That's all for the week - thanks for reading this blog and posting your comments.
We'll be back Monday from 9am.
Have a relalxing, and not too rainy, weekend.
Shares have closed sharply lower, erasing a big chunk of yesterday's oversized gains after Wall Street exuberance turned to caution overnight.
The ASX dropped 0.8 per cent to 5729.6 points, after Thursday's 1.3 per cent rise, dropping four sessions out of the past five for a weekly loss of 0.2 per cent.
The Trump inspired rally in the stock market looks very tired, said Fat Prophets CEO Angus Geddes.
"We are now in March and headed towards "the Ides", which is a seasonally weaker period for the markets," he said. "Given the strength and breadth of the rally since last November is approaching six months, I believe that a correction is due."
Gold miners were the day's - and week's - biggest losers as the precious metal's price turned south following some hawkish comments from Fed officials, which bumped up the probability of a March rate rise in the US to 90 per cent.
Resolute Mining fell 9.6 per cent today and 24 per cent over the week, on both counts the biggest loser among the top 200.
Most blue chips fell today, led by a 1.4 per cent drop in BHP and a 4.1 per cent slump in Rio Tinto. The big banks shed between 0.6 per cent (CBA) and 1 per cent (Westpac), while Telstra bucked the trend, rising 0.4 per cent.
QBE was the shining star among the bourse's biggest members, rising 1.8 per cent thanks to its correlation with higher global bon yields.
Bit of late news that we missed earlier:
Japan's core consumer prices rose for the first time in over a year in January thanks to a pickup in energy costs, but a slump in household spending showed why economic growth and inflation have lagged the more ambitious goals set out by policymakers.
As rising protectionism in the United States poses risks for the world's third-largest economy, as well as the rest of export-reliant Asia, there is a danger companies will shy away from boosting wages seen as crucial for durable growth.
That will also undermine the Bank of Japan's efforts to accelerate inflation to its still-distant 2 per cent target, analysts say.
Government data showed on Friday the core consumer price index (CPI), which includes oil products but excludes volatile fresh food prices, rose 0.1 per cent in January from a year ago, posting the first increase since December 2015.
It compared with a median market forecast for a flat growth and followed a 0.2 per cent drop in December.
Many analysts expect core consumer prices to head toward 1 per cent later this year. But that would still be half-way to the BOJ's goal, which was put into perspective by separate data showing household spending slipped in January even as the job market tightened further.
"Inflation will accelerate this year due to a rebound in energy costs and the weak-yen effect. But it won't heighten much next year unless wages spike and boost spending," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.
"The hurdle for hitting 2 per cent inflation remains very high, which means the BOJ will maintain its ultra-loose monetary policy for the time being," he said.
Fresh off AFR's Chris Joye giving the RBA a hard time this morning, UBS economists have brought out a note titled, "Is the Aussie cash rate now too low?".
Consumer inflation may be below the central bank's target, but the hurdle for further rate cuts "looks very high", what with support from rising commodity prices, the end of the mining capex cliff and then this week's GDP data that showed a big rebound over the fourth quarter.
The UBS team nonetheless reckon low local inflation will offset the global reflation trend and keep the RBA on hold until late 2018.
But they ask whether that static approach may hide "a more uncomfortable truth". That is: "Is the RBA cash rate now set too low?"
They explain:
Even if inflation stays below 2%, is the current RBA rate simply set too low for an economy with improving fundamentals and a tax system biased toward gearing over saving. Housing prices have reaccelerated above 10%, investor credit growth has jumped to near the macro-prudential cap and household debt is making new highs.
Viewed through another prism, did Australia cut the cash rate to 1.5% in mid-16, for a global deflationary environment that was just beginning to end?
It's likely despite some internal angst at the RBA, that the best path is steady rates & some more macro-pru (& rely on record housing completions ahead to settle the market). But there remains some risk that if prices & lending don't slow (as we expect), the RBA may get frustrated & feel compelled to start normalising higher the cash rate earlier than most expect.
While there remains some debate on the best measure of housing prices, the renewed strength in demand at auctions, where volumes of activity are also no longer low, argues upside above our forecast for flat housing price momentum from here, pointing to further acceleration after the recent doubling from mid-16 from 6% to 12% y/y (& bringing with it a raft of social issues around affordability).
