Markets Live: Miners dig deep

That's it for Markets Live today.

Thanks for reading and your comments.       

See you all again tomorrow morning from 9.

After bouncing off early losses the ASX didn't look back, pushing higher into the afternoon to close up 17 points or 0.3 per cent to 5747.

In eco data, retail sales for January came in as expected - a "modest bounce" after they fell in December. The Aussie dollar was largely unmoved, but ended the day down a touch at 75.75 US cents ahead of the RBA meeting tomorrow.

The sharemarket turnaround can probably be credited to the big banks, which went from hindering to helping the sharemarket. Westpac was the best, up 0.7 per cent, while CBA added 0.4 per cent and NAB and ANZ climbed 0.2 per cent.

The real action, however, was in the miners, which went from strength to strength following the weekend's National People's Congress in China, where the country's leadership reaffirmed their growth targets. 

Rio added 2 per cent and South32 and Fortescue 3 per cent, while BHP climbed 1.6 per cent. Gains for the iron ore miners was despite a drop in Dalian futures for the bulk commodity. Chinese authorities have also been making noises about curbing excesses in futures markets. In any case, Bluescope Steel jumped 2.6 per cent.

Telstra and Woolies added 1.1 per cent, Wesfarmers was flat, while CSL eased 0.2 per cent.

There were a few companies trading ex-dividend, such as Tatts, which fell 2.2 per cent and Caltex 1.6 per cent.

The biggest loser of the day was Navitas, which plunged 14 per cent after revealing it would not be getting as much government business in the next financial year, whcih would crimp earnings.

Many economists have been pointing out that the recent strong economic data coming out of the US have been sentiment indicators such as consumer confidence or business surveys, rather than hard facts proving that the economy really is growing at a faster pace:

A chart for the Fed to ponder... pic.twitter.com/EgZIZLkitR

— Tracy Alloway (@tracyalloway) March 6, 2017

Once again, lots of stocks - including a few heavyweights - are trading ex-dividend this week, likely to keep som pressure on the market.

Here's a handy overview, courtesy of Macquarie:

Vicinity Centres is considering replacing some of its cleaning contractors with robots in a bid to automate and save costs, according to one of the company's non-executive directors, Wai Tang.

In a roundtable discussion ahead of International Women's Day, Ms Tang said disruption and volatility in the sector had led to many changes.

Vicinty Centres, which manages shopping centres around the country, had recently started trialling whether robots could be used to clean its centres.

But such a move, if it was formally implemented, would "displace many jobs", she said.

"Already four weeks into the trial we are seeing some organisational savings in terms of wages," she said.

"That said, we are starting to think about how we redeploy these cleaners - some are contractors - and how do we re-skill and redistribute the workforce to other areas. These are things at the top of our mind."

Other company directors are thinking about how they deal with digital disruption, including the rise of automation, artificial intelligence and associated issues of cyber security.

Marie McDonald, non-executive director of CSL, said billionaire Microsoft founder Bill Gates' idea of placing a tax on robots was a bad one and could potentially stifle innovation.

Jane Halton, who in October joined the board of ANZ after stepping down as secretary at the Department of Finance, said the use of artificial intelligence was growing rapidly, but had created security questions.

"In certain parts of the health sector you're increasingly reliant on the transfer of information electronically," she said.

A recent paper by StartupAUS said 4.6 million jobs would be lost if Australians didn't become digitally ready.

"Nobody hankers for the day where it was a genuine profession to spend your life shovelling horse remains from streets of Melbourne," Ms Halton said. "There are jobs that are going to disappear."

Read more.

Markets are partying like it's 1999, driving share valuations to dizzying hights on bets that economic growth is really picking up this time around - but Citi's Matt King isn't convinced.

"While the global economy is undoubtedly improving, we think market strength owes more to lingering global monetary and credit stimulus than to fundamentals," he says in a note to clients.

King lists seven reasons why he thinks the exuberance won't last:

1. Fed rate hikes may stop the party: While at this point a hike on March 15 has been so well telegraphed that it ought not to cause a 2013-style tantrum, Citi thinks much of investors' willingness to pile into risky assets stems from the lack of return on cash. "Each and every additional bp in risk-free yield is likely to make investors think twice about the risk they are running in order to generate return elsewhere."
2. Real yields to weigh on risk assets: The second reason Citi thinks the rally has been so strong is that real yields have remained surprisingly low. While nominal yields have risen since the US election, almost all of the action has been in inflation (and growth) expectations as the market focused on potential growth positives. But now rates markets have adjusted to the "new mood music from the Fed" and the rally in credit was starting to look out of whack even with today's real yield levels.
3. Central banks are taking their feet off the gas: Bank of Japan purchases have almost halved since their shift to yield targeting; ECