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Have a good evening.
The sharemarket extended its year-end rally to hit a fresh 2016 high, as investors continued to buy up equities and rotate away from bonds.
Mining companies led the day, with BHP Billiton rising 1 per cent and Rio Tinto closing up 1.5 per cent.
The benchmark S&P/ASX 200 Index climbed 0.4 per cent to 5613.5 points, its highest point since August 2015, while the broader All Ordinaries Index also closed up 0.4 per cent at 5662 points.
"These stocks are just bouncing back after being hit, people are just taking advantage while the fund managers away on holidays," said Anna Kassianos, senior analyst at Platypus Asset Management.
"They're trading well so when there are any pullbacks, people are willing to buy them up."
ANZ and NAB continued the trend, closing up 0.6 and 0.5 per cent, respectively. However, the Commonwealth Bank and Westpac each closed down 0.2 and 0.3 per cent, respectively.
Iron ore miners also managed to climb despite iron ore prices falling 2 per cent to $US79.62 per tonne on Tuesday night, making it the fifth fall of the last six sessions. Fortescue shares rose by 0.2 per cent, while gold and coal miners also grew off the back of higher prices.
The dairy sector also showed resilience as a2 Milk bounced back to close up 6.15 per cent, the day's second-best performer after a bullish trading update reassured investors of the company's state, while Bega Cheese also closed up 3.87 per cent.
Both companies were at pains to distance themselves from troubled infant formula producer Bellamy's Organic, which suspended its shares from trading last week after a disastrous quarter in China saw stock prices plummet. Bellamy's also announced its shares would stay suspended until January 13 while it analyses its finances and underlying demand.
The Reserve Bank of Australia minutes this week have provoked a split between market traders and economists about the direction of interest rates next year.
The market believes Australia can handle a higher cost of borrowing and has lifted the chance of a rate hike in 2017 from 40 per cent to around 55 per cent.
But economists are less bullish, with ANZ and Westpac both predicting the central bank to keep rates at a record low 1.5 per cent for the entirety of 2017, while NAB expects two more cuts.
On one hand, the RBA minutes offered a more positive view of the overall economy suggesting there was less of an easing bias, however the wording of the statement made clear the central bank is keeping a keen eye on household debt and the frothy property market.
"They are definitely more concerned around household debt and not just in terms of financial stability but in terms of the macroeconomic implications of that," says Felicity Emmett, senior economist at ANZ.
"For example, if we did see a rise in unemployment because of some external shock, that could see house prices come down a bit and that could prompt a vicious circle because then there are consumer spending implications."
The bank was caught between the "considerable uncertainty" in labour market momentum and the resurgent property prices in Melbourne and Sydney which prompted the board to keep rates on hold.
The minutes of this month's policy meeting also explicitly set out the board's ongoing debate on the impact of its five-year easing cycle on asset prices and household debt.
The Australian dollar has largely failed to follow commodity prices higher, providing the bank with some comfort a lower Aussie will likely allow it to continue to forecast a return to trend growth over time.
National Australia Bank goes even further and suspects the RBA will slice interest rates twice more in a bid to prevent unemployment rising in 2018 as housing construction slows, while the US Federal Reserve will continue to hike.
"Any rise in the unemployment rate would likely see the market quickly switch to the view that still easier financial conditions are required in Australia, even as the US raises rates," says Peter Jolly, global head of research at National Australia Bank.
"NAB's forecast sees this occurring via a combination of lower official rates and a lower Australian dollar."
Shareholders are right to be increasingly worried about just how financially painful Bellamy's Chinese burn is going to be, Elizabeth Knight writes:
At its worst, the organic baby formula producer is experiencing an existential moment as the crisis it's having with suppliers and customers drags on.
The saga of Bellamy's demonstrates just how rapidly a company can move from being a sharemarket darling with seemingly limitless growth prospects to a sharemarket pariah with a questionable business model.
Following a trading halt and a two-week trading suspension of its shares in early December, the company has now requested its shares remain suspended from trading on the ASX until January 13.
Such a delay does not not augur well for the future of the company, which is in the sights of at least one class action law firm and whose chief executive, Laura McBain, is the subject of calls for a scalping.
In the meantime, shareholders are stuck holding the stock they can be almost certain will drop precipitously when trading eventually resumes. And such an outcome would be more favourable than the other possibility that the stock never comes back onto the market.
Wall Street's winners (banks) and the losers (tech stocks) since the US election:
Back to topReturns since election...