This suggests low rates are simply being capitalised into housing prices which are then increasing the debt burden. While interest servicing costs are at 13-years lows (because of record low rates), the cost of servicing both principal and interest has risen to a 7-year high (see chart), and will approach prior cycle peaks on a mere 100bp of RBA hikes.
Near-peak servicing costs with below-neutral cash rates suggests a great deal of vulnerability were inflation to rise unexpectedly.
Bunnings has warned its suppliers to prepare for a major expansion after the hardware behemoth swooped on 11 former Masters Home Improvement stores across Australia and announced plans to open nine new stores across NSW, Victoria and Queensland.
The transformation of the Masters sites has piqued the interest of the competition watchdog but only in relation to the four Masters sites that represent new trading locations for the Bunnings network.
Seven of the Masters stores slated for transformation are in suburbs where there is already a Bunnings warehouse and the chain is shutting these stores and moving into the revamped Masters premises.
ACCC chairman Rod Sims said there were only a handful of new stores, most of them were "swaps" from current Bunnings stores.
"We've also got to assess how much interest there is in these stores from other hardware players," Mr Sims said.
"We are still looking at it but we are conscious there are only a small number of new stores and there ... aren't a lot of other people clamouring to take them over as hardware stores."
Mr Sims said the ACCC also made a distinction between somebody who gets dominance by outplaying everybody else on the field, versus someone who does it by mergers that shouldn't happen or any "anti-competitive behaviour".
"Bunnings are in the best place to buy them but they've really earned their way into that," he said.
The Wesfarmers-owned Bunnings would not comment on the new store openings except to confirm its planned store rollout included a number of former Masters stores.
In a communication sent to suppliers, which BusinessDay has seen, Bunnings said it would be embarking on a "very busy new store opening program" from April to September.
Iron ore has been a surprise winner this year, with prices soaring to just below $US100 a tonne, but HSBC reckons the bulk commodity is set for a "massive fall".
"The current iron ore price rally has been supported by higher than expected Chinese iron ore demand in the second half of 2016, which was driven by an earlier start of the seasonal restocking cycle on low inventory levels," an HSBC team led by metals and analyst Anshul Gadia write in a note called "When the music fades".
With higher imports as well as iron ore production in China, HSBC expects the inventory build-up to be complete by the second quarter of this year.
In the meantime, the analysts predict the ramp-up of new supply, a seasonal recovery in Australia, Brazil and China and the restart of Indian mines are set to flood the market, turning a deficit of 10 million tonnes in the first quarter of this into a surplus of 30mt in 2Q17, widening to about 40mt in 4Q17. And even more supply could be added if prices stay elevated.
"The longer prices remain elevated, the greater the likelihood that marginal supply will be added to the market," the analysts say.
"At these prices levels, there is a danger that this incremental supply could become sticky as producers renew their commitment to cost and capital. Should incremental supply growth persist, prices may need to fall below the marginal cost of production for an extended period to drive the necessary closures and rebalance the market," the analysts warn.
The seasonally stronger iron ore output combined with the "wall of new supply" are set to be the main drivers of a potential "collapse" in iron ore prices, as market fundamentals remain weak, HSBC says.
"While some of the more speculative noise will likely abate, the key fundamentals remain weak and we believe that relatively strong supply growth will ultimately drive prices lower as demand growth fails to absorb additional volumes."
HSBC's long term price forecast is for a return to $US52 a tonne, more than 40 per cent below the current spot price of $US92.36.
The analysts warn if prices do correct by that much, equity prices will likely follow suit, considering the "historical strong correlation between iron ore prices and diversified equities", which is why they prefer diversified miners.
The analysts note that BHP has a limited sensitivity to iron ore prices (calculated at 8 per cent valuation sensitivity to a 10 per cent change in iron ore prices) and even Rio's is just 10 per cent, compared to 40-50 per cent for Vale. But Glencore is their favourite miner as it has no iron ore exposure.
"We would view any share price weakness as support to further accumulate positions in diversified miners on which we already have a constructive opinion," they add.
Dalian iron ore futures are down another 3.5 per cent today, while spot iron ore prices rose 1.2 per cent to $US92.36 a tonne overnight
Former Reserve Bank governor Glenn Stevens says the economy has managed the aftermath of the mining boom better than other periods of prosperity.
In a rare public appearance since retiring as central bank governor, Mr Stevens told an audience of financiers in Sydney that work conducted by his colleague Ric Battellino showed that almost ever prior boom "ended badly".
