Writes the SMH's economics editor Ross Gittins:
The latest stage in the politicisation of Treasury came last week with its publication of a report on The Effectiveness of Federal Fiscal Policy, commissioned from Professor Tony Makin, of Griffith University.
If you've never heard of Makin's work, you'll be surprised to learn he regards fiscal policy as utterly ineffective and probably counterproductive.
If you have heard of it, you won't be. Makin's views on the ineffectiveness of fiscal "activism" – using budgetary stimulus to assist recovery during recessions – are well known, unchanged and unchanging.
He's the go-to guy for anyone who'd like an independent report asserting that fiscal policy doesn't work – never has and never could.
In all the decades since Makin made up his mind on this question, all the academic theorising and empirical evidence from the real world have served only to confirm the wisdom of that decision.
His paper's "review" starts by rubbishing that deluded fool John Maynard Keynes – who, presumably, will never attain the intellectual heights reached by Makin and his mates – and praising such giants of the profession as Robert Mundell, Marcus Fleming, Robert Lucas and Thomas Sargent.
It then reprises Makin's well-rehearsed argument that the Rudd government's budgetary stimulus – undertaken at the urging of the then Treasury secretary, Dr Ken Henry – was unnecessary and unhelpful.
And finally it does a lot of hand-wringing about the rapid growth in the public debt (especially when you exaggerate the size of the debt by quoting gross rather than net, a trick Makin seems to have learnt from Barnaby Joyce), the burden being left to our children, and the need to make reducing recurrent government spending our top fiscal priority.
One small problem – the last time Makin ran his anti-activism line, in a paper commissioned by the Mining Council, Treasury issued a detailed refutation. Makin seems to have taken none of its substantive criticisms into account in his Treasury-commissioned version.
This is a measure of the extent to which politicisation has changed Treasury's tune.
Aged care operator Estia Health has launched a $137 million capital raising and dropped its interim dividend in a bid to bolster its beleaguered finances.
Macquarie Capital, which conducted a strategic review of the embattled operator, is handling the raising which it will also fully underwrite.
With that review now concluded, Estia's chairman Pat Grier is stepping back to become a non-executive director.
Fellow board member Dr Gary Weiss will take the chair from the start of 2017.
The $136.8 million raising is being offered at $2.10, a 21.6 per cent discount to its closing price last week.
Institutional investors are expected to account for around 55 per cent of that total, with the remainder being offered to the retail register.
Aside from $5.8 million in transaction costs, the raising is devoted to reducing Estia's borrowings.
Core debt will be cut to $85.5 million while net debt will be reduced to $143 million.
The operator's leverage is currently running at 2.41 times. After the raising that will be cut to a more modest 1.62 times, well within a new target gearing of 1.5 to 1.8 times.
"Today's announcements put Estia on a fresh footing with a strengthened balance sheet," said chief executive Norah Barlow.
"We will continue with our greenfield and brownfield development pipeline and refurbishment opportunities program, but under a more conservative business plan and growth agenda.
"We have also identified some non-core assets that will be divested and we will continue to review our portfolio to ensure that we have the right mix of assets going forward."
Along with its listed peers, Japara Healthcare and Regis Healthcare, Estia has come under pressure this year after the federal government announced cuts to the sector.
Already Estia has unveiled two earnings downgrades while its founder Peter Arvanitis and other key staff including a previous chief executive left the company.Estia has come under closer scrutiny as its net debt approached its borrowing ceiling.
Gas pipeline major APA Group has taken its first firm step into solar power, signing a 12-year electricity sales contract that will underpin a $50 million project in Western Australia.
The contract with WA retailer Synergy will allow for the construction of the 20 megawatt Emu Downs solar project adjacent to APA's existing 80 MW Emu Downs wind farm. Construction will start in January.
APA chief executive Mick McCormack has been voicing ambitions to develop into solar power as he explores growth opportunities for the company which is already the country's dominant gas transmission operator. In August, he pointed to $1.5 billion in potential growth projects over the next three years, including about $500 million in renewable energy and power generation.
The venture will also be supported by $5.5 million of funding from the Australian Renewable Energy Agency, as advised in September.
