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Investors shrugged of the mid-year budget update from the Treasurer and built on some early strength to end the session well higher despite a weak lead from Friday night trading on Wall St.
The ASX 200 index added 29 points or 0.5 per cent to 5562 as it looks to end the year above 5600 and on a bright note.
The Aussie dollar was largely unchanged over the course of the session at 72.9 US cents after climbing above 73 US cents following the MYEFO release. That was the correct response, as it turned out, with all major ratings agencies confirming that there would be no immediate loss of our cherished AAA debt rating.
There were more stocks up than down, with bond proxies the standout performers on the day, if for no other reason than it has been unusual to see them get any support as bonds have sold down in recent weeks. Transurban added 2.4 per cent and Sydney Airport 1.9 per cent, while listed property trusts lifted 0.8 per cent as a group and utilities 1.2 per cent.
The major banks put in a solid performance following selling in their US counterparts last week, with the Big Four all adding around 0.4 per cent. The miners did OK except for Fortescue, which fell 4.8 per cent as iron ore futures drooped. BHP and Rio added 0.4 per cent.
Oil continued to climb through the session, as did gold, boosting producers' stock prices.
Among the best and worst, capital management activity at Corporate Travel Mgt is messing with Bloomberg's numbers - hence the 20 per cent gain in the chart below.
The day's worst was Seven West Media, off a savage 8 per cent as details emerged of an affair involving the CEO, with reports the exec will not be stepping down.
BusinessDay columnist Michael Pascoe tells a tale of two parliamentary housing inquiries:
What an amazing difference 19 months can make for parliamentary inquiries into housing affordability and ownership.
In May last year, there were all sorts of recommendations on how federal, state and local governments could try to fix all sorts of problems.
Last week, the only recommendation was to maintain the status quo – to change nothing. Turns out there really isn't much of a housing problem anyway.
The primary difference between the two inquiries and their reports was that the first was a Senate effort while the second came out of the House of Representatives.
Coalition senators were in the minority on the Senate inquiry, they were in the majority for the Reps effort.
No prize for guessing the coalition made maintaining the housing status quo a point of difference for the July election. The unkind might suggest the government tried to run a scare campaign about it.
Both inquiries had submissions from much the same list of suspects – the informed, the concerned, the experienced, the self-interested and the barrow-pushers. Both inquiries were told much the same stories. Yet the outcomes were completely different.
Last week's House of Reps effort doesn't take long to read as it's basically a series of grabs from the submissions and no recommendations, just conclusions to change no federal policy, to observe that state and local governments could do more to increase supply and this, chairman David Coleman's final paragraph:
"Importantly, the government is working to improve housing affordability through the Smart Cities Plan, which will partner with the states and territories, and local governments to deliver co-ordinated housing supply solutions that drive national priorities tailored to local needs. The committee welcomes this important initiative."
That's a concluding paragraph could be a template for the conclusion of all government reports. It's a gem of its kind, crafted, polished and so nearly perfect. If only Mr Coleman had worked in a "diverse" - would have slotted in nicely before "local needs". Oh well. Next time.
The tale of two housing inquiries
How can two parliamentary inquiries only 19 months apart reach vastly different conclusions? Michael Pascoe comments.
China's yuan is one of the world's most overvalued currencies, according to Deutsche, contradicting views that Beijing is artificially holding its currency down against the likes of the greenback.
The following chart from the bank - courtesy of Business Insider - tracks the value of individual currencies based on a series of fundamental indicators including purchasing power parity (PPP), effective exchange rates (EER) and fundamental-equilibrium exchange rate (FEER).
Based on these three metrics, Deutsche says that the Chinese yuan is currently the most expensive currency, beating out the likes of the Swiss franc, Philippine peso, the US dollar and the Australian dollar for that title.
At the other end of the spectrum, the Japanese yen, Mexican peso and Polish Zloty are perceived to be the cheapest currencies in the world of those analysed, with the euro not far.
Iron ore futures in China tumbled as much as 5 per cent, extending losses to a fourth session in a row, as stocks of the steelmaking raw material at the country's ports rose to the most in more than two years.
Inventory of iron ore at major ports in China, the world's top importer, hit 111.55 million tonnes as of Dec. 16, the highest since September 2014, according to data tracked by industry consultancy SteelHome.
Spot iron ore prices have surged 87 per cent this year, snapping a three-year decline, mainly due to the strength in China's steel market. The spot benchmark touched $US83.58 a tonne on Dec. 12, the strongest since October 2014, and last fetched $US81.49.
But analysts say with steel prices largely spurred by China's campaign to address excess capacity, iron ore demand could weaken eventually.
"Iron ore prices have remained disconnected [from] the fundamentals in our view since late October, ranging from $60-$83/tonne despite clearly abundant supply of iron units," Macquarie analysts said in a note.
"We still believe iron ore supply remains abundant with prices above $60/tonne, and with Chinese mine costs lower in US dollar terms given recent yuan depreciation, we do not see a return of cost inflation in iron ore mining which justifies prices anywhere near current levels."
The most-traded iron ore on the Dalian Commodity Exchange fell as much as 5.1 percent to 573 yuan ($US83) a tonne, and was down 3.7 percent at 581.50 yuan by midday.
Weaker futures could drag spot iron ore back below $US80 a tonne if bids consequently drop in the physical market, traders say.
The most-active rebar on the Shanghai Futures Exchange was down 3.2 pe rcent at 3254 yuan a tonne, also slipping for a fourth consecutive session.
Here's a bit more from ANZ economists, who note that while the 2016-17 budget deficit has been revised slightly lower, deficits in the three years to 2019-20 are forecast to be higher (see chart).
"The government continues to project a small surplus in 2020-21, and indeed, has (heroically) revised surplus projections in the outer years higher, with the surplus in 2025-26 now expected to be 0.4 per cent of GDP, up from 0.2 per cent of GDP," they write.
"On balance, we see the MYEFO as buying the government some additional time from rating agencies. Passing key legislation ahead of the May 2017-18 budget will be critical if Australia is to maintain its AAA credit rating."
The ANZ economists say the the implications for the RBA "are limited".
"While Governor Lowe and former Governor Stevens have consistently made the case for increased government spending on infrastructure, it's clear that the Commonwealth is not in a financial position to lift spending.
"With the ratings agencies so far suggesting that the AAA rating is likely to remain at least until the May Budget, we see no implications for monetary policy."
And now Standard & Poor's has confirmed that the MYEFO will have no impact on the AAA rating, according to ANZ's senior rates strategist:
S&P: AUSTRALIA BDGT UPDT HAS NO IMMEDIATE RTG IMPACT
— Martin Whetton (@martin_whetton) December 19, 2016
And staying in our region, China's overheated property market continued to cool in November as authorities rolled out renewed home-buying curbs to deflate a housing bubble.
New-home prices, excluding government-subsidized housing, gained from the previous month in 55 of the 70 cities tracked by the government, compared with 62 in October, the National Bureau of Statistics said. Prices dropped in 11 cities, compared with seven a month earlier. They were unchanged in four.
Local authorities from Shanghai to Tianjin stepped up property curbs last month, following a raft of restrictions rolled out in almost two dozen cities since late September. That has reined in runaway prices, with the value of homes sold last month gaining at the slowest pace this year, official data last week showed.
President Xi Jinping and his top economic policy lieutenants reiterated their vow to curb a property bubble in the annual planning conference concluded Friday.
"Houses are built to be inhabited, not for speculation," the leaders said in their post-meeting statement released by the official Xinhua News Agency. China will use finance, land, taxation, investment and other instruments to establish a "fundamental and long-term system" to curb asset bubbles and market volatility, according to the statement.
"The government looks set to continue with its cautious differentiated approach towards containing the property bubble risk whilst at the same time being careful not to upset its stabilisation," said Donna Kwok, a senior China economist at UBS in Hong Kong.
New-home prices in Shenzhen, the nation's hottest property market earlier this year, fell 0.3 per cent in November from October, the second straight month of declines, the data showed. Prices in the capital Beijing and Shanghai both snapped a 20-month streak of gains. Shanghai, which introduced restrictions in March, last month increased the down-payment threshold for first-home purchasers from 30 per cent to as much as 70 per cent if they have mortgage loan record, dealing a blow to purchasers seeking to buy more expensive homes.
"Tamed price growth shows policy tightening, together with the various administrative measures such as suspending pre-sales permits, have been effective," JPMorgan Chase analysts wrote in a Dec. 13 note. "There should be less tightening in 2017."
Malaysia's ringgit touched the lowest level since the Asian financial crisis as investors continue to sell down emerging-market assets and after a crackdown on currency speculators last month exacerbated outflows.
The ringgit declined as much as 0.1 per cent to 4.4805 per dollar, a level unseen since January 1998, according to prices from local banks compiled by Bloomberg, before paring losses to trade little changed at 4.48 in morning trade in Kuala Lumpur.
The ringgit has lost more than 6 per cent since the US election, the biggest decline in emerging Asia, as expectations that incoming American president Donald Trump will stoke inflation with his fiscal policies spurred outflows from the region. Sentiment toward Malaysian assets has also been hurt by the central bank's move in November to clamp down on trading of non-deliverable forwards even as it provided greater onshore hedging flexibility with revised regulations.
"It is a confluence of the relative decline in cash metric, high foreign holding of bonds sold off, investors' trepidation about FX controls and the underlying political or headline risks," said Vishnu Varathan, a senior economist at Mizuho Bank in Singapore.
Economists at Capital Economics said that higher interest rates in the US are likely to put downward pressure on the ringgit, but that rising oil prices are "likely to provide some boost" to the currency.
"We expect the ringgit to hold up relatively well," they said. "Our forecast is for the ringgit to finish 2017 at 4.50 to the US dollar, compared with its current level of 4.44."
The country's deputy finance minister Johari Abdul Ghani told reporters in Kuala Lumpur that the currency will eventually recover back to its "fair value", without specifying that fair value level.
Seven West Media shares have slumped more than 8 per cent following revelations chief executive Tim Worner has been accused of a workplace affair and abuse of power by former Seven executive assistant Amber Harrison.
Seven West Media has not issued an official statement but sources said Worner will not stand down in light of the allegations.
Australian Shareholders' Association director Stephen Mayne said that he believes Seven should issue a full public statement to the ASX.
"So far we're only hearing the former employee's allegations and the publicity is now so widespread and so damaging and the company must get out of the bunker and start openly communicating."
"The share price has responded adversely today which shows that culture and reputation does matter," he said.
Details of the alleged workplace affair surfaced after Harrison's two year negotiations with Seven West Media broke down.
The nation's major banks will benefit from an earnings uplift of about 1 per cent after raising interest rates on investor and interest-only loans, according Macquarie Securities.
In a note to clients, the Macquarie analysts said recent interest rate increases would likely boost the bank's margins by one-to-two basis points, equating to a 1 per cent rise in earnings.
"This price action coupled with less aggressive front book discounts, suggests that profitability across the mortgage book has improved materially in recent months," the research said. "We expect to see convergence in offerings over time and see upside risk to Commonwealth Bank's earnings and downside risk to Westpac's earnings."
CBA, the nation's largest property lender, has outlined increased borrowing rates for property investors along with changes for interest-only home buyers over the next four months.
Increases for property investors of up to 15 basis points took effect last week and and interest-only home loans will be repriced from March 17.
It follows recent rises from NAB, ANZ and Westpac and its subsidiaries.Macquarie's analysis - which took into account mortgage pricing trends and discussions with mortgage brokers - found that pricing competition had eased in recent months.
"We estimate that front-book discounting has reduced by about 20-30 basis points from peak levels," the research said.
"Based on current pricing, we estimate that front book profitability has improved to about 23 per cent for owner occupier loans and about 30 per cent for investor loans. While this is clearly positive for earnings, we note that front-book returns remain below those currently generated by the back-book (we estimate the back-book generates 30-40 per cent return of core tier one capital), which will be an ongoing source of margin pressure in the medium term."
Macquarie raised its earnings estimates across the major banks by about 1 per cent due to re-pricing initiatives. The broker increased its price targets for the banks by 4-10 per cent largely driven by "earnings changes and the sector's re-rating."
"Our preferred exposures are NAB and Westpac which offer over 10 per cent total shareholder return."
The second of the big three ratings agencies has confirmed Australia's top credit rating is safe, for now.
Following Fitch, Moody's said that while it expected budget deficits to be "somewhat wider for longer than currently projected", Australia's credit metrics remained consistent with its AAA rating.
It applauded the government's decision to not get carried away with a recent spike in commodity prices and treat them as though they were long term.
"Its decision to depart from standard practice to assume that commodity prices remain broadly unchanged around recent levels and instead to factor in a fall in commodity prices in the MYEFO denotes credit-positive fiscal prudence," Moody's said in a statement.
"We also do not assume that commodity prices will continue to rise at the pace seen in recent months."
But S&P is the one everyone is waiting for, after it in July put the rating on review, in line for a possible downgrade.
The budget update figures are even worse than they look, says Capital Economics, predicting that Australia will lose its coveted AAA rating "sooner rather than later" - but adding that a downgrade won't hurt the economy much.