"They had high inflation on the way up and a recession on the way down. We are not having this. This has been a remarkable adaptation to a very large boom".
Mr Stevens said that even though the mining boom has been volatile for the country, had it not occurred we just would have had a "lower average" outcome.
"We have gained share in key commodity markets that we can keep and the country is richer as a result, notwithstanding the adjustment problems," he said.
Mr Stevens said one of the lessons of the 2008 financial crisis was to accept that greed and fear are endemic to human nature.
"If you forget the cycle of fear and greed you will run into trouble."
"There's a pattern of recurring crises. Finance is prone to that. It always has been. It will always be at least prone to some sort of a crisis."
"The question really is 'are they big crises or manageable ones' and 'what can you do to manage them?'"
Mr Stevens said that it was apparent in the midst of the 2008 financial crisis that the bank would have to ease financial conditions aggressively and inject the system with liquidity.
"We did an exercise where we tried to add up the total amount of collateral that we would think would be acceptable in a pinch. I think the answer was $900 billion and I thought 'that should probably enough'"
"So you lend against collateral. You liquefy the system and you do that as much as th system needs. Your job is to turn on the tap."
The Australian dollar is languishing at multi-week lows, pulled down by a greenback that strengthened on rising expectations the US Federal Reserve will hike interest rates this month.
The Aussie has slipped another 0.25 per cent to US75.48¢, following a 1.4 per cent tumble overnight, its biggest drop since the day after the US election in November.
The Aussie is down 1.4 per cent this week so far and is set for its worst weekly performance since mid-December. In contrast, the US dollar index is set for its best week since late 2016.
The Aussie traded in a US76.05/77.31¢ range for all of February, with strong chart support at US76.00¢. Technical analysts say that support was broken in a burst of selling during European trading on Thursday, triggering a series of stop losses.
The Aussie was also pressured by weak commodity prices with aluminium, oil and gold all falling.
"Most commodities had a day to forget and although the USD is stronger across the board, the AUD is the worst G10 performer," said Rodrigo Catril, currency strategist at NAB.
US dollar bulls were buoyed by hawkish comments this week from influential New York Fed president William Dudley as well as other central bank official prompting more investors to increase wagers on a rate hike this month.
Fed chair Janet Yellen and vice-chair Stanley Fischer are slated to speak later today, and could reinforce the hawkish message.
Fed funds futures imply a 90 per cent probability of a hike at the Fed's March 14-15 policy meeting.
Elsewhere, the Aussie is also continuing its losing streak. It's dropped 0.3 per cent on the yen, coming off a two-week high, and hit a three-week low on the euro. It also faltered on its New Zealand counterpart, drifting away from a more than seven-month peak touched on Thursday.
Australia has moved from an income recession to an income boom - but you're unlikely to be feeling it in your hip pocket.
Following this week's surprisingly strong GDP data (+1.1 per cent growth in the fourth quarter and 2.4 per cent over the year), Australia appears well on the way to notching up 26 years without a recession, the longest continuous period of economic expansion in any country in the modern era.
What's more, the income side of the national accounts looks particularly strong, Capital Economics economist Paul Dales points out. The 3.0 per cent quarterly rise in nominal GDP was the largest since the second quarter of 2010 and real gross domestic income (which takes into account the immediate and direct influence of changes in export and import prices) also rose by a stellar 2.9 per cent over the quarter, thanks to soaring commodity prices sparking a jump in the terms of trade.
"Put simply, much more money came into the country, which explains why these various measures of national income shot up," he says.
"So if the outright falls in real GDI and the stagnation in its annual growth rate in 2015 was characterised as an income recession, then it's fair to say that Australia is now enjoying something of a mini income boom."
Whether or not this translates into a period of much stronger real GDP growth depends on what businesses do with the extra income.
Dales says the early indications are that they will boost their profits and pass hardly any of it on to households. Indeed, while corporate profits rose by a whopping 20 per cent in the fourth quarter, the compensation of employees fell by 0.5 per cent, he notes.
"So just as the income recession of 2015 wasn't followed by a real recession (partly as foreigners absorbed a lot of the pain from the previous plunge in commodity prices) the recent mini income boom won't translate into a boom for the real economy," Dales says.
To recap: shares have taken their biggest hit so far this year - following yesterday's largest rise of the year - pressured by a selloff in financials and materials and as Wall Street took a breather from a strong run.
