On April 6, 1917, the United States officially entered World War 1. Just six weeks short of 100 years later, Donald Trump is being sworn in as President of the United States. And thus ends the "American Century", says Michael Pascoe:
You can quibble about when the American Century began – the United States' economic, political and cultural dominance is generally given a mid-20th century start. That short-changes the US. Britain's "Imperial Century" finished with World War I, the period that saw America challenge Europe's economic might, so there's no point leaving a gap in the timeline.
And, yes, for those who have nominated all of the 21st century as Asia's, there is an overlap with the end of the American. As it turns out, there is a neatness about January, 2017 - Trump's inauguration follows close on Xi Jinping's Davos speech, the moment China's president claimed global leadership on trade and climate in the vacuum of America's advertised withdrawal. As the China Daily puffed "the one major power with a global outlook":
"Ready or not, China has become the de facto world leader seeking to maintain an open global economy and battle climate change. In effect, President Xi has become the general secretary of globalisation."
In contrast, Trump has promised to shrink America with his mercantilist policies, his "border tax" and weird veneration of a manufacturing-based economy that doesn't really exist anymore.
In economic terms, the eclipsing of American power is well underway. Dominance went a good while ago with China the key driver of global economic growth this century. By the World Bank's reckoning, China's economy is already bigger on a purchasing power parity basis. In absolute terms, the American economy remains substantially larger but the cross-over point appears to be within the next decade, depending on how you want to fiddle your assumptions.
Beyond bragging rights for being "the biggest", that really doesn't matter all that much – first, second, whatever. A world with multiple large, strong, interrelated economies is a good thing. A world of rising economic equality would be a very good thing.
More important is the aspiration that the better part of American Exceptionalism offered. Trump is extinguishing the American "light on the hill".
Boosted by higher government spending and record bank lending, China is expected to report today around 1pm that its economy grew at an annual pace of 6.7 per cent in the fourth quarter, giving it a solid tailwind heading into what is expected to be a turbulent 2017.
But Beijing's decision to double down on spending to meet its official growth target may have come at a high price, as policymakers will have their hands full this year trying to defuse financial risks created by an explosive growth in debt.
The world's second-largest economy also faces increased uncertainties from a cooling housing market and the government's bid to push through painful structural reforms, which could help deal with the root-cause of rising debt and housing risks but may weigh on near-term growth.
China's sluggish exports also could come under fresh pressure this year if US President-elect Donald Trump follows through on pledges to impose tough protectionist measures.
"While Chinese growth looks stable into early 2017, a more marked slowdown by the second quarter appears inevitable," Gene Frieda, global emerging markets strategist at asset management giant Pimco, said this week.
"Growth has been stabilised only after massive fiscal and credit stimulus. China's total government and private sector debt will likely surpass 285 per cent of GDP this year, a 90 per cent increase since 2008."
While China's economy appears to be on much better footing than a year ago, the expected fourth-quarter growth rate would still be near the weakest since the global crisis.
Economists polled by Reuters estimated GDP grew 1.7 per cent in October-December from the previous three-month period, versus 1.8 percent in July-October.
A surprisingly strong print today would likely boost global financial markets, particularly commodities, which have already been buoyed by China's record imports of crude oil, iron ore, copper and soybeans.
A weak outcome would likely raise the risk of more capital outflows, adding pressure on the yuan currency , which last year hit 8-1/2 year lows. China recently tightened curbs on outflows as its foreign exchange reserves fell to near six-year lows..
The economy also likely grew around 6.7 per cent for 2016 as a whole - roughly in the middle of the government's target range - as a stimulus-fuelled construction boom breathed new life into its long ailing "smokestack" heavy industries.
Australian banks have rallied hard since the US election but this is about as good as it gets for their share prices, Citi says, downgrading three of the big four.
The share price rally has left expectations too high heading into financial year 2017, as the market's expectations of cost cuts seems misplaced, analyst Craig Williams writes in a note to clients.
"We fear these expectations are misplaced as investment spend outweighs staff reductions," he says.
Williams predicts profitability conditions will be as tough in FY17 as they were in the previous one.
Here are the main reasons for Citi's skepticism about the major banks:
- Constrained revenue growth: Revenue is to be hit by slowing balance sheet growth and competition-led margin contraction. Some respite is expected from higher interest rates, however benefits are expected to be long-dated.