Mr McCormack said that the project is "the type of energy infrastructure asset that APA will continue to invest in."
"The expansion of APA's existing Emu Downs Wind Farm with the complimentary solar generation makes logical and financial sense both from a power generation profile, as well as sharing transmission connection infrastructure," Mr McCormack said.
Citigroup analyst Michael Dargue has pointed out that renewable energy investments are likely to offer APA lower returns than its core pipeline business.
He said a fully contracted renewable energy project could generate about 8 per cent rate of return when geared at 60-70 per cent. But as APA's current return on equity is about 9 per cent, the expansion into renewables is likely "dilute to returns," Mr Dargue told clients in a note in August.
APA shares are up 0.6 per cent at $8.09.
Travel insurance re-seller Cover-More has agreed to a $741 million takeover offer from Switzerland's Zurich Insurance Group.
Under the deal, Zurich will acquire Cover-More for $1.95 cash a share, a 48 per cent premium to the target's last closing price of $1.32 on Friday.
It marks Zurich's second acquisition in the Australian insurance market this year. Zurich in March purchased Macquarie Group's life insurance division for an undisclosed sum.
Cover-More chairman Louis Carroll said the board had concluded unanimously that the sale at a significant premium to the market price was an attractive outcome for shareholders. He said Zurich had proposed to operate Cover-More as a discrete business and retain the existing management team.
The deal will be executed via a scheme of arrangement requiring the approval of 75 per cent of Cover-More shareholders at a meeting the insurer said was expected to be held in late March or early April 2017.
Cover-More said it expected to deliver EBITDA in the range of $54-57 million for the financial year ended June 30, in line with the $54.5 million forecast by six analysts polled by Thomson Reuters.
In reaching November's landmark agreement to reduce oil production, OPEC members laboured for months to overcome their mutual suspicions and frequent mistrust.
Talk of further cuts over the weekend has this morning helped push oil prices to new highs for 2016.
But reaching the deal could turn out to be the easy part - enforcing it could be another matter.
The Organisation for the Petroleum Exporting Countries has a history of failing to enforce its own production limits, according to numerous energy analysts and former OPEC officials, writes the Wall Street Journal. The cartel's agreements usually spell out exactly how many barrels a day each member must cut. But ensuring that everyone abides by these quotas has been supported only by a fragile honour system, with OPEC having no official mechanism for punishing members that stray from their pledges.
In 17 production cuts since 1982, OPEC members have reduced output by an average of just 60 per cent of their commitments, according to Goldman Sachs. OPEC exceeded its quota by an average of 883,000 barrels a day on average from 2000 to 2008, according to Morgan Stanley.
"The unfortunate part is we tend to cheat," Ali al-Naimi, Saudi Arabia's former oil minister, said of OPEC members at a Washington, DC, event this month.
"There is still more supply than demand. And I believe if they make a concerted effort to reduce—everybody—there will be a balance. But that remains to be seen," he said.
Shares are recording modest gains in early trade with most of the excitement confined to energy stocks, which are getting a nice boost after oil jumped 5 per cent in the first session of trade after Saudi Arabia said it would cut production further than expected.
The ASX 200 is up 20 points or 0.4 per cent at 5581, with oil fetching $US57 a barrel and reclaiming 17-month highs. Crude's price is up by close to a quarter over the past two weeks and by more than 50 per cent this year.
BHP is up 1.3 per cent , while Woodside is up 2.7 per cent, Origin 2.8 per cent, Santos 3.7 per cent and Oil Search 3.1 per cent.
The big miners are doing well, with Rio climbing 0.6 per cent and Fortescue 2.4 per cent. The major banks are all up, but range from a 0.9 per cen gain in NAB to a 0.1 per cent gain in Westpac. Macquarie is up 1.2 per cent.
Woolies and Wesfarmers are both a little lower. Healthcare and gold miners are down.
Among the early winners are Sirtex, which is rebounding a little after losing a third of its market cap on Friday, while Domino's has jumped 5.4 per cent after being raised to buy at UBS this morning.
A2 Milk is off 3.5 per cent, perhaps in reflected nervousness from Bellamy's trading halt ahead of a earnings update.