The backdrop of downbeat commodity and metals prices is enough to put the benchmark index on track for a weekly loss of 0.3 per cent.
Gary Burton, a market analyst at IG Markets, attributed some of the weakness to investors cashing in on yesterday's strong gains.
Financial stocks are tracking their US peers, with the big four banks all down about 1 per cent.
Materials were hampered by commodity prices, as gold and copper prices fell in the face of a strong US dollar. Rio Tinto is one of the biggest losers, shedding more than 3 per cent.
The miner has deferred for at least two years a decision on former chief executive Sam Walsh's performance-related pay, after a scandal over $US10.5 million in payments to a consultant in Guinea.
"We saw commodities prices down overnight...There was a bit of weakness in the space of commodities in general," Burton said.
Fortescue fell as much as 5.1 per cent to over a month's low.
On the flipside, insurer QBE is up 1.8 per cent, profiting from rising US yields.
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A Sydney-based investment manager has become the world's best-performing hedge fund as it soared 145 per cent last year, thanks in part to its bets on marijuana companies.
Stock and credit investments in North American marijuana producers contributed 22 percentage points of last year's gain for the $264 million Tribeca Global Natural Resources Fund, said Ben Cleary, who co-manages the pool with Craig Evans. The fund has gained 4 per cent this year through February, Cleary said.
The marijuana bets helped the hedge fund rise to the very top among more than 10,000 rivals tracked by data provider Preqin and stand out in a lacklustre year for the industry. Eight US states and the District of Columbia legalised recreational cannabis use among adults and more than half of all US states have laws allowing medical use of the drug.
While federal laws prohibit the sale of marijuana and officials from Donald Trump's administration have sent mixed signals on whether they would increase enforcement, Cleary said he isn't concerned because cannabis laws are state-based.
"People have voted with their feet at the ballot box," Cleary said. "Financing to this sector is still incredibly hard to find and the cottage-like mum-and-dad industry is prime for consolidation in the US."
The US legalised cannabis industry's revenue hit $US6.7 billion last year and is highly likely to surpass $US20 billion in five years, Cleary said. The industry will expand to $US50 billion by 2026, Cowen & Co, the former bond brokerage aiming to become Wall Street's leading provider of cannabis research, estimated in September.
"This will have far-reaching impacts, including lower beer sales, as Generation Y gravitate towards the 'low carb' alternate," Cleary said.
Stock prices of Aurora Canabis and Canopy Growth, both medical marijuana producers which the Tribeca fund has invested in, more than tripled last year and have advanced 12 per cent and 30 per cent this year, respectively.
The fund also made money in 2016 from investments in salmon producers in Norway, Australia and New Zealand, including Tasmania's Tassal Group and Sanford.
Cobalt and lithium companies in Asia, Canada and Australia, such as Galaxy Resources, proved profitable trades last year amid battery demand of the growing electric car industry, while bearish bets on the fertiliser industries in Europe and North America also paid off.
NAB's chief executive has refused to answer questions over why the bank paid out and wrote a letter of recommendation for a disgraced planner when he left the business.
Labor MP Matt Thistlethwaite grilled chief executive Andrew Thorburn over its actions against Graeme Cowper, a Sydney financial adviser, exposed by Fairfax Media in 2015 for giving inappropriate advice to a number of clients.
Mr Cowper left NAB in 2010 but not before the bank sent a breach report to ASIC. He went on to work for other financial institutions after resigning from NAB.
The parliamentary hearing was told NAB paid out Mr Cowper before he left and wrote him a letter of recommendation.
"You allowed him to resign and gave him a payout, I also understand you wrote him a nice letter. This is a man you admit breached your code of conduct, you allowed him to resign and gave him money - are you living in the real world?," Mr Thistlethwaite asked.
Mr Thorburn wouldn't be drawn on the specifics of Mr Cowper's case, citing legal issues, but said standards had changed since 2010.
"As I sit here today we have far more scrutiny, far more scrutiny of the advice our planners are giving."
Mr Thorburn began his appearance by stating that more than 1000 people were found not to have acted in line with the bank's code of ethics, with many being disciplined.
"The message here to all our people is that we are in a position of trust, we have high standards, they are expected to be met and if they are not, there are consequences," he said.
But committee chairman David Coleman pressed him on the consequences for one executive, head of wealth, Andrew Hagger, who it was revealed had not been disciplined and received his 120 per cent bonus despite presiding over a million-dollar scandal.