- Cost savings unlikely to be the saviour: The sector is in the midst of a 1-in-30 year IT reinvestment phase which will keep expense growth at low single digit levels irrespective of revenue growth conditions
On the positive side, Williams doesn't expect a sharp decline in asset quality, despite pockets of stress, nor a sharp increase in core capital.
Among the individual banks, Citi has downgraded ANZ back to 'neutral' and CBA and Westpac to 'sell', but kept its 'neutral' rating on NAB.
ANZ faces a more challenging outlook for its restructuring story, which pushed the shares higher last year, Williams says.
"The cost reduction narrative becomes remarkably similar to peers, while the next phase of balance sheet contraction in the IIB (international and institutional banking) division is likely to have a larger revenue impact."
Meanwhile, CBA and Westpac will feel the impact of retail banking competition in FY17 as well as a continued obligation to invest in IT in the future, he predicts. "This dynamic will keep core profit growth constrained."
Citi's pecking order from most to least preferred: ANZ, NAB, Westpac, CBA.
ANZ, NAB, WBC, CBA.
The collapsed childrenswear chain Pumpkin Patch will shut its doors within weeks after receivers failed to find a buyer for the childrenswear chain.
Receivers KordaMentha have announced that 68 Pumpkin Patch and Charlie & Me stores across Australia and New Zealand will close by the end of January, costing 560 people their jobs. Pumpkin Patch's remaining 56 stores will close as and when stock is sold, through to mid-February.
"We have successfully traded stores through the traditional holiday period and stock levels are now considerably reduced," receiver Neale Jackson said. "The balance of stock will be consolidated in the remaining stores as the receivership enters its final phase."
After years of losses and dwindling sales, and being squeezed by discount department stores such as Kmart and middle-of-the-range brand Bonds, New Zealand-based Pumpkin Patch collapsed in late 2016 owing $76 million.
It employed about 1000 people in Australia at its 117 stores, plus close to 600 people in New Zealand across its 43 stores.
Santos has posted record full-year production and beaten guidance on costs as new chief executive Kevin Gallagher continues to turn around the oil and gas producer after the crash in oil prices.
But shares are still down nearly 1 per cent at $4.08, despite small gains in oil prices overnight, as somne analyst had been hoping for higher revenues.
Output in calendar 2016 reached 61.6 million barrels of oil equivalent, up 7 per cent on the previous year and towards the upper end of guidance, Santos said in its December quarter report.
Sales volumed jumped 31 per cent to 84.1 million boe, ahead of guidance, helping revenues edge up 6 per cent despite still-depressed commodity prices. December quarter sales rose 26 per cent to $US753 million, taking revenues for the full year to $US2.59 billion.
Morgans analyst Adrian Prendergast described the report as "reasonable" although it fell just shy of his estimates for production and sales revenues.
Gallagher said the business had been restructured and "substantial" costs reduced, resulting in it generating free cash flow "for the first time in many years". The oil price at which Santos generates free cash has been lowered from $US47 a barrel at the start of 2016 to $US38 a barrel.
Shares have opened lower, led down by the big banks and miners as the Trump rally of late last year continues to unwind amid uncertainty ahead of the Republican's inauguration later today.
The ASX is down 0.5 per cent at 5666.5, on track for a 1 per cent weekly loss and its second straight week in the red.
Real estate and finance are leading losses, following similar slides in these sectors on Wall Street overnight, while healthcare is the main winner, led up by more gains in CSL (+2.1%) following yesterday's surprise profit upgrade.
"While CSL's share price rose 12.5% in response to yesterday's profit upgrade, it still finished on its high. This suggests unsatisfied buying that may see further gains over coming days," says CMC chief market analyst Ric Spooner.
Spooner says that a reversal of the current downtrend in the ASX will depend heavily on Trump's first actions following his inauguration.
"It's clear that investors have reached a level where they are prepared to wait and see what the Trump administration has to offer in its crucial first 100 days in office. This begins with tomorrow's inauguration speech. If Mr. Trump's acceptance speech is any guide, this speech may not do much to scare the market horses."
Oroton shares are getting smashed in early trade after the luxury handbags retailer lowered its first-half earnings forecast following a 10 per cent decline in year-to-date sales.