The $10.3 billion blowout in the deficit over the next four financial years mean the chances of the budget being balanced by 2020- 21, which the rating agencies are demanding, had become even less likely, said economist Paul Dales.
"The real situation is even worse as the Treasurer has reclassified a hefty chunk of the budget deficit as structural rather than cyclical," he said.
..Gov still projecting surplus by 2020-21 but wafer thin at just 0.1% of GDP. Budget projections are still blowing in the wind! #MYEFO .. pic.twitter.com/XBseENGx4H
— Shane Oliver (@ShaneOliverAMP) December 19, 2016
This meant that even when the economy is much stronger the budget deficit would be larger than previously thought, he said, noting the structural deficit had been revised up by $26 billion over the next four financial years.
The Treasurer doesn't expect net debt to be much higher than previously thought, Dales said this was apparently due to "valuation effects associated with an increase in yield and an increase in investments, loans and placements".
In other words, debt had been revised down partly because it's been decided that the loans and investment aren't worth as much.
"That's sounds suspiciously like a neat accounting trick," Dales said.
CBA chief currency strategist Richard Grace said the question now was whether the rating agencies were fed up with the 'political commitment' to get the budget back into surplus.
"We continue to see a 40 per cent chance of a downgrade today and in
the next 48 hours, with a more likely chance of a AAA sovereign downgrade following the release of next year's May budget. Today's information did not contain game changing material."
Markets look to be shrugging off today's mid-year government budget update, with the Aussie dollar actually climbing a touch post the announcement, suggesting that, at the margin, traders had been ready for something worse.
The currency climbed modestly at midday, and is now 0.2 of a US cent higher at 73.1. The ASX was also unfussed, with banks trading through the announcement slightly higher or flat, suggesting investors are not immediately concerned about an imminent rating downgrade that would flow through to the lenders.
Aside from that, bond proxies remain the standout performers, with Sydney Airport up 3 per cent and Transurban 2.7 per cent. Utilities and listed property are also doing well, with the sectors around 1.2 per cent higher. Telstra is up 1.1 per cent and the major banks are all hanging on to gains of at most 0.4 per cent.
Iron ore miners Fortescue and Mineral Resources are having a tough time, down 3.5 per cent and 4.4 per cent, respectively, but BHP, Rio and South32 are all higher - the last by a hefty 3.3 per cent. Gold miners are up, in line with the precious metal. Newcrest has added 0.8 per cent.
Ratings agency Fitch is first cab off the ranks, and it's likely to trigger a first little sigh of relief in Canberra:
Back to topFITCH SAYS AUSTRALIA'S BUDGET OUTLOOK STILL CONSISTENT WITH AAA RATINGS DESPITE SLIGHT DETERIORATION
— Jacob Greber (@jacobgreber) December 19, 2016
The federal budget deficit will blow out by another $10.4 billion over four years, ratcheting up expectations Australia's AAA credit rating will be cut and potentially delivering a blow to the economic credibility of the Turnbull government.
While today's mid-year budget update forecasts a slight improvement in the budget bottom line this financial year of $600 million - with a deficit of $36.5 billion rather than $37.1 billion expected - the following three years will see Treasurer Scott Morrison's budget bottom line head further into the red than expected in May.
Despite the blow out in deficits the return to surplus target of 2020-21 has not changed.
Here's a look at the MYEFO forecasts. Our full report will be available later this afternoon at https://t.co/HBM7UKKl3C #ausbiz pic.twitter.com/YpC9uh6rf0
— CommSec (@CommSec) December 19, 2016
Since 2009-10, Australia's last four treasurers - Wayne Swan, Chris Bowen, Joe Hockey and now Morrison - have predicted a return to surplus 12 times but so far, none have delivered.
The federal government has been bracing for a downgrade to Australia's credit rating as soon as today.
Ratings agency S&P put Australia on negative watch just days after the July 2 election, citing high levels of external and household debt and the potential difficulties facing the Turnbull government in passing new revenue and expenditure measures through the new Parliament.
Prime Minister Malcolm Turnbull and Morrison have, in response, highlighted more than $22 billion in budget repair measures passed since the election.
A cut to Australia's AAA rating - the first since 1986 - would push up the cost of borrowing for state and federal governments and, crucially, the cost of Australians' mortgages. It would also effectively blunt the Turnbull government's claims to be better economic managers than Labor and likely have a flow on effect on consumer confidence, which is already sagging in the lead up to Christmas.
Tax receipts have been hit hard since May, according to the update, with the amount of tax collected by government hit by softer wages growth and domestic prices. Government receipts are down by $3.7 billion in 2016-17 and $30.7 billion over four years.