— Charlie Bilello, CMT (@charliebilello) December 21, 2016
***$BAC: +34%$GS: +34%$MS: +28%$JPM: +24%$C: +22%
***$AMZN: -2%$FB: -4% pic.twitter.com/61nHWwR82a
Bourses around the region are in an upbeat mood, as investors look past geopolitical events to the prospects of faster US economic growth.
Japan's Nikkei is up 0.2 per cent, the Hang Seng in Hong Kong has added 0.6 per cent, the Shanghai Composite is flying nearly 1 per cent higher and the Kospi in Korea has gained 0.25 per cent.
Markets are showing resilience to terror incidents, with investors choosing instead to focus on the likelihood of increased US government spending that has buoyed equities and pummeled bonds since Donald Trump won the November 8 presidential election.
Trading volumes are thinning and swings in global equities are muted as a turmoil-filled year draws to a close, with a volatility gauge for European stocks at the lowest since 2014.
"Noteworthy is the resilience of equity markets and low volatility in the face of two horrific terrorist attacks in Europe," Jason Wong, a currency strategist at Bank of New Zealand in Wellington, wrote in a note to clients. "They seem to have had little impact on the market."
The record-setting US stock rally is wiping out almost any hint of fear for equity investors as this turmoil-filled year in global markets draws to a close. Bond and currency traders face a more complicated future.
The CBOE Volatility Index, often called Wall Street's fear gauge as it tracks demand for protection against price swings, has dropped toward the lowest level since 2014 even as the rally that took all four main US stock benchmarks to record highs over the past month cools.
That contrasts with indicators that show investors expect stronger price swings in currencies and in sovereign securities, after the steepest debt rout in decades prompted speculation that the 30-year bull market in bonds is over.
Bonds started tumbling in September and at first took equities with them. Then, Donald Trump's surprise election win turned the share market around even as it accelerated the carnage in debt - world stock market capitalisation added almost $US2.5 trillion over the past six weeks, while a similar amount came off the Bloomberg Barclays benchmark for global fixed-income securities.
"The split in bond and stock volatility measures is a sign of the contrasting fortunes for the two markets, so the disconnect may continue until bond yields hit a choke point and I doubt we are there yet," said Nader Naeimi, who heads a dynamic investment fund for AMP Capital. "The climb in currency volatility is a bit more concerning. Should it remain elevated, with emerging currencies declining against the dollar, that may yet help to drive up price swings for stock markets."
Infant formula makers are scurrying to distance themselves from troubled Bellamy's Australia, following the company's extended share suspension.
Bega Cheese said demand was strong for baby formula in China and other Asian countries, as it continued talks with the organic baby food maker about supply arrangements and volume forecasts.
Bega supplies baby formula to a number of customers, including Bellamy's, with product for local and international markets through its plant at Tatura.
Bega chairman Barry Irvin noted the significant price discounting and short term oversupply of baby formula and milk powders in China, but said consumer demand for the category remains.
"The guidance I gave on earnings at the Bega AGM is still our position," he said.
Rival formula maker, A2 Milk Company, also sought to distance itself from Bellamy's problems in China.
"The company notes the higher level of recent commentary and interest from shareholders relating to the infant formula market," said A2 chief executive Geoffrey Babidge.
"In this context, the company wishes to confirm that, consistent with the trends communicated at the annual meeting, the business continues to trade very strongly reflecting, in particular, significant year-on-year growth in its infant formula business."
A2 noted that the near doubling of revenue in the first four months of fiscal 2017 was due to the strong growth in baby formula and milk products, and also included a build in sales ahead of the key shopping event Singles Day in China.
Earlier in December, Bellamy's said it had been hit by a build-up of baby formula caused by changes to Chinese import regulations, and lower sales during Singles Day.
Bellamy's has been suspended for a week, following a two-day trading halt. It today requested the suspension remain in place until January 13 while it continues talks with key suppliers and manufacturers, painting a bleak picture for investors about the nature of its problems.
Bega Cheese shares are up 3.35 per cent at $4.01, while A2 Milk is rallying 6.4 per cent to $2.075.
Markets may be starting to price in a hike in the cash rate next year, but AllianceBernstein warns that the possibility of a housing crisis could force the RBA to cut again.
The pace of growth in housing construction, meanwhile, was unsustainable and its support for the economy was beginning to fade, said Roy Maslen, chief investment officer Australian Equities.