Shares are down 20 per cent at $1.67 following news that Oroton expects earnings before interest, taxes, depreciation and amortisation (EBITDA) of between $4.5 million and $5 million in the six months to January 28, compared to $8.9 million for the prior corresponding period.
Chief executive Mark Newman said the group's already weak like-for-like sales did not improve during Boxing Day and the New Year, and also cited a $1 million hit from exchange rate movements.
Billionaire investor George Soros has warned that global markets will falter given the uncertainty of incoming US President Donald Trump's policies.
"Right now uncertainty is at the peak," Soros told Bloomberg News at his annual media dinner held at the World Economic Forum in Davos, Switzerland. "I don't think the markets are going to do very well."
Stocks in the United States surged after Trump's November 8 election victory.
"Markets see Trump dismantling regulations and reducing taxes, and that has been the dream," said Soros. "The dream has come true."
But Trump has called for border taxes and withdrawing from his predecessor's Trans-Pacific Partnership trade deal, among other policies that have unclear ramifications for US growth, Soros said.
"It's impossible to predict exactly how Trump is going to act," he said.
Soros, who founded Soros Fund Management and now is chairman of the New York-based firm, was a large contributor to the Super PAC fund-raising group backing Democratic presidential nominee Hillary Clinton and had donated to other groups supporting Democrats.
Overall, Soros said about the president-elect: "I personally am convinced that he is going to fail. Not because of people like me who would like him to fail. But because his ideas that guide him are inherently self-contradictory and the contradictions are actually already embodied by his advisers ... and his cabinet."
Turning to the United Kingdom, Soros said it is unlikely that Prime Minister Theresa May will "remain in power" given divisions within her government.
May on Tuesday laid out plans for Britain to negotiate its exit from the European Union. Soros said that process will be long and that "a bitter divorce" will hurt both sides.
Soros famously made huge profits in 1992 betting against the British pound as it crashed below the preset level and had to be withdrawn from the European Exchange Rate Mechanism.
China has an interest in European unity because of the bloc's importance as an export market, Soros said.
He said President Xi Jinping, who on Tuesday made a case for China's leadership in Davos, can steer his country to either a more open society or a more closed society, while nudging it to a more sustainable economic growth model.
"Trump will do more to make China acceptable as a leading member of the international community than the Chinese could do by themselves," Soros said.
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Markets remain Trump-driven, says IG's Gary Burton:
Overnight markets seem to be reverting back to the mean following a few days of uncertainty around Theresa May's hard Brexit speech. With the UK putting a time window fixing trade negotiations with the world. Considering a history of drawn out trade negotiations in the past, this could be unlikely, you may remember it took 10 years to agree on the Pacific trade deal, the one Donald Trump as indicated he will undo on his first day in office.
UK negotiators may find themselves on the receiving end of negotiations rather than being the price makers as Theresa May is indicating. Evidence of this is now showing up in the FSTE 100 down another 1.1% overnight with the FSTE 250 also coming sharply off the highs of last week.
The Markets and the world are now weighing up the US Republicans' ability to match the President Elects campaign statements with real world outcomes. Set your alarm clocks for 2am Saturday morning if you want to watch the ceremony. Commentary around Trumps success or failure is coming from some of the more experienced with George Soros speaking at Davos and suggesting Trump will fail based on his ideas being contradictory.
With US10 year bond yields at 2.46 %, putting in a new high for 2017, it would seem the market is more looking forward to controlled inflation and a renewed economy. It should be noted the US Volatility indicator rose 5% overnight, the VIX is still at complacent levels any further moves higher would see some risk off taking place. With the US Indices failing to take out recent highs, namely the DOW a full 350 points away after failing to take out the 20,000 point level, further consolidation seems likely.
For Australia today we are expecting a follow through from the weakness in global markets overnight the BHP ADR pricing in at $26.40, The ASX 200 is expected to find further weakness in the real estate sector currently the worst performing sector both here and in the US, strong falls in real estate stock provided the drag on US indices over night. The CBA ADR down $1.60 at $81.00 suggest the financials will do it tough today.
Our markets really have a tug of war going on with commodities regaining the bid and louder noises coming from real estate investors not seeing further value in a market that made extraordinary gains over the past 4 years putting a cloud over the financials mortgage risk in a potential rising rate environment.