Read more banking burns here and AFR even has a live bank inquiry blog here.
It's high time for the RBA to lean against the housing bubble, the AFR's Chris Joye comments:
With the world's leading credit rating agency warning this week that it will potentially downgrade all Australian banks — and the nation's sovereign rating — unless the housing market's crazy momentum cools fast, it's beyond time for the Reserve Bank of Australia to reverse its 2016 mistakes.
If governor Philip Lowe ran money at a hedge fund, he would be forced to cut his losses and accept that the logic the RBA used to rationalise its May and August rate reductions was wrong (as we warned ad nauseam).
The two main reasons the RBA felt it could further debase borrowing costs were: first, because it thought the housing market was already cooling (erroneously claiming house prices fell in July); and, second, that its rate cuts would not reignite the boom that it launched in 2013. Both assumptions proved faulty.
Between January 1 and April 31, 2016, Australian capital city home values appreciated at a frisky 8.1 per cent annual pace (after removing the April jump in CoreLogic's index when it upgraded its sales sample, which is the largest of any index provider). In the 10 months since April 2016 (or following the RBA's May cut), price growth has accelerated to 10.4 per cent a year. Strike one.
Just as the Australian Prudential Regulation Authority's 2015 constraints on credit creation were starting to mitigate the irrational exuberance, the RBA injected borrowers with another double dose of adrenalin.
And yet in September 2016, Lowe advised parliament that "the two interest rate cuts we have had this year do not seem to have stimulated a new round of house price increases".
The RBA's bubble-blowing is clearly borne out in auction clearance rates, which are one of the best proxies for real-time conditions. Last weekend the national clearance rate hit 79 per cent compared to 72 per cent at the same time a year ago. Strike two.
The final blow to the RBA's case has been the subsequent surge in speculative lending, which had been moderating before the May cut.
Here's more
BHP Billiton's investment dollars are ready to flow into Mexico's Trion oil prospect, with chief executive Andrew Mackenzie expected to finalise within days the investment agreement that was struck with PEMEX in December.
The visit to Mexico comes ahead of a big week in oil and gas, with executives from BHP, Shell, ExxonMobil and Saudi Aramco also scheduled to speak at the CERA Week conference in Houston.
BHP will spend at least $US382.4 million, and potentially $US1.2 billion exploring the offshore permits that contain the Trion discovery, after beating BP and several other big oil companies in a competitive tender process.
BHP did not provide a construction cost estimate for Trion in its December announcement of the successful bid, but PEMEX director of resources Gustavo Hernandez said this week that it would likely cost $US11 billion to build if approved.
"Total estimated investment throughout the project's life amounts to approximately $US11 billion and investment flows will come as early as 2017 to carry exploratory activities that provide a better understanding of the subsoil," he told analysts.
Hernandez suggested first production was hoped to begin within six years.
"Initial production is expected for 2023 and by 2025 the project will reach a production plateau of 120,000 barrels (per day) of oil equivalent," he said.
Analysts are hoping the $US11 billion construction cost can be reduced with optimisation work, with Tudor Pickering Holt analyst David Gamboa saying the $US11 billion price tag looked expensive on a dollar per barrel of oil basis.
BHP shares are down 1.1 per cent, but still outperforming Rio's 3.3 per cent loss.
Stocks are wallowing deep in the red, but spare a thought for the gold sector which is getting absolutely smashed this week as investors brace for a US rate rise, selling off the yellow metal.
The All Ordinaries gold index is down a whopping 3.6 per cent today, extending this week's losses to more than 10 per cent, which is conventionally regarded as a 'correction'.
St Barbara is leading the sector's losses today, down 7.6 per cent, followed by a 7.5 per cent slump in Resolute Mining, while over the week Resolute has taken the biggest beating, plunging 22.3 per cent.
The falls come as spot gold posted its worst session since December, dropping 1.2 per cent to $US1234 an ounce. It's trading flat this morning.
Gold took a hit after data showed US jobless claims fell to a 44-year low. Labour tightness, combined with rising inflation, could encourage the Federal Reserve to raise interest rates at its March 14-15 policy meeting.
"The short-term risk is probably skewed to the downside. The previous two occasions ahead of a Fed hike, we've seen gold weaken only to rally in the aftermath and that could potentially be seen once again," said Ole Hansen, head of commodity strategy at Saxo Bank.
