quarter's inevitable conclusion. For those three years, the government has primarily relied on low interest rates to provide an alternative growth engine. It has turned out that the main contribution of low interest rates has been to encourage higher housing prices, which in turn has helped maintain consumer spending through the wealth effect.
No, it has never been a sustainable solution. A very valuable transition mechanism that has done a great job, yes, but you can't rely on always increasing the number of dwelling units being built and renovated. Growth through housing expansion is coming to an end.
It's by no means too late to answer that wake-up call, for the government to get serious about providing sustainable fiscal stimulus. We're not about to fall into recession this quarter – but our economic horizon is shrinking.
What the national accounts underlined was the extent of the federal government's lost opportunity to increase investment in infrastructure ahead of the well-telegraphed end of the resources construction boom.
To borrow a Keatingism, every galah in the pet shop has been saying the government should borrow more to invest in the nation's future. Opportunity knocked, but the coalition was not at home, clinging instead to a threadbare ideology of smaller government and bigger corporate tax cuts. The Republican Tea Party writ small.
The ATO has today released 2014-15 tax data for close to 2000 companies, and there are plenty of gems in the numbers.
Starting top down, there were approximately 1.2 million companies operating in Australia and they reported total income tax payable of $67 billion in 2014-15.
The 1904 corporate tax entities that reported under the transparency measure represent almost two-thirds of that amount. Of those, 670 - or 35 per cent - paid no tax.
But household names including the big four banks, two supermarkets, miners and Telstra were among the top 10 taxpayers.
BHP went from the biggest taxpayer in 2014 to 6th in 2015. It reported the biggest decrease in tax paid in dollar terms.
Qantas was the largest company by income with no tax payable, in a year it reoprted a loss. It had total income of $15 billion, taxable income of $211 million and no tax payable.
Apple told the ATO its tax payable for 2015 was almost twice the figure it reported in the special purpose financial accounts that it filed with ASIC.
While Apple's ASIC accounts showed tax payable for 2015 was $82.6 million, its tax return filed with the ATO showed tax payable was $146.3 million.
The results do not yet show the effects of recent initiatives including the Multinational Anti-Avoidance Law and Divert Profits Tax, the latter of which has yet to be written into law.
Billionaire Gina Rinehart and her Chinese business partner have been cleared by the federal government to buy iconic cattle empire S. Kidman & Co, ending more than a year of uncertainty over the future of the vast property.
Treasurer Scott Morrison said the deal meant that Kidman, which spans about 1.3 per cent of the nation's total land area, would remain majority Australian owned. The largest cattle station, Anna Creek and a property known as the Peake, will be carved out and acquired by the local Williams farming family, Morrison said.
The land sale was one of the most political in recent times, with South Australian Senator Nick Xenophon and Queensland independent Bob Katter the latest to oppose Rinehart's bid, on the grounds that it was in coalition with Chinese interests, by supporting an all-Australian rival offer.
Founded in 1899 by so-called Cattle King Sidney Kidman, the company's ranches span 101,000 square kilometres and carry about 185,000 cattle. Acting on the advice of the Foreign Investment Review Board, the government blocked the sale to a Chinese company in November last year, saying the proximity of the Anna Creek ranch to a weapons-testing range could compromise national security.
Rinehart's $386.5 million bid, made under the entity Australian Outback Beef Pty., was unanimously recommended by the Kidman board in October, topping a rival offer by a group of outback ranchers.
Chinese inflation continues to rise: in November producer prices rose 3.3 per cent from a year ago, the highest since October 2011, thanks to soaring prices for commodities such as steel and coal.
The producer price index (PPI) had been expected to rise 2.2 per cent on-year, compared with the previous month's rise of 1.2 per cent. Its the third rise in the PPI following years of drops.
"This confirms our view that China has emerged from a multi-year deflationary trap," said Raymond Yeung, chief greater China economist at ANZ
Producer prices in the mining industry surged 14.8 per cent, accelerating from a 7.9 per cent pace the prior month and a 2.1 per cent gain in September. Raw materials prices rose 5.8 per cent.
The consumer inflation rate rose to 2.3 per cent from a year earlier, the fastest pace since April this year,compared with a 2.1 per cent posted the prior month. Analysts had predicted the consumer price index (CPI) would rise 2.2 per cent.
So Chinese CPI at 2.3% and PPI at 3.3% suggest, with trade, the level of economic activity in #China (perhaps globe) looking okay#forex
— Greg McKenna (@gregorymckenna) December 9, 2016
"As the commodity market heats up, inflation has returned to China," said Yeung. "The next move of the PBoC should be an interest rate hike, not a cut."