"We see the prospect of some disorder in the housing sector in the second half of 2017 that could well force the Reserve Bank to lower the cash rate," he said.
The asset manager's economists believe that, while commodity prices have improved recently, the rise is unlikely to be enough to reboot the Australian economy overall.
For Australian equities, the 2017 outlook is dominated by uncertainty about the strength of China's demand for commodities and the likelihood of fresh anxieties over the stability of Europe's financial system, he said.
These were key risks for the Australian market's top two sectors, resources and banks respectively.
"Expectations of volatility notwithstanding, we continue to see some attractiveness in equities based on the level of dividend yields relative to returns on bonds and cash, and the scope for active investors to discover value opportunities and invest defensively," said Maslen.
Here are the asset manager's four major market themes for 2017:
- The global debt overhang continues to provide a headwind to world GDP growth, forecasted by AB to be 2.8 per cent next year compared to an estimated 2.6 per cent for 2016
- Political populism could cause further upheavals
- An increase in fiscal stimulus, as more countries follow Japan's lead and conclude that quantitative easing and other unconventional monetary policies have run their course
- The likelihood that global inflation has bottomed and is about to rise
"The prospect of higher inflation and the expectation of further, though prudent and measured, interest-rate rises by the US Federal Reserve virtually ensure further volatility in global bond markets next year," said the economists.
Law firm Slater & Gordon has been ordered by the corporate watchdog to hand over documents for a new investigation into whether the company's financial accounts were doctored.
The documents must be provided to ASIC in a swift manner - some later this month and others early in the new year, according to a statement released to the sharemarket.
"In particular, the ASIC investigation seeks to determine whether those financial records and accounts were deliberately falsified or manipulated and whether the company or any of its officers have committed offences," Slaters said.
The documents relate to financial records and accounts from the period December 1, 2014 to September 29, 2015.
An ASIC investigation into Slater & Gordon's accounts for 2013-14 and 2014-15 was first revealed by The Australian Financial Review in June 2015. ASIC and Slaters informed the market on February 29, 2016 that this investigation had concluded, suggesting the corporate watchdog has found more reason to probe the firm.
Slaters underlined that the order "should not be construed as an indication by ASIC that a contravention of the law has occurred and nor should they be considered a reflection upon any person or entity."
In an email to staff this morning, Slaters' Australian chief executive Hayden Stephens reiterated that ASIC had not yet indicated that any law had been broken.
"It is worth noting a number of matters," Mr Stephens wrote. "First of all, the company's accounts throughout this period were subject to audit."
Slaters' long-running use of accounting firm Pitcher Partners to conduct audits had been a point of prior contention. It switched to Ernst & Young in December 2015, after more than a decade of using Pitcher Partners.
"I appreciate that this presents yet another challenge in what has already been a challenging year," Mr Stephens said. "We will deal with this as we are dealing with other issues relating to past events, in a way that does not interrupt our continuing operations. The most important thing is that each of us continues to focus on serving our clients.
Offshore hedge fund managers and priced-out young Aussies have long argued the pace of house price growth in the nation's biggest cities is unsustainable. They may finally be right.
After two years of double-digit growth, the Sydney house price index gained just 3.2 per cent in the year to September, the weakest increase since 2012, according to the latest government data. Melbourne's rise of 6.9 per cent was the slowest in more than a year.
The dip comes amid increased warnings from the central bank of a looming oversupply of inner-city apartments, with Morgan Stanley analysts saying there could be a surplus of 100,000 units by 2018. Fitch Ratings this month cut its outlook for the Australian banking sector, citing "key risks" around the housing market, while a measure of consumer confidence in property is the lowest in a year.
"I just don't think it can continue," said Paul Dales, chief Australia and New Zealand economist at Capital Economics. "Overall market conditions aren't really consistent with this strength going much further."
The biggest banks, whose loan books are dominated by property, have taken note. The cost of borrowing for property investors is on the rise as the banks begin to reprice credit. Westpac, CBA, ANZ and NAB have increased their mortgage rates for landlords by between 7 basis points and 15 basis points this month.
After peaking at 31,546 commencements in March, the surge in apartment building is starting to fall back - an illustration that developers are also facing a more difficult lending environment. ANZ chief executive Shayne Elliott told shareholders at the annual general meeting this month that the bank is reducing "exposure to CBD, inner-city apartments, because we are a little concerned about some of the risks there."
Tighter lending standards for property investors and foreign buyers, together with capital controls by Chinese authorities, have compounded the slowdown, according to Paul Bloxham, chief Australia economist at HSBC.