Bellamy's shares have been halted ahead of a trading update.
The company is to make an updated announcement on the"impact of trading conditions on the company's expected financial results," it says in statement to ASX.
Bellamy's shares plunged 44 per cent earlier this month after it flagged revenue below estimates on weak volume from China. The stock last fetched $6.68.
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OPEC are the oil masters again, writes IG analyst Gary Burton:
There will be a push for Australian oilers including BHP Billiton this morning, with a chain of announcements that signal Saudi Arabia is trying to lift oil prices above $US60 a barrel, and perhaps closer to $US70 a barrel.
Saudi Arabia is also preparing a partial flotation of its crown jewel, state-owned oil company Saudi Aramco, in 2018, higher oil prices will make this significantly more attractive for investors. The downside is this move towards higher prices may not work, as it flies in the face of the resurgence of US shale drilling from Texas to North Dakota so volatility in the coming months will be news dependant. This agreement between OPEC and non-OPEC counties is the first in 15 years with potential cut of 300,000 barrels a day, showing a massive statement of intent to the market that they want to rebalance the oversupply. This adds to the reflation trade happening in global equity markets.
With our Aussie 200 tentatively pushing back to the 5600 point level, a lift in base commodities continues alongside a further lift in banking yield stocks.
This is now starting to include the insurance companies AMP and QBE on the expectation of higher bond yields in the US and Australia. The Australian market has rallied 320 points, or 6 per cent, since Trump's election win. It is expected the market will open 23 points higher at 5583, however, with the weekend's events, strong gains are expected in BHP, Woodside and Santos, with the potential to lift the Index to 5600 points.
A great way to start the week leading into a potential Christmas rally seasonally expected in the second or third week of December.
Here are the market highlights heading into the ASX open:
- SPI futures up 23 points or 0.4% to 5582
- AUD -0.1% to 74.50 US cents
- On Wall St, Dow +0.7%, S&P 500 +0.6%, Nasdaq +0.5%
- In New York, BHP -1.1% (up 49% year to date), Rio -2.3% (up 41% year to date)
- In Europe, Stoxx 50 +0.4%, FTSE +0.3%, CAC +0.6%, DAX +0.2%
- Spot gold -0.9% to $US1159.86 an ounce
- Brent crude +1% to $US54.40 a barrel
- Iron ore down 12 US cents to $US81.66 a tonne
- LME aluminium +1.5% to $US1750 a tonne
- LME copper +0.7% to $US5825 a tonne
- Steaming coal +0.4% to $US84.35/tonne, metallurgical coal didn't trade and last fetched $US280
- 10-year bond yields: US 2.47%, Germany 0.36%, Australia 2.81%
In company news:
- Macau denies report it's cutting the daily ATM withdrawal limit. Crown fell 5.3% on Friday following the reports.
- BHP boss says rally in iron ore and coal won't last
- AGL boss says LNG glut will last well into the next decade
- Carsales is planning a one-off, non-cash impairment charge of around $7m
- OzForex trades ex-dividend
In analyst news and views:
- QBE raised to buy at Shaw
- Domino's raised to buy at UBS
- IAG cut to hold at Bell Potter
- Flexigroup cut to hold at Morningstar
- Sirtex raised to buy from underperform at APP
- Northern Star and Saracen Minerals raised to buy at Bailleu Holst
- AWE raised to buy at Cannacord
- Medical Developments raised to new buy at Moelis
A decision by the US Federal Reserve this week to not raise rates would be "dreadful", as investors and economists consider an increase a foregone conclusion and have now shifted their focus to finding clues on whether the Fed will tighten faster than expected in 2017.
After lifting rates for the first time in almost a decade this time last year, the Fed has failed to hike further, worried that it could derail what has been a lengthy but frail economic recovery since the global financial crisis of 2008.
But the market's unexpectedly enthusiastic response to Donald Trump's surprise US election victory on November 8 has removed what was seen as the last possible impediment to a quarter percentage point lift in the official US Fed funds rate to 0.5-0.75 per cent, from 0.25-0.5 per cent.
Reflecting this, fixed-income traders are pricing in a 100 per cent chance of a rate rise, and the reaction in markets would be one of shock if Thursday morning's decision did not play out as expected.
