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With only three sleeps until Christmas, there is no stopping this Santa rally. Not even dropping Wall St futures and listing iron ore futures prices could derail the ASX 200 closing at the day - and the year's - high of 5644, up 30 points or 0.5 per cent for the session.
The big four banks powered the day's gains, as ANZ continued its winning ways to climb 1.4 per cent, while CBA, NAB and Westpac all added around 0.7 per cent. Macquarie climbed 1.1 per cent.
BHP and Rio eased slightly, but Fortescue shot 1.5 per cent higher. CSL was a drag, falling 0.6 per cent, but most sectors were up.
Here's a nice end-of-year column from the indomitable Marcus Padley (yes, it took us a few goes to write indomitable):
I know everyone wants to be rich but quite honestly, what is rich? If you're going to tell me a sum of money, especially some ridiculous sum of money, then you are almost certainly doomed to being poor because rich or poor is a state of mind not a state of your bank balance.
Look no further than the hordes of rich but miserable celebrities and Lotto winners. Money does not guarantee happiness, and I cannot believe anyone is genuinely happy because they spent twice as much on a kitchen bench top. So what is "rich"?
t may be different for you but for me, at this stage of life and parenthood, rich is an income that allows me to deliver to my wife and family's expectations with a little extra for toys. (I like motorbikes). On that basis we as a family are already "rich" because we are delivering income to expectation.
And that's all it takes to be rich, a state of mind not a sum of money. You cannot tell from the fact that we are still busting our arses every day, or from the fact we don't travel as much as some of those much richer people on Facebook, but we are, by our own definition, "rich".
So are you "rich"? If not then maybe you have unrealistic expectations and maybe that's all that needs to change, not your bank balance. "Rich" is not a relative ranking as most people think, it's not an us and them, a "have" and a "have not", it is an inner satisfaction that is available to you right now with just a little bit of thought.
All you have to do is stop reading and start thinking. Redefine rich in your head from something unachievable to something achieved. A happy family perhaps. Presents under the Christmas tree. There it is, you're rich and you didn't even know it.
Capital Economics' Paul Dales, who was one of the few to correctly predict the RBA would lower rates again this year, outlines his "hopes and risks" for 2017:
The range of possible economic outcomes for next year are wider than usual and it is possible that 2017 proves to be a sweet spot for both Australia and New Zealand.
For example, Trump's probable fiscal stimulus could ignite growth in the US at the same time that the recent acceleration in growth in China is sustained. The smaller, relatively open economies such as Australia and New Zealand would undoubtedly be dragged along in the slipstream of those two global powerhouses, especially if it meant that commodity prices remained high or even rose further.
Without wanting to dampen the festive cheer, we also need to highlight the sour scenario, in which the policies of the US President-elect aren't all they are trumped up to be and the recent turnaround in economic growth in China proves to be short-lived.
In that case, Australia and New Zealand would presumably struggle against a backdrop of subdued global demand and falling commodity prices. Underlying inflation would remain below the targeted ranges and both the RBA and RBNZ may be forced to cut interest rates to new record lows.
Our view is that the most likely outcome is a mishmash of both of those fairly extreme scenarios, and one that is a mirror image of 2016. The main surprises this year were the weaker-than-expected performance of the US economy and the strongerthan-expected performance of China. It's likely to be the other way round in 2017, with economic growth in the US accelerating but growth in China slowing
Unfortunately for Australia and New Zealand, we are far more exposed to a slowdown in China than an improvement in the US. And the recent news on building activity has highlighted that Australia can no longer rely on housing construction to cushion the blow from falling mining investment and soft activity overseas. This partly explains why we believe that GDP growth in Australia in 2017 will struggle to beat 2.5%.
Whether or not that prompts the RBA to cut interest rates further largely depends on what happens to housing.
Our biggest call for 2017 is that stubbornly low underlying inflation will prompt the RBA to cut interest rates from 1.5% to 1.0%. We may well be wrong on that, especially if the Australian dollar weakens significantly. But we very much doubt that the RBA will raise interest rates next year.
A $3.7 billion windfall from better than expected iron ore prices has barely made a dent in Western Australia's mountain of debt, leaving Treasurer Mike Nahan to argue the state desperately needs a "circuit breaker" and must sell its electricity poles and wires.
The West Australian government upgraded its iron ore price forecasts in its mid year review released today but the additional $3.7 billion in mining royalties over the next four year is offset by a $1.9 billion drop in tax revenue and a $1.6 billion cut in GST payments.
"The state government cannot stress enough how important reform of the grossly unfair GST distribution system is, as WA's higher royalty income will largely be redistributed to the other states and territories," Dr Nahan said.
The unpopular state government goes to the polls in less than three months promising an $11 billion deal to sell Western Power will slash debt and free up $3 billion for infrastructure spending.
The Labor opposition and One Nation, which polls have shown could attract 10 per cent of the vote, oppose the sale.
Asked what the government's "plan B "would be if it secures office but One Nation gains a balance of power in the upper house, Dr Nahan joked that he would just wait six months and then all their representatives would leave the party.
The government cut its deficit forecast from a record $3.9 billion to $3.4 billion. It projects a $521 million surplus in 2019-20.
The government increased its iron ore price forecast for this fiscal year from $US47.70 per tonne to $US64.3 per tonne and lifted the price to $US59.10 per tonne in 2017-18, up from $$US49.2 per tonne.
Pierpont's annual Dubious Distinction Awards are an AFR institution. Here is a taste from this year's crop:
Invisible Hand for Economic Management
To Spain, which held an election in October 2015 and spent the better part of this year without a government before settling on a minority administration a few months ago. In that time the Spanish economy has performed well. The IMF expects it to record 3 per cent growth this year, ahead of France, Germany and the US. Wages and jobs have been growing while negative interest rates have pushed down monthly mortgage payments. Leaving the question, does Spain need a majority government?
Oliver Twist Begging Bowl
To Clive Palmer, who in February was discovered to have ripped nearly $10 million out of Queensland Nickel in donations to his Palmer United Party. He then cried poor and demanded the Queensland Government guarantee QNI's borrowings. After QNI went into liquidation, Clive applied to the High Court to declare that the liquidators were acting unconstitutionally in demanding him to appear in a public examination. Clive declared he was standing up "for the rights of all Australians". When the High Court rejected his application, Clive said it was like living in Nazi Germany.
Top Trendsetter
To Britain's Neil Woodford, who scrapped bonuses at Woodford Investment Management, saying: "There is little correlation between bonus and performance, and this has been backed by widespread academic evidence." That thudding noise you heard was of overpaid London investment bankers swooning away all around the City.
Adviser of the Year
To Costa Asset Management Pty Ltd, which received $5,374,474 for advising Costa Group on its ASX listing. In its annual report, Costa Group said it was understood some of that fee had been on-paid to Frank Costa but the group was unable to determine how much. Pierpont would have thought this riddle could have been solved by asking Frank, who is a director of Costa Group.
The run of consecutive losses in Chinese iron ore futures has stretched to seven as heavy smog that has enveloped most of northern China curbed demand for the commodity.
Tianjin port, one of China's busiest, has stopped handling coal, iron ore and other non-liquid products, traders familiar with the move said on Tuesday.
"I can't see anything from my window," said a Tianjin-based trader who has opted to stay home given the poor visibility in the city. "Our cargo agent will inform me when the port will reopen."
The most-traded iron ore futures contract on the Dalian Commodity Exchange today is trading down 0.8 per cent higher at 563 yuan. The contract has lost 12 per cent since hitting a nearly three-year high last week.
Due to the heavy smog, authorities have asked mills in northern China including in the top steel-producing province Hebei to restrict production, said a trader in Shanghai.
"Some mills are not running on full capacity to reduce emissions," he said, adding that steel supply was high.
Physical iron ore trading had a similarly bearish tone, pushing the spot price back below $US80 a tonne.
Iron ore for delivery to China's Qingdao port slipped ever so slightly lower to $US79.19 a tonne on Wednesday evening, according to Metal Bulletin. The spot benchmark touched a two-year high of $US83.58 on December 12.
The AFR's companies editor James Thomson highlights the big lesson in the Bellamy's crisis is that regulation in China is a fickle beast:
This will not be a merry Christmas for the management and board of infant formula maker Bellamy's Australia, led by chief executive Laura McBain.
The company's request for an extension to the voluntary suspension of its shares until January 13 speaks to a company in deep trouble.
The only question now is how deep.
The general feel in the market is that Bellamy's has been squeezed from both ends.
We know that sales in China have dropped sharply, something Bellamy's has blamed on discounting from lesser known brands which are unlikely to get accreditation to import formula under new Chinese regulations, and so are dumping stock. The big Singles Day sales event in China in November was also below expectations for Bellamy's.
Wednesday's statement also suggests that Bellamy's suppliers are also putting the pressure on.
In this way Bellamy's is something of a victim of its own success.
The strong foothold it built in China brought other players into the market and sent demand surging. To meet this demand, Bellamy's, which outsources its manufacturing, has had to fight to secure supply of ingredients and manufacturing capacity.
The sudden drop off in sales appears to have left the company in a tough spot. Presumably Bellamy's is trying to get its supply contracts in line with the lower level of demand it is now seeing from customers.
Given Wednesday's news, it does not seem this process is going well.
Regardless of how Bellamy's emerges from this suspension, investors need to heed the lessons about doing business in China.
Bellamy's success in the market was unusual in that it wasn't built on relationships with retailers but through the more grassroots channel of the daigous, small traders who buy and resell Western products directly to Chinese consumers.
This "grey market" trade got so big that the government stepped in to regulate it - and sent shockwaves through the market that Bellamy's is still suffering from.
AMP Capital's head of dynamic asset allocation, Nader Naeimi, sketches out his view on how 2017 will unfold:
With 2016 winding down and the New Year approaching, the global reflation theme is broadening. 2017 is likely to be a year of "reflation contagion".
A reflation contagion is going to be backed by the reversal of the post GFC aversion cycle and the likely emergence of an opposing virtuous cycle where expectations for improved growth prospects and still friendly monetary policy giving way to higher inflation expectations and higher bond yields leading to reduced hunger for yield.
As the demand for yields wanes and wage pressures build, capital expenditure is likely to replace share buy backs and dividends feeding back into stronger growth and rising inflation expectations and more capital expenditure. In fact, the reflation driven advance since the mid-year has already produced some notable milestones:
- A synchronised and broadening global recovery with a two-and-a-half-year high in global manufacturing breadth. Among manufacturing purchasing manager indices globally, 73% have positive year-to-year changes. The 6 month rate of change is now the highest since 2013.
- A six-and-a-half-year high in the global forward earnings breadth. Among the All Country World Index markets, 98% have positive year-ahead earnings estimates.
- A break in deflationary downward spiral: China, one of the biggest economies and the centre of the deflationary spiral, recorded 54 consecutive months of declines. It broke that gloomy run at last in September, when prices increased by 0.1% from a year earlier, thanks to rebounds in the steel and coal industries.
- Euro area input price pressures rising at the fastest pace in over five years.
Reflecting the above and in line with our investment philosophy and the indicator weight of evidence, we move into the New Year with the following core positions:
- Discrete exposures to Japanese, European and US banking sector totalling 8 per cent
- Exposure in commodities futures as well as global energy and material stocks
- Maintaining an emerging market exposure, despite the post Trump sell off.
- Preferring Japan and Europe to US equities
- Preferring value over growth for the US and globally.
- And with equity volatility cheap, we maintain a protective put structure against the fund's entire equity exposure for falls between 3-8 per cent (expiring March 2017).
'Tis the season to complain about superannuation, writes BusinessDay columnist Michael Pascoe:
Christmas and Wednesday's summer solstice aren't the only events you can count on at this time of year.
There is also the plethora of Year 12 result stories and, soon, the extent of the January sales. But before it recedes with the season, it's worth marking this month's report about employers not paying the compulsory superannuation guarantee levy.
The latest rendition added to what was already well known by boosting the suspected extent of dodgy employers not paying super. Industry Super Australia and Cbus reckon 30 per cent of workers are missing at least some of their superannuation.
That's a big step up from the Australian Tax Office's internal risk review last year that guessed somewhere between 11 and 20 per cent of employers could be non-compliant to a greater or lesser degree, and that non-compliance was endemic in small businesses and industries with lots of cash payments and contracting arrangements.
As sure as there are lists of dangerous toys before Christmas, there will be another story about it next year because, despite the occasional talk, the politicians aren't prepared to do what's necessary to fix the problem.
There is a line that carries weight within the government than many employers need the working capital that's provided by delaying compulsory super payments.
So it's not news or a surprise that the present system of relying on employers to do the right thing clearly is not working for many people. Only the extent of the abuse is open to speculation, whether it's a lot or more than that.
The seasonal unpaid super story
Some industry super funds believe 30 per cent of workers are missing at least some of their superannuation. Michael Pascoe comments.
Shares in commercial printer PMP have plunged as much as 22 per cent to 62.5 cents, after the ACCC expressed concerns about the proposed merger with IPMG.
The competition regulator said the merger might substantially lessen competition in supply of heatset web offset printing, the main method for printing catalogues and magazines.
The concerns follow the recent consolidation in the sector, including IVE Group's acquisition of Franklin Group and AIW.
PMP's $120 million all-scrip acquisition of IPMG would create a listed printer and printing services group with $112.2 million earnings before interest, tax, depreciation and amortisation, including a forecast $40 million in synergies, and proforma profit of about $40 million a year based on 2016 financial year numbers.
Just a reminder that your blog editors will be heading into a well-deserved Christmas break on Friday after the (early) close of trade on the ASX.
We'll be away for 10 days, restarting the blog on Tuesday, January 3.
We're not quite there yet, but it's still a good opportunity to thank all our readers for sticking with us in 2016 and hope to see you back next year!
It's also a good time of the year to send us your feedback - if there's anything you'd like to see more of, less of, different angles of next year, let us know: jmeyer@fairfaxmedia.com.au or p.commins@fairfaxmedia.com.au
The top end of town seems to have decided that now is a prudent time to start cashing in some of the profits they've reaped from the staggering market turnaround that has seen US stocks rise nearly 10 per cent since the presidential election.
US chief executives and other senior corporate insiders are selling stock at a furious rate. And the insider selling is heaviest in the three sectors - financials, industrials and energy - that are expected to be the biggest beneficiaries of Trump's proposed policy changes.
"It makes total sense to take some money off the table and be positioned more for two-sided risks", Mohamed El-Erian, the chief economic adviser at Allianz said in a television interview this week.
"We've priced in no policy mistakes, we've priced in no market accidents, and we've ignored all sorts of political issues."
High profile billionaire US bond investor, Jeffrey Gundlach agrees.. He's warned there's going to be a "buyers' remorse period", when investors form a more realistic assessment of US President-elect Donald Trump.
"The bar was so low on Trump to the point people were expecting markets will go down 80 per cent and global depression - and now this guy is the Wizard of Oz, and so expectations are high", Gundlach said in an interview earlier this month. "There's no magic here."
Macquarie Group has struck a £1.6 billion ($2.7 billion) deal with Denmark's DONG Energy to buy half of a huge offshore wind farm in the UK, in a scaling-up of its overseas renewable energy investments.
The deal, announced overnight, will see Macquarie's European Infrastructure Fund 5 and Macquarie Capital each take 25 per cent of Race Bank, a 573 megawatt wind farm being built off the North Norfolk coast.
The project, due to be fully operational in 2018, will comprise 91 huge 6-megawatt wind turbines with a capacity of 573 megawatts, producing enough electricity to power more than 400,000 homes in the UK.
The deal price includes the 50 per cent equity stake and a commitment to fund half the capital cost, including the price of connecting the project into the grid.
The news comes as a bipartisan coalition of former and serving British MPs has raised alarm about Macquarie's investments in the sector.
Here's more on the political fallout
New Zealand's economy surged ahead in the third quarter, in stark contrast to Australia's, as consumers spent with abandon while homebuilding and tourism boomed, cementing expectations the RBNZ is done cutting interest rates.
Official data showed gross domestic product rose 1.1 per cent, above economists' forecast of a gain of 0.9 per cent, putting it among the rich world's fastest growing developed nations. Australia's GDP shrunk 0.5 per cent in the third quarter as the local economy hit a soft patch.
For New Zealand it was the fifth straight quarter of growth at 0.7 per cent or more. The annual pace was a rapid 3.5 per cent, fuelled in part by super-strong population growth of 2.1 per cent.
The solid data should give the Reserve Bank of New Zealand further reason to not lower interest rates when it meets in February, even as inflation and wages growth remain subdued.
The RBNZ has already slashed interest rates thrice this year to a record low 1.75 per cent to help stoke inflation, which, at just 0.2 per cent sits well below the bank's target band of 1 to 3 per cent.
The strong rise in GDP probably won't be repeated in the fourth quarter as activity will have taken a temporary hit after November's earthquake, said Paul Dales from Capital Economics.
"Nonetheless, the economy is clearly very strong it will probably continue to grow by an impressive 3.5 per cent next year. That would increase the chances that underlying inflation rises back to more acceptable rates," said Dales who reckons the RBNZ is done with cutting, but also far away from lifting rates.
Manufacturing grew 1.2 per cent in the quarter while higher visitor numbers boosted tourism exports and retail, trade and accommodation services. Growth in the overall services sector, which makes up 70 per cent of the economy, rose 1.1 per cent, while construction jumped 2.1 per cent.
A 0.7 per cent decline in goods exports, which were hit by falling daily and meat shipments, was practically the only soft spot and that should change this quarter with dairy prices recovering.
Shares have opened flat, shrugging off a soft lead from Wall Street as local banks continue to find buyers, offsetting losses in the materials sector.
The ASX is up 3.6 points at 5617 and the All Ords has added 3.5 points to 5565.
The big banks are up between 0.1 per cent (ANZ) and 0.4 per cent (CBA), while the big miners are both slightly lower.
Consumer staples are leading the market's gainers, with Wesfarmers rising 1 per cent, while Woolies is up 0.7 per cent.
The board of Seven West Media will commission a second independent investigation into former employee Amber Harrison, who alleges she was mistreated by the company in the wake of a sexual relationship with its chief executive Tim Worner.
After meeting nearly every day this week since the story first broke on Sunday, the board announced this morning it wants another inquiry.
Seven's share price dropped from 81 cents to 74 cents earlier this week, but closed at 80 cents on Wednesday. However, concerns over the chief executive's future have rattled investors.
"To allay any concerns that our shareholders may have the board has determined it prudent to commission a further independent inquiry to establish all of the facts so as to confirm that all necessary matters have been and were taken into account," the company announced.
Monte dei Paschi di Siena has all but failed to pull off a last-ditch rescue plan and a state bailout for the ailing Italian bank now looks inevitable, sources told Reuters.
Confirming an earlier Reuters report, the bank said late on Wednesday it had failed to secure an anchor investor for its offer of new shares, which has just hours left to run.
Two sources close to the matter told Reuters this had in turn dissuaded other institutional investors from supporting this part of the 5 billion euros rescue plan.
The bank needs to raise the money in the share offer and a separate debt-for-equity swap by the end of this month to avert being wound down by regulators, a move that would rock confidence in the eurozone's fourth-largest banking sector.
The Italian government is expected to step in this week, possibly as early as today, to bail out the Tuscan lender, Italy's third biggest bank and the world's oldest.
Monte dei Paschi had pinned its hopes on Qatar's sovereign wealth fund investing 1 billion euros in its cash call, but that option is no longer on the table, said the sources familiar with the progress of the rescue plan.
A failure of Monte dei Paschi, which has been in crisis mode for years, would threaten the savings of thousands of Italians, though a government bailout might not protect them entirely. Under EU bailout rules, investors must bear some of the losses before taxpayer money can be used to save a bank.
Parliament earlier on Wednesday approved a 20 billion euro plan to prop up the wider banking sector, starting with a yet-to-be-disclosed investment in Monte dei Paschi.
Prime Minister Paolo Gentiloni's new government is expected to meet on Thursday or Friday to issue an emergency decree to bail out the bank. This would expose the lender's 40,000 retail bondholders to losses, a politically explosive move.
Under the private rescue plan, Monte dei Paschi has had to persuade retail and institutional bondholders to convert their notes into shares.
Shares in the bank closed down 12 per cent at 16.30 euros.
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Market participants are clearly winding down, IG strategist Chris Weston says:
While we saw ASX 200 turnover some 18% below the 30-day average yesterday, I wouldn't be surprised if we saw less than $5 billion today. Volumes through the S&P 500 were 30% below the 30-day average, while volumes were down some 40% on the German DAX and of course this shouldn't surprise too greatly.
The moves in equities, or should I say lack of them won't surprise too many either, as it's reflected in such low levels in implied market volatility. By way example, the US volatility index (the "VIX") fell a further 1.5% to 11.3%. No one is really prepared to put any real money to work in the market right now and this is also reflected in the intra-day ranges, with the DAX and DOW trading in a measly 39 and 37 point range respectively.
Our call for the ASX 200 is unsurprisingly flat, but we still see the open at the highest levels since 3 August 2015. It's always nice to end the year on a high. There almost seems to be a sellers strike through global equity markets and that is certainly true of the Aussie market. Short sellers (through the wider market) have largely shut up shop until the New Year, understanding that at an index level bad news is not impacting sentiment at all. Interestingly though, our own flow from retail clients is positioned largely on the short side, with 78% of all open position on the ASX 200 sold short.
There seems to be a view that we may see a drift back into 5600 in the short-term and that may well eventuate but there are some positive seasonal factors at work here. Of course, there are still individual stock stories where traders will still act aggressively and try and short sell these names for a quick profit as the buyers stand aside and price falls.
It's interesting to see 33% of the ASX 200 trading at 4-week highs. This has to be seen as bullish in my opinion, as we are seeing good participation in the rally. I would be concerned though and we generally see the market top out when we see around 50% of the market at 4-week highs. The market internals doesn't suggest an over loved market just yet.
The fact that the S&P 500 energy space is up 0.3% when oil was probably one of the few markets that actually showed any life overnight shows that at this time of year strange and mysterious things happen in markets. US crude is around 2% lower than where we were when the ASX 200 closed yesterday, with traders reacting to a 2.256 million barrel increase in crude inventories, with the analysts expecting a drawdown of over 2million barrels. As mentioned yesterday this estimate is about as big a lottery as we get in the world of forecasting and data estimates.
In local corporate news, Caltex has made its second large acquisition in a matter of months - and its first move into New Zealand - all but confirming it is out of the running to acquire Woolworths service stations.
Last month Caltex paid $95 million for Victorian retailer Milemaker Petroleum, giving the importer and refiner control of another 46 service stations in Victoria, with leases optioning out to 30 years.
And today it said it will buy an independent New Zealand fuel importer and distributor, Gull New Zealand, for $NZ340 million ($324 million), giving the Australian company a fuel import terminal at Mount Maunganui import fuel terminal and the company's retail assets.
Following the closure of the Kurnell refinery, Caltex has established a large fuel import centre on that site, while also establishing a buying and trading arm in Singapore to supply its Australian operations.
It is acquiring the New Zealand company on a multiple of 8.2 times the forecast earnings before interest, depreciation and amortisation for 2017, it said, which will decline to around 7.5 times taking annualised synergies into account, it said. The acquisition is expected to be earnings per share accretive in the first full year of ownership.
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