Fed Governor Lael Brainard said on Wednesday that an improving global economy and a solid US recovery mean it will be "appropriate soon" for the Fed to raise rates, and on Thursday Fed Governor Jerome Powell said "the case for a rate increase in March has come together."
"March is now looking like a likelihood," said Rob Haworth, senior investment strategist for U.S. Bank Wealth management, referring to the possibility of a rate hike. "You're getting people stepping back in their gold trade."
Fed chair Janet Yellen and vice chairman Stanley Fischer will speak on Friday, likely providing further signals on the US central bank's policy path.
A correction in gold, however, is likely to be shallow as investors remained friendly to bullion as a hedge against global uncertainty and rising inflation, analysts said. ABN Amro lifted its year-end 2017 gold price forecast by $US200 to $US1300, but said prices would likely consolidate until turning higher later in the year.
"We think that the US dollar rally is behind us and this is a positive for gold prices," said analyst Georgette Boele.
The OECD has warned of a "rout" in Australian house prices, leading to a new economic downturn, saying both prices and household debt have reached "unprecedented highs".
The warning is in an otherwise positive biennial assessment released overnight that broadly mirrors the Australian Treasury's.
Putting the risk of a recession at around one in five, the Paris-based OECD says alongside a shakeout in China and ongoing weakness in business investment, the single biggest threat to the nation is from a potential hard landing in the property market after years of double-digit price gains.
OECD officials – writing in what is their first major review of Australia's economy since 2014 – said the housing market may not "ease gently" and could develop into a "rout on prices and demand with significant macroeconoimc implications".
A chief consequence would be a juddering shutdown in household consumption and a surge in mortgage defaults that would ricochet around the economy.
The storm warning follows a report by Corelogic this week showing annual growth in Sydney prices last month hit 18.4 per cent – the highest rate since the city's 2002 boom.
Continuing price gains in Sydney and Melbourne are feeding concern that ultra-low official interest rates, as well as tax breaks that favour older generations, are distorting the housing market, worsening inequality, affordability, and concentrating systemic risks in a handful of big lenders. Furthermore, yields are on a downward slide as investors fall over themselves to buy at prices that imply they are betting only on future capital gains rather than meaningful rental returns.
The OECD's report also echoes the Reserve Bank's recent unease over high levels of indebtedness, which governor Philip Lowe confirmed last month could easily backfire into a spending slowdown.
Among a series of growing vulnerabilities, including a potential shakeout in global trade caused by a misstep on US Federal Reserve rate hikes, rising protectionism, and the risk of a Chinese yuan devaluation, there is now a "non-negligible risk" of recession in Australia over the next two years.
Shares have opened sharply lower, handing back a fair chunk of yesterday's outsized gains as the recent barrage of hawkish Fed comments takes its toll on sentiment.
The ASX has dropped 0.8 per cent to 5728,4, putting the index on track for a small weekly loss, with yesterday's session the only one this week to have ended in the black.
"Sentiment snapped despite data that shows higher consumer confidence and a tightening job market in the US, and resurgent inflation in Germany," said CMC chief market strategist Michael McCarthy.
"Weakening commodity prices may see Australian investors extend the losses over the session. This latter dynamic is potentially exacerbated by the strength of resources stocks during trading yesterday."
While all sectors are in the red, it is materials that's leading the losses, down 1.7 per cent.
BHP is the biggest drag on the benchmark index, falling 1.5 per cent, while Rio is down 2.6 per cent. The big banks are also all in the red, around 0.5 per cent.
Gold miners are among the hardest hit, with Newcrest sliding 2.6 per cent and Resolute Mining plunging 8.1 per cent.
QBE is one of the few winners, with the yield-sensitive stock rising 0.4 per cent.
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The talking point for markets has centred on the Snap's incredible debut, but more broadly the conversation has firmly focused on the US dollar and the potential March 15 hike from the Federal Reserve, IG's Chris Weston says:
It has been amazing to watch the fed fund futures market move from pricing the probability of a hike from a lowly 20% in early February to now sit at 90% if you look at the Bloomberg calculation, 79.7% on the CME Fedwatch tool.
Either way, interest rate traders have said it is now firmly the base case that they raise and when so many Fed members have shifted into a more hawkish setting and signified a March hike then the interest rate market participants will not question that.