This tax hit has not been offset by strong recent commodity prices for iron ore and coal.
Iron ore miner Fortescue Metals has warned its proposed joint venture with larger Brazilian rival Vale, for blending their iron ore at key Chinese ports, could fall over.
"Negotiations are continuing between the parties on an amicable and commercial basis, however, it is looking less likely that any transaction will be completed," the Australian miner said.
The two companies announced in March they were in talks to form a joint venture for blending their iron ore, which could help them match the benchmark quality in the world's largest iron ore market, and help take share away from rivals BHP Billiton and Rio Tinto.
Fortescue shares are down 3 per cent, the biggest drag on the benchmark index this morning after Chinese iron ore futures slid close to 4 per cent Sunday night.
Australia's prized AAA credit rating is hanging in the balance as the government releases its mid-year budget update, due over the next 30 minutes.
Today's MYEFO (mid-year economic and fiscal outlook) will reveal the size of Treasurer Scott Morrison's budgetary problems, and could result in the country's credit rating being cut for the first time since 1986.
But what exactly is this rating, where does it come from and why does it matter?
Here's a good explainer on everything you always wanted to know about our AAA credit rating but were afraid to ask.
MYEFO: budget deficit to deteriorate
The Mid-year budget update is not expected to contain good news for the government. Peter Martin explains why.
Bonds have been selling off across developed markets, right? Not quite. While US bonds have certainly fallen hard, German shorter-term government paper has actually rallied.
Two-year German government bond yields hit further record lows on Friday as banks loaded up on bonds likely to become scarcer after recent tweaks to the European Central Bank's asset purchase program.
On a day when most high-rated euro zone government bond yields were down 3 to 4 basis points, the yield on the German two-year government bond, the Schatz, hit minus 0.80 per cent for the first time.
The ECB said earlier this month it would reconfigure its bond-buying scheme at the start of 2017, introducing changes that suggested it would focus purchases on short-dated government bonds.
It expanded the eligibility of the scheme to include bonds with maturities of one year and above and bonds yielding less than the deposit rate.
Investors were already struggling with a shortage of short-dated bonds - used as collateral to borrow in money markets - before the changes, and this is expected to worsen.
"The ECB has come up with measures to reduce scarcity, but it's not going to make a sea change," said ING strategist Martin van Vliet, referring to the ECB's move to make a securities lending program easier to access.
At the longer end of the curve, European bond yields have moved well away from the record lows they hit around mid-year, with German 10-year yields at 0.31 per cent.
Meanwhile, Australian bonds continue to be dumped, with the 2-year yield rising to 1.834 per cent this morning, its highest since early May, while the 10-year yield is close to 2.9 per cent, within reach of the 2016 high it hit late last week.
Coles is trying to reform the poker machine industry by introducing $1 bet limits on the thousands of machines it owns but says it is being stone-walled by gaming machine manufacturers.
The supermarket giant, owned by conglomerate Wesfarmers, wrote to five major poker machine manufacturers requesting they reprogram their units so it could trial the bet limits on its 3069 machines, The Australian Financial Review reports.
But the manufacturers - Aristocrat, IGT, Konami, SG Gaming and Ainsworth Game Technology - all refused, saying it was too expensive and that such reforms needed to come from the $11.5 billion industry as a whole.
Reform advocates have long campaigned for $1 maximum bet limits to reduce how much gamblers can lose, a measure recommended by a 2010 Productivity Commission report into gambling.
Machines can currently swallow up to $10 a spin.
Coles managing director John Durkan told the AFR that manufacturers refused the request because it would impact on the rest of the gaming industry.
Nonetheless, Coles was determined to do it. "We just have to find a way," he said.
Legislation stops anyone but manufacturers from altering how gambling machines work, meaning they can easily block Coles' request.
Coles' poker machines are in its 89 hotels and pubs, which are mostly in Queensland. State law means the company needs the pubs and hotels in order to own and operate bottle shops in Queensland.
Coles' 3069 poker machines pale in comparison to the gambling assets of its major supermarket competitor. Woolworths has 12,182 machines across Australia through its Australian Leisure and Hospitality Group, earning $1.1 billion last year by some calculations.
Gaming academic and reform advocate Charles Livingstone estimates gamblers lose about $185 million a year in Coles' poker machines.
Australians feed more than $11.5 billion a year into pokies every year and about 40 per cent of losses come from problem gamblers, according to the 2010 Productivity Commission report.
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