The bad news for James Packer's gaming empire, Crown Resorts, just keeps coming, with the company's share price falling as much as 8 per cent on Friday amid concerns gamblers in Macau may soon have less cash to splurge.
Crown's local stock decline mirrored a plunge in US casino shares overnight after the South China Morning Post reported that China is imposing a 50 per cent cut on one bank's ATM withdrawal limits in Macau, the world's largest casino market.
The cap at UnionPay, taking effect on Saturday, reduces the limit to 5000 patacas ($840), the newspaper reported.
Shares of Las Vegas Sands dropped 13 per cent in US trading, Wynn Resorts fell 11 per cent and MGM Resorts International sank 4.3 per cent.
US-listed shares of Crown's casino venture in Macau, Melco Crown Entertainment, plunged 14 per cent. Crown, which owns about 27 per cent of the business, is trading 6.4 per cent lower at $11.27.
The market rout has underscored Macau's importance to the global gaming industry. New rules on ATM cash would extend China's tightening of capital controls as depreciation pressure builds on the yuan.
The news "came out of nowhere," said Steven Wieczynski, an analyst at Stifel Nicolaus & Co.
UnionPay doesn't likely account for a "significant" amount of the bets placed in Macau, "certainly not to levels implied by the sell-off", he said in a research note overnight.
The Macau Monetary Authority's limit on withdrawals in Macau is designed to further tighten rules on the use of China UnionPay cards, the Morning Post said. Law enforcement officials have scrutinised UnionPay transactions as a way for people to illegally take cash out of China.
The development strikes a blow to casino operators just as the Chinese betting enclave of Macau was starting to recover.
The impressive Trump rally over the past weeks is blind to the rates re-set, argues the AFR's Chris Joye, who has hedged half his core portfolio in cash as he's "uncomfortable with the bullish price action":
Global equities have embarked on a crazy-brave rally since the Trump ascendancy, with the local bourse's total returns (inclusive of dividends) now sitting at an impressive 7.8 per cent for the year to date.
Almost half of this performance has, however, materialised over the last 37 days. During the first 10 months of 2016, the equities market's total returns were looking more ordinary at merely 4 per cent.
There is nevertheless reason to think that the typical end-of-year-exuberance will further inflate returns on what are the riskiest securities (sitting at the bottom of the corporate capital structure) into double digits.
This ebullience will be awkwardly juxtaposed against the US Federal Reserve's belated decision to hike rates for the first time in 2016 and only the second time since the global financial crisis (GFC). It is astonishing to think that with the US jobless rate having plummeted from 10 per cent to 4.6 per cent (and US wages growth now back at pre-GFC levels), the central bank has kept short-term cash rates near zero.
Undeniably one of the biggest investment risks next year will be higher core inflation in the world's largest economy, which could compel an intensification of the recent re-rating of long-term interest rates that have been ignored by one-eyed equities markets giddy on unexpected shots of Trump tequila.
One of the smartest local bond bandits, Charlie Jamieson, argues that "while the media have been fixated on the Trump rally, domestic data have collapsed". He warns that "Trump isn't just one data point – he is the only data point currently". "The commodity rally isn't just welcome, it is critical to keeping Australia's ship from sinking."
ANZ has followed rivals in pushing up variable interest rates for property investors, blaming higher funding costs and its obligations to regulators.
The bank said property investor borrowers would face a 0.08 percentage point increase, with its benchmark rate for these customers increasing to 5.6 per cent.
The move follows similar rises this week from National Australia Bank, Westpac, Suncorp and ING Direct, with all of the lenders also a pointing to a lift in their cost of funds.
The hikes follow a rise in bond yields, which can raise banks' costs, and recent strength in lending to property investors as house price growth accelerated in Sydney and Melbourne.
After a political backlash against banks following their skinny interest rate cuts in August, ANZ did not increase interest rates for owner-occupiers, a move that would probably reignite the political attacks on banks.
For financial markets, the most momentous day of 2016 wasn't November 8, when president-elect Donald Trump prevailed in the US elections, nor June 23, when the UK voted to leave the European Union.
It was July 11, according to Bank of America Merrill Lynch chief investment strategist Michael Hartnett.
"That day was the day that the greatest bull market ever in the bond market ended," he said during the bank's year-ahead outlook presentation on Wednesday. "And since then, yields have been rising, and that without a doubt is the biggest event of 2016."
On that day, the 30-year Treasury yield hit a record intraday low of 2.0882 per cent. The yield on Australia's benchmark 10-year government bottomed three weeks later, on August 2, at 1.811 per cent; it's currently above 2.8 per cent.