"I think it would be dreadful if they didn't [raise rates]," ANZ rates strategist Martin Whetton said. "In terms of being a transparent central bank, it would be the wrong message to send."
With a rate rise locked in, economists are now focused on what they can glean from the Fed's messaging about the path of interest rates into 2017 and beyond, particularly in light of the US President-elect's expected stimulatory agenda of infrastructure spending and tax rate cuts.
ANZ economists expect a hike in June and December, in line with both the market consensus and the Fed's own median prediction of one or two hikes.
"I would say most of us in the market believe the risk is they say, 'Hey, we are looking at two, maybe three, hikes next year,' and in that environment you are talking a stronger US dollar and you would definitely see further weakness in the bond market," Mr Whetton said.
Saudi Arabia signalled it's ready to cut oil production more than expected, a surprise announcement made minutes after Russia and several non-other OPEC countries pledged to curb output next year.
Taken together, OPEC's first deal with its rivals since 2001 and the Saudi comments represent a forceful effort by producers to wrest back control of the global oil market, depressed by persistent oversupply and record inventories.
"This is shock and awe by Saudi Arabia," said Amrita Sen, chief oil analyst at Energy Aspects in London. "It shows the commitment of Riyadh to rebalance the market and should end concerns about OPEC delivering the deal."
Oil prices have surged more than 15 per cent since OPEC announced Nov. 30 it will cut production for the first time in eight years, rising this week briefly above $US55. The price rise has propelled the shares of energy groups from Exxon Mobil Corp. to shale firms such as Continental Resources Inc.
Riyadh agreed with OPEC on Nov. 30 to cut its production to 10.06 million barrels a day, down from a record high of nearly 10.7 million barrels in July.
"I can tell you with absolute certainty that effective Jan. 1 we're going to cut and cut substantially to be below the level that we have committed to on Nov. 30," Saudi oil minister Khalid al-Falih said after the weekend's meeting.
The Saudi minister said he was ready to cut below the psychologically significant level of 10 millions barrels a day -- a level it has sustained since March 2015 -- depending on market conditions.
Al-Falih made his announcement after non-OPEC countries agreed to reduce production by 558,000 barrels a day, suggesting he had been waiting for the deal before committing to further cuts. The non-OPEC reduction is equal to the anticipated demand growth next year in China and India, according to data from the International Energy Agency.
"The deal speaks volumes about the Saudi commitment to rebalance the market," said Yasser Elguindi, a veteran OPEC watcher with consultant Medley Global Advisors. "No-one is talking any more about $US30 a barrel oil."
Major US stock indexes powered to another day of fresh record highs on Friday, with the S&P 500 ending the week up 3 per cent, as investors bid up shares in sectors that have lagged in the month-long rally since Donald Trump's presidential election.
The benchmark S&P 500 registered a record high for the third straight session, while the Dow and Nasdaq also hit new highs. The Dow recorded a fifth straight week of gains.
Trump's expected agenda of economic stimulus and reduced taxes and regulations has particularly fuelled financial and industrial shares. On Friday, sectors that have underperformed - healthcare, consumer staples, utilities and tech - led the way.
"You have this post-election exuberance that has been infecting every area of the market," said Peter Costa, president of trading firm Empire Executions. "There was a rotation out of tech stocks early on because the industrials were in favour. Now the tech stocks are getting some legs under them as well."
As the market has climbed, investors have also pointed to a recent run of encouraging economic data supporting equities.
On Friday, a preliminary survey from the University of Michigan showed the US consumer sentiment index at its highest since January 2015. US wholesale inventories fell in October amid a surge in sales, supporting views that inventory investment would help economic growth in the fourth quarter.
The rally will be tested by next week's Federal Reserve meeting. The US central bank is widely expected to raise benchmark interest rates, with market participants looking for clues about the pace of future hikes."The tone of the Fed is going to be key to the sustainability of this rally," Ghriskey said.
Good morning and welcome to the Markets Live blog for Monday.
Your editors today are Jens Meyer and Patrick Commins.
This blog is not intended as investment advice.
Fairfax Media with wires.
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