"The Australian housing market is cooling," Bloxham wrote in his 2017 housing outlook late last month. "Tighter prudential settings and a pull-back in foreign demand are expected to weigh on prices, particularly of apartments."
Still, few are predicting an outright crash as record low interest rates and population growth underpin the market. Helping fuel price gains is a shortage of properties in desirable suburbs, which in turn feeds competition among buyers.
BHP Billiton's Samarco joint venture in Brazil has taken a small step towards a restart of operations, signing a preliminary agreement with Vale to use the latter's Timbopeba pit to deposit its tailings in future.
Under the deal reached between Samarco and joint owners BHP and Vale, Vale will transfer the Timbopeba pit to Samarco, and Samarco will supply Vale an undisclosed amount of non-processed ore for a certain period after restarting operations.
Operations at the Samarco mine have been suspended since a tailings dam failed in November 2015, causing flooding that killed at least 19 people and led to widespread environmental damage.
BHP said earlier in December that production at the Samarco mine could restart sometime in 2017, but only if the joint venture project's $US3.8 billion of debt is restructured and new operating approvals are secured.
"After obtaining the required environmental licenses, Samarco is expected to temporarily deposit its tailings in its own pit - Alegria Sul, for a period of two to three years," BHP said in a statement today. "The use of the Timbopeba pit may allow Samarco to operate for up to several years without a new tailings structure."
The Timbopeba pit currently belongs to Vale, which runs a neighbouring mine. The Samarco mine produced 30 million tonnes of iron ore annually prior to the fatal accident.
And another asset sale: Cabcharge has agreed to sell its 49 per cent stake in Australia's largest private bus company ComfortDelGro Cabcharge, for $186 million to joint venture partner ComfortDelGro.
Chairman Rick Millen says the board is evaluating how the sale proceeds will be used, with priority to be given on cutting debt and growth initiatives.
Cabcharge expects to book net proceeds of $183 million on the stake sale, which is expected to be wrapped up late February 2017.
This sale is also getting investors' tic of approval, with Cabcharge shares up 2.8 per cent at $3.98.
REA Group shares are up 2.7 per cent at $54.74 after the company said it's selling its European businesses for $189.7 million to the UK's Oakley Capital Private Equity.
The digital real estate advertising company, which owns Australia's realestate.com.au website, will sell at Home Group S.a r.l. and REA Italia S.r.l. which operate in Luxembourg, France, Germany and Italy.
REA Group said the sale will yield a profit of $168.4 million, and will allow the company to sharpen its focus in key growth markets in Australia, Asia and North America.
The ASX could have done a better job communicating with the market and with rival exchange operator Chi-X on the day of its outage, ASIC's findings indicate, leading the ASX to review its communications protocol.
The regulator's report into the September 19 outage confirms that market participants were confused on the day and relied on various formal and informal sources of information about whether the exchange would trade normally.
The ASX closed trading early after an unusual technical failure interfered with trading. Chi-X was still able to settle trades even though the ASX was down.
ASX also declined to accept Chi-X's invitation of an open conference call, Wednesday's report shows, instead relying on its designated point person for all contact.
"ASX is reviewing the effectiveness of the communication channels it has historically used for incident management to assess whether improvements can be made to enable stakeholders to respond and take appropriate actions during market outages," ASIC said, recommending "less frequent but more meaningful communications" from a "'single source of truth".
Most of the communications to market participants such as brokers was conducted via email and inquiries to the ASX's service desk. But not everyone was equally informed; the website was only updated periodically and some users could get additional information from contacts at ASX or ASX account managers.
"The outage raises questions as to whether the communications policy is still adequate," ASIC said.
Has the Australian dollar finally bottomed?
After falling for four straight sessions to a six-month low of $US72.23¢ following the Fed's rate rise and hawkish outlook that flagged three hikes in 2017, the currency has stabilised a bit this morning, climbing to $US72.64¢.
But BK Asset Management's Kathy Lien says it's too early to tell if the currency has found a temporary trough, and that from a technical perspective, the currency appears poised for further losses.
Lien also notes that the Aussie is vulnerable to Chinese - US tensions and the impact of a weak Chinese currency.
On the other hand, the RBA minutes released yesterday, made it clear the central bank is worried about the high levels of household debts, making it even more unlikely it will cut rates further, as this would just exacerbate the debt problem.
Financial markets reacted by pushing chances of an RBA rate hike by the end of next year to above 50 per cent, the highest in years. This should support the Aussie dollar.