Everyone was positioned for interest rates to sink lower and lower after Brexit, said Harnett, but firming economic data and the move towards fiscal over monetary stimulus - buoyed by proof of populism at the polls - closed the book on the bond bull market.
Violent rotations will follow in its wake, he warned, highlighting the shifting dynamics now driving markets - from monetarism to Keynesianism, globalisation to protectionism, growth to value stocks, and so on.
The US was the "great deflation winner", said Hartnett, and amid an environment of rising inflation and bond yields, other regions are poised to outperform.
"The big fun will be in Japan, will be in Europe, it'll be in oil, it'll be in value stocks, it'll be in small cap," he said.
"There I think you will get double-digit gains next year, all because those are very, very tied to something that has changed, which is the direction of inflation and the direction of interest rates."
The renowned US stock market valuation index developed by Robert Shiller is at its highest level since the 1929 bull market crashed, triggering the Great Depression, but the famous economist says Wall Street still has room to rise in the short term under President-elect Donald Trump.
The cyclically adjusted price-to-earnings ratio, commonly known as CAPE, has topped hit 27, exceeded only in the 1929 slump and the 2000 tech bubble.
Despite the warning indicator, Shiller cast doubt on whether the much-watched valuation index meant that an imminent equity price crash was in the cards.
"It is at the point that over the long haul, over the next 10 years, they [shares] might underperform," the 2013 economics Nobel prize winner said in a US television interview. "I'm tempted to be optimistic for the short run."
"We just got a president who wants to cut corporate taxes and he wants to ease regulations," Shiller said. "So my own indicators are a little bit less effective in this environment."
"On the other hand I still believe in them in the long run."
The US stock market is on track for its fifth consecutive week of gains as the major bourses continue to hit record highs. The broad S&P 500 is up more than 5 per cent since the November 8 election.
Westpac chief executive Brian Hartzer has added his voice to calls for government to boost the economy through infrastructure spending.
Speaking at the bank's AGM in Adelaide, Hartzer urged the federal government to deploy fiscal policy in an effort to deliver a much needed kick start to confidence and investment from the private sector.
"With interest rates near all-time lows, we believe there is a strong argument for governments to borrow to fund projects that expand economic capacity," Hartzer said.
The call to action has followed a series of public criticisms of government spending including from NAB chairman Ken Henry and former Reserve Bank governor Bernie Fraser.
State governments did not escape the call to arms either, with Hartzer zeroing in on their roles in providing vital pieces of infrastructure.
"Australia's economic growth would also be improved by increased state and federal government investment in infrastructure – especially roads and transport."
Sirtex Medical has tried to reassure shareholders that its radiation treatment for liver cancer is a long-term growth opportunity after disappointing first half sales and a profit warning
But shares are still down more than 30 per cent at $17.00, after earlier halving in value.
The company said that soft sales of its treatment doses in the Americas, Europe, the Middle East and Africa meant that worldwide dose sales growth would only be between 4 and 6 per cent in the six months to December 31, compared to 15.7 per cent in the prior corresponding period.
Sirtex said sales growth will be between 5 to 11 per cent in the 12 months to June 30, compared with 16.4 per cent.
Full-year earnings will be flat at $74 million at best, the company said, but could drop by up to 12 per cent.
Chief executive Gilman Wong said conditions have been volatile with increased competition for patients, a rival drug approval and restrictions in reimbursements.
Shares have opened flat, with gains in financial and energy stocks offset by small losses in most other sectors.
Analysts expect today's session to be a bit more subdued as investors digest the strong gains of the past days.
The ASX is up less than 1 point at 5544.4, despite strong gains in the big banks, which are following leads from Wall Street.
CBA is up 0.6 per cent, ANZ has risen 0.7 per cent and is on its way to top $30, while Macquarie has added 1.25 per cent.
Among the losers, Sirtex is down a whopping 46 per cent following disappointing first-half sales.
Crown has dropped 5.5 per cent following reports China is imposing a 50 per cent cut on one bank's ATM withdrawal limits in Macau, the world's largest gambling market.
The bulls clearly rule this week but will the good times last? Here's our poll:
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Poll closes in 59 minutes.
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It looks like the bulls are in total control here, says IG strategist Chris Weston:
While investors are focused on fiscal stimulus in the US and how the suite of proposed fiscal measures can complement already accommodative monetary policy, in Europe we are far from having any sort of fiscal response. This means Mario Draghi and the European Central Bank (ECB) still have a job to do and once again we have seen the central bank change the perimeters accordingly.
