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Shares ended a surprisingly strong week on a high, buoyed by the big banks and energy stocks.
The ASX signed off at 5560.6, its highest close since August 24, up 0.3 per cent for the day and 2.1 per cent for the week.
Resource giants BHP Billiton and Rio Tinto had a fairly solid week, thanks to a roaring iron ore price and gave the bourse some solid support. On Friday though, BHP closed down 0.4 per cent whereas Rio Tinto managed to close up 0.3 per cent.
Oil was hovering around $US53 a barrel on Friday, ahead of talks beginning Saturday in Vienna between OPEC and 14 other oil-producing nations to straighten out the supply levels and discuss OPEC's decision to cap production. Australia's largest oil producer Woodside Petroleum finished up 2.4 per cent for the day.
There was plenty of equities news around on Friday to keep market watchers busy. Shares in liver cancer treatment company Sirtex plunged 37.2 per cent to $16 after the company announced a 40 per cent profit downgrade thanks to steepening competition. Investors angrily discarded the stock as the announcement came only six weeks after an optimistic AGM.
Crown Resorts shares also took a belting after reports emerged the Monetary Authority of Macau will half the amount of cash UnionPay card holders can withdraw from ATM machines. Investors sent the share price tumbling 5.3 per cent on fears the lack of cash may cause a severe dent in revenue.
First home buyer numbers continue to dwindle, and a fall in loans for the construction of new homes signals the building boom will soon wind down, economists say.
Home loan approval numbers fell 0.8 per cent in October, a slightly smaller fall than the 1.0 per cent decline the market expected. The value of loans approved for owner-occupied housing fell 0.8 per cent in October, and loans for investment housing rose 0.7 per cent.
Investors are once again the main drivers of activity in the housing market, Commonwealth Bank senior economist Kristina Clifton said.
"Approvals to investors have increased this year and now outpace loans to owner- occupiers," she said. "The two interest rate cuts this year have reduced financing costs and increased the attractiveness of property investment. On the other hand, approvals to owner-occupiers are slowing and first home buyers continue to account for a smaller share of new loans."
ANZ economists said investor enthusiasm was not extending to new dwellings, with finance for the construction of new homes trending lower for six months to hit its lowest level in over two years in October.
"This decline, combined with the recent drop in building approvals, support our view that we are around the peak in housing construction, and will see investment fall through 2017," they said in note.
The week started off with investors worried that Italy's resounding 'no' in a referendum on constitutional reform could spark turbulence on markets - but instead we're getting an early Santa rally that has driven the ASX to a four-month high.
Just like after other political risk event this year - think Brexit or the US election - markets were quick to shrug off predictions of doom and gloom.
"Many of these events have seemed less negative than feared once they transpired – Britain and more importantly Europe did not collapse after the Brexit vote, many of Donald Trump's policies are positive for growth and hence sharemarkets and even though Italy voted 'No' there is a long way to go to get to an 'Itexit' (Italian exit from eurozone)," says AMP Capital head of investment strategy Shane Oliver.
"A lesson in all this is to turn down the noise – the coverage around Brexit, etc, was huge but investors would have been better off doing nothing but sticking to their long turn strategy. Or if you are going to do anything be contrarian and buy the dips."
Oliver adds that December is usually one of the strongest months of the year, but the famous 'Santa rally' seems to have arrived earlier this year.
The average gain in December is about 2 per cent, based on data for the past 30 years - and the market has already risen more than 2.1 per cent this month.
But more than 60 per cent of respondents to our poll predict the rally still has some way to go, with a sizeable minority predicting the ASX could even eye 6000 points before the year is over.
Poll
The bulls are out in full force, sparking talk of an early Santa rally. Where do you expect the ASX to end the year?
Poll closed 9 Dec, 2016
Disclaimer: These polls are not scientific and reflect the opinion only of visitors who have chosen to participate.
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
Trump says again tonight that China is unfairly devaluing its currency.
— James Fallows (@JamesFallows) December 9, 2016
Who will dare tell him CN gov has been keeping RMB *up* not down?
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:
Poll
The bulls are out in full force, sparking talk of an early Santa rally. Where do you expect the ASX to end the year?
Poll closed 9 Dec, 2016
Disclaimer: These polls are not scientific and reflect the opinion only of visitors who have chosen to participate.
SPONSORED POST
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.
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