Other factors propping up the currency heading into 2017 are the massive rebound in iron ore and coal prices as well as a pick up in global risk appetite.
But, as witnessed over the past week, these Aussie-positives don't count for much when the almighty greenback surges.
​The clash between these forces - higher commodity prices, growing chance of an RBA rate rise and upbeat sentiment on the one hand and rising US yields and a stronger greenback on the other - will likely continue to shape the Aussie's path at the start of next year.
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Shares have built on the year highs they hit yesterday, as banks and miners lift together, while a return of the Trumpflation trade of selling bonds and gold sparks losses for precious metal producers.
The ASX 200 is up 21 points or 0.4 per cent in early trade at 5611.7, and has pushed above intraday highs for 2016.
Miners are back in favour today despite further falls in the iron ore price overnight, and energy plays are also higher as the oil price lifts. BHP is up 0.7 per cent, Rio 1.2 per cent and South32 1.9 per cent, while Fortescue has added 0.7 per cent.
Sydney Airport is off another 2.3 per cent after being hit with a broker downgrade this morning and after yesterday's news that the government looks set to play hard ball re who pays the costs of a new Western Sydney airport. The overnight sell-off in bonds wouldn't have helped either, with the local 10-year yield up a little at 2.85 per cent.
The big banks are providing solid support, pacing the market's gains. Telstra is off a little and CSL up 0.3 per cent. Woolies and Wesfarmers continue to gain support, up around 0.3 per cent.
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The bulls are trotting, rather than running, writes IG chief market strategist Chris Weston:
It's a good day to be an equity bull,but it's a slow grind higher as opposed to an explosion in demand and the moves we are seeing in many markets are still fairly subdued.
There is a clear focus on implied volatility and rightly so, the US volatility index (aka the "VIX") at 11.56% is approaching the year's low of 11.02%, while we are actually at the year's low point on the ASX 200 volatility index. This would be generally be ideal for investors who want income (i.e. high dividend paying names) if it weren't for the rising bond environment working as a cost of capital.
However, it seems traders and investors are simply not positioned for an impending rush of blood to the head and range expansion in markets. Everyone is very calm as we head into Christmas and New Year.
That all may change at the start of 2017 when fund managers have locked in their monthly, quarterly and year's performance and we don't have the FOMO (Fear of Missing Out) trade pushing cash into the market on literally any 0.5% drop.
The European equity markets are really where I want to be. I have been pushing a positive message on the Italian MIB and German DAX for a while and we now have strong breakouts occurring, with the DAX trading to the highest levels since August 2015 and Italian market since January. The MIB has rallied some 20% since hitting 16,000 on 21 November, helped by good-will towards the banking space, with the government asking parliament for a €20 billion debt increase.
Market calls: what was right and wrong in 2016?
Market participants were often completely wrong when predicting political events. Even if they predicted the correct outcome, they certainly failed to call how the market would react, while others have been quite accurate. (This video was produced in commercial partnership between Fairfax Media and IG Markets)
Here are the overnight highlights:
- SPI futures up 12 points or 0.2% to 5564
- AUD up 0.1% to 72.58 US cents (earlier touched 72.23)
- On Wall St, Dow +0.5%, S&P 500 +0.4%, Nasdaq +0.5%
- In New York, BHP +1.7%, Rio +2.4%
- In Europe, Stoxx 50 +0.7%, FTSE +0.4%, CAC +0.6%, DAX +0.3%
- Spot gold -0.7% to $US1130.62 an ounce
- Brent crude +0.9% to $US55.42 a barrel
- Iron ore -2% to $US79.62 a tonne
- Steaming coal -0.3% to $US86.20/tonne, Met. coal flat at $US270
- LME aluminium +0.7% to $US1721 a tonne
- LME copper +0.1% to $US5502 a tonne
- 10-year bond yield: US 2.56%, Germany 0.26%, Australia 2.84%
In analyst news and views:
- TPG cut to sell at Shaw
- Sydney Airport cut to hold at Morgans
- Village Roadshow raised to buy at Ord Minnett
- Westgold Resources rated new buy at Bell Potter
- Independence Group raised to buy at Wilsons
Quick update on that last post: Bellamy's has asked for its suspension to be extended to January 13.
In an ASX statement, Bellamy's asked for the extension "pending negotiations with key supplier/manufacturers in order to determine the impact of those negotiations on the company's expected financial results".
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