The ECB's actions on the face of it initially looked to the market that they were signalling a tapering of its bond buying program, but once everyone had a chance to really sink their teeth into the proposals they found this to be far from true and that the ECB were actually pushing the program out – QEinfinty if you will.
We have seen a number of the key technicalities (around its program) removed, including the range of bonds they can buy and this will give them greater control of the yield curve. This is very important for European banks, hence European banks flew last night and with talk of late that Italian banks may gain access to the European Stability Mechanism (ESM) I wouldn't be surprised if Italian banks pushed even higher from here.
We can look at European assets and see a sizeable 15 basis point (bp) increase in the Italian yield curve, with a more modest rise in the German curve (+10bp). EUR/USD initially popped as the algos reacted to the slower pace of purchases (but the ECB are not tapering), but the pair is back testing the $US1.06 level and the ECB, along with the Bank of Japan have pushed EUR as the key funding currency for FX traders (in the carry trade). All European equity bourses have rallied strongly, and one can look at the Italian MIB as a picture of beauty. I am happy to be long this index and accumulate on a pullback, despite genuine solvency, political and credit-rating concerns in Italy.
US markets have pushed modestly higher, but US financials have once again been the place to be. Being long US financials has been such a great trade and everyone has filled their boots on "Trumponomics" inspired reflation.
The Australian equity market also looks to be feeding off some of the ECB-inspired inspiration, with an open into 5560 (+0.3%). I am not so sure our domestic banks will be treated in such the same positive way European or US banks were, and a flat open is likely here. BHP should open around 0.5% to 0.7% higher (based on its ADR), but this looks to be supported by higher oil prices, with US crude 2% higher from yesterday's ASX 200 close.
We have seen commodity futures under some pressure, with iron ore, steel and coking coal futures down 6.2%, 2.1% and 4.7% respectively. This may take some of the heat out of the materials space.
All four major US stock indexes set fresh record highs overnight as a month-long rally following the presidential election of Donald Trump rolled on.
Investors have driven up equities since Trump's November 8 election over optimism about domestic economic stimulus and reduced corporate taxes and regulations.
Supporting the upbeat sentiment was a report that showed the number of Americans filing for unemployment benefits fell from a five-month high last week, pointing to labour market strength that underscored the economy's momentum.
"This is just a continued melt-up post-election. The path of least resistance has been higher," said Jason Ware, chief investment officer with Albion Financial Group. "Seasonally, you have a strong period. You have money coming out of the bond market ... so that money has to go somewhere."
The Dow Jones industrial average rose 65.19 points, or 0.33 per cent, to 19,614.81, the S&P 500 gained 4.84 points, or 0.22 per cent, to 2,246.19 and the Nasdaq Composite added 23.59 points, or 0.44 per cent, to 5,417.36. All three indexes set new records, a day after they each posted gains of at least 1 percent. The Russell 2000 index of small-cap stocks, which has soared 15 per cent since the election, also hit a new high.
Financials, among the major gainers since the election, led the way again overnight, rising 0.9 per cent. Industrials, another post-election beneficiary, fell back 0.5 per cent, weighed down by defence stocks.
While investors are still adjusting to the economy's outlook under a Trump administration, "generally speaking, the idea that taxes will be less and regulations will be dialled back seems to be creating not only optimism but laying the groundwork for economic expansion," said Bucky Hellwig, senior vice president at BB&T Wealth Management.
"So if you own stock, you want to hold onto it. If you don't, you want to buy it," Hellwig said.
Here are the key points of the ECB's decision overnight:
-
The ECB extended QE to the end of 2017 (or three months more than expected)
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Monthly asset purchases will be reduced by €20bn to €60bn from April. (This was a surprise, coming earlier than expected)
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The extension still adds an additional €540bn to QE, or about 5% of GDP (that's €60bn more than if QE had been extended only to September on €80bn a month as markets were expecting)
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The minimum maturity for eligible purchases was cut from 2 years to 1 year and if needed, purchases of securities with negative yields (below the deposit rate of -40bps) will be permitted. (This contributed to a steepening of the yield curve, which buoyed banking stocks).
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Bond purchases won't be able to deviate from countries' shareholding in the bank (meaning there are limits to the number of say Italian bonds the ECB will buy)
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Mario Draghi was at pains to make it clear the ECB isn't considering an end to QE, despite the taper (which he said wasn't actually one)
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The ECB also updated its macroeconomic projections, making no material change to the outlook: slow growth, soft inflation remains
Bank shares jumped, bond yields rose and the euro dipped after the ECB said it would prolong its bond purchase program but surprised investors by scaling back on how much it will spend each month.