The European Central Bank stuck to its super-easy monetary policy overnight, telling those calling for a tightening - like economic powerhouse Germany - to be patient as the bloc slowly regains its economic health.
Pledging to look through an inflation blip fuelled by rising oil prices, ECB President Mario Draghi acknowledged a string of surprisingly strong growth indicators. But he argued that the outlook was still fraught with risk, requiring the bank to maintain its unprecedented stimulus.
Having already bought 1.5 trillion euros worth of assets and cut rates deep into negative territory, the bank often tests the patience of hawkish Berlin, and tensions could run high this year as Germany prepares for elections in the autumn.
"The recovery of all of the eurozone is in the interests of everybody, including Germany," Draghi said. "We have to be patient. As (the) recovery will firm up, real rates will go up."
Critics in Berlin argue that thrifty Germans face negative returns on their savings while highly indebted and inefficient governments borrow money for next to nothing, raising concern that German voters will turn on the establishment and flock to populist parties.
With elections also due in France, the Netherlands and possibly Italy, the ECB will be keen to chart a steady course and avoid any more political ripples until new governments are in place.
"For the time being, the ECB will stay on its autopilot," ING economist Carsten Brzeski said. "Even a hint at 2018 tapering will not come before the summer, after the Dutch and French elections and the first possible impact of new US economic policies."
Here's how maor markets performed overnight:
- SPI futures down 10 points or 0.2% at 5627
- AUD +0.7% to 75.57 US cents
- On Wall St, Dow -0.4%; S&P 500 -0.4%, Nasdaq -0.3%
- In New York, BHP -0.3%, Rio -0.7%
- In Europe, Stoxx 50 -0.1%, FTSE +0.3%, CAC +0.6%, DAX flat
- Spot gold flat at $US1204.40 an ounce
- Brent crude +0.6% to $US54.23 a barrel
- Iron ore -1.3% to $US80.99 a tonne
- Thermal coal: +0.5% to $US83.45 a tonne; coking coal flat at $US190
- LME aluminium -0.5% to $US1826 a tonne
- LME copper -0.5% to $US5739 a tonne
- 10-year bond yield: US 2.47%; Germany 0.38%; UK 1.40%; Australia 2.76%
US stocks fell overnight, with the Dow erasing its 2017 gain on investor caution ahead of Donald Trump's inauguration as president on Friday.
The Dow fell for a fifth straight day, its longest losing streak since just before the November 8 U.S. election.
Still, Trump's swearing-in will mark one of the best performances for stocks for any presidential transition period of modern times. The S&P 500 is up 5.8 per cent since the vote.
And though the S&P 500 sank 5.3 per cent on President Barack Obama's inauguration day and tumbled 20.4 per cent during the first 34 trading days of his administration, bottoming on March 9, 2009, the index has nearly tripled in price off that low. Including reinvested dividends, it has delivered a total return of nearly 295 per cent.
That is the second-best run for the stock market under any president since Dwight Eisenhower.
The rally in stocks since Trump's election has slowed in recent weeks as investors look for more details on his policies.
Traders in the options market have grown increasingly cautious and have been loading up on defensive contracts, even as overall levels of stock market volatility are close to record lows.
"There has been a lot of talk about selling the inauguration because it's going to take so long to get some of these initiatives pushed through ... so the market seems to have stalled out and consolidated," said Robert Pavlik, chief market strategist at Boston Private Wealth in New York.
"The next logical move may be down before it regroups and moves higher. Why start accumulating new positions when you don't have a real directional reason to do it?"
The Dow Jones Industrial Average closed down 72.32 points, or 0.37 per cent, to 19,732.4, the S&P 500 lost 8.2 points, or 0.4 per cent, to 2,263.69 and the Nasdaq Composite dropped 15.57 points, or 0.28 per cent, to 5,540.08.
While S&P 500 utilities, real estate and energy led sector losses, S&P financials weighed the most on the market, falling 0.6 per cent.
The financial index, which rallied sharply following the election on Trump's promises of reduced regulations and expectations of higher interest rates, is now down 1 per cent since the start of the year.
Good morning and welcome to the Markets Live blog for Friday.
Your editor today is Jens Meyer - please send any tips, suggestions, feedback, jokes, criticism, praise to jmeyer@fairfaxmedia.com.au
This blog is not intended as investment advice.
Fairfax Media with wires.
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