In US trade tonight we should hear near definitive confirmation of a near-term tightening with Fed members Charles Evans and Jeffery Lacker due to speak as part of a panel at 02:15 AEDT. Then the generals of the Fed Stanley Fischer and Janet Yellen should go some way to sealing the deal when they speak at 04:40 AEDT and 05:00 AEDT respectively.
Next Friday's US payrolls could have some influence, but the trend in job creation has been strong and the probability is we get a number in-line with the consensus of 180,000, with wage growth of 2.8% and then it's good night Vienna, game, set and match. The question then, of course, becomes how many more hikes we get this year?
As said, the USD has been the mover on the day and is now the currency du jour. A nice push higher in the five- to seven-year part of the US fixed income curve has given the USD bull's new life and especially we can see 5 year US treasuries looking to test the December highs of 2.12%. It's probably worth highlighting though the continued flattening of the 2-10 year yield curve, which now sits at 116bp.
The bond market, it seems, is saying that perhaps policy will tighten in the short- to medium- term, but longer-term inflation expectations remain firmly anchored. It is not a reflection of an argument of a recession, as some will be saying.
Arguably the talk of the FX markets though has been the sell-off in AUD/USD, and at 1.5% the sell-off is the biggest since November 9. I would be focused on how price reacts (in AUD/USD) if the sellers can push the pair into $US0.7510, which has been such a pivotal and defining level for so long. The market is clearly net long AUDs and subsequently, hedge funds still have much to liquidate, but it is still early days and there are still attractions for holding AUD, namely very low implied volatility, so carry structures still work.
Snap surged 44 per cent in its stock market debut, valuing the disappearing-photo app maker at more than $US28 billion.
That's a vote of confidence in the company's ability to grow quickly and fulfill its promise of new products to change how people communicate.
Snap, which started with a mobile phone app for sending vanishing photo and video messages, has been building out its advertising and media business, reminding investors of the early days of Facebook and Google's YouTube
Even so, some analysts are already betting the rally won't last: Two have already given the shares a "sell" rating, one with a price target of just $US10. Why?
Snap is years from profitability, with a net loss higher than its revenue. User growth on the Snapchat app slowed in the fourth quarter, drumming up scepticism for how big the company's advertising business can be.
Investors still don't have a clear picture of how the company plans to become profitable, so instead must put their faith in chief executive Evan Spiegel, who rarely talks publicly about his vision.
"There's reason for caution," said Jessica Liu, an analyst at Forrester Research. The success of Facebook - which priced shares at $US38 apiece in 2012 and now trades around $US136 - is an anomaly, she said. Snap needs to improve its user growth and prove the value of its ads. "Its TV-like revenue pursuit is new and untested."
Shares closed at $US24.48, giving the company a market valuation of about $US28.3 billion. Snap sold 200 million shares in its IPO at $US17 each, above the $US14 to $US16 marketed range. It was the biggest social-media IPO since Twitter more than three years ago, and the first tech company to list in the US this year.
More than 500 investors stampeded to get hold of some of the riskiest bank bonds for sale this year, in the latest example of how desperate money managers are for securities offering decent income.
Investors put in orders for 16 times the $US750 million of bonds that Macquarie Group was selling. That enthusiasm allowed the bank to cut the borrowing costs on the high-yielding notes known as additional Tier 1 securities, Bloomberg quotes people with knowledge of the matter.
Such bonds are part of a group of securities known as contingent convertibles, or CoCos, that have surged 3.8 per cent this year - outstripping the advance for debt sold by junk-rated corporates.
It's another sign of how fund managers are leaping for anything that pays any sort of yield. The Macquarie bonds, like others in the CoCos group, can suffer losses if a bank runs into trouble, making them risky for investors. It's a volte-face for bonds that were vilified in the first part of last year over fears that European lenders including Deutsche Bank and Italy's UniCredit might miss coupon payments.
"It's a massive change from a year ago," said Tom Kinmonth, a credit strategist at ABN Amro. "There's more risk appetite and regulators are being kinder."
Macquarie was willing to pay about 7 per cent annual interest on the notes, a figure that fell to 6.125 per cent amid strong demand.
The bulk of the demand for Macquarie Group's securities was concentrated among Asian investors, with the order book for the deal already more than 10 times oversubscribed by the time US investors got in on Wednesday, the people said, asking not to be identified as the information isn't public. From that point, demand ballooned to as much as $US12 billion.
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