European shares rose to their highest in eleven months, with banking shares leading the way up. The Italian banking index rose 3.6 per cent to a five-month high with struggling lender Monte dei Paschi rising 4.1 per cent.
Higher yields are seen helping reduce pressure on bank margins which have been pressured by sluggish economic growth and ultra low interest rates.
"Banks typically outperform as yield curves steepen," said Barclays, adding that banks such as Societe Generale, ING and and ABN Amro looked to be best placed to benefit from rising long term rates.
The euro saw its biggest one-day percentage drop against the US dollar since June after the ECB said it would reduce its bond buying program to 60 billion euros a month from 80 billion, but extended it from April to December 2017.
ECB President Mario Draghi said it was not an outright winding-down of quantitative easing (QE) but this did not completely reassure fixed income investors.
"Currencies are reacting more to the extension and bonds are focused on the taper," said Frances Donald, senior economist at Manulife Asset Management in Boston. "The total announcement today is more easing than expected. It may take more time for the bond market to recognise that."
The euro was last down 1.3 per cent at $US1.0614 after initially surging to $US1.0875 after the ECB's statement. The US dollar rose 0.9 per cent against a basket of major currencies after the ECB news and ahead of next week's Federal Reserve meeting at which a rate hike is expected.
"It didn't help the euro was at the highs; we had a clearing of euro shorts after the Italian referendum," said Vassili Serebriakov, FX strategist at Credit Agricole in New York referring to an Italian vote against constitutional reform days before theECB meeting.
The S&P 500 benchmark stock index rose, with its biggest boost from financials, followed by the materials sector.
"This is just a continued melt-up post-election. The path of least resistance has been higher," said Jason Ware, chief investment officer with Albion Financial Group. "Seasonally, you have a strong period. You have money coming out of the bond market ... so that money has to go somewhere."
The main event overnight was the European Central Bank's decision to trim back its asset buys in a surprise move, but the bank also promised protracted stimulus to aid a still fragile recovery, and dismissed any talk of tapering the program away.
With still no sign of a sustained rebound in underlying inflation and heightened political risk from looming elections in four of the eurozone's five biggest economies, the ECB promised to keep borrowing costs depressed longer than predicted, even reserving the right to raise back purchases if the outlook sours.
Although the cut in the volume of monthly assets buys suggests a concession to conservative countries such as Germany and the Netherlands, the underlying message was seen as dovish, catering to nations on the periphery and a boost for financial markets.
Catching financial markets off-guard, ECB President Mario Draghi said the bond buys would be cut to 60 billion euros a month from 80 billion euros starting April but they would go on until the end of 2017, three months longer than expected.
"There is no question about tapering," Draghi said. "We can even go back to 80 (billion)... there's a range of options."
"The key message... is to show that there is no tapering in sight, to show that the ECB is going to stay in the market, to show that we will continue to exert pressure on market prices," Draghi added.
After initially rising on the cut in monthly purchases, the euro weakened 1.3 per cent and stocks surged 1 per cent, boosted by bank shares that have rallied all week.
"During the Q&A session, ECB president Draghi had difficulties sending a very clear message to markets on how to read today's message," ING economist Carsten Brzeski said. "Throughout the press conference, he sounded more and more dovish."
The ECB has already spent more than 1.4 trillion euros buying bonds and is at risk of running out of assets. The Bundesbank argues that this blurs a legal line and can be considered central bank financing of budgets.
To make further buys possible, the ECB relaxed some of its self imposed rules, increasing the pool of eligible assets.
Bonds with maturity between 1 and 2 years will now be included in the asset buys and the bank will also purchase bonds yielding less than its -0.4 percent deposit rate, if necessary.
But in another small victory for conservative euro zone members, the ECB decided not to allow bond purchases to deviate from countries' shareholding in the bank, an issue considered a red line Germany's Bundesbank.
"By surprising on the dovish side with duration and at the same time tapering the purchase rate, the ECB has made a shrewd move in our view," HSBC economist Simon Wells said.
"By tapering, albeit conditionally, it has made a sop to its critics who think policy is already too loose," Wells said. "But it has also bought itself time and side-stepped a series of potentially difficult discussions about further extensions during 2017."
Underlying its promise for extensive stimulus, the ECB predicted inflation at 1.7 per cent in 2019, arguing that higher energy prices could lift consumer prices even without lifting the underlying trend.
But when asked if the 1.7 per cent met its goal of below but close to 2 per cent, Draghi said: "Not really, so we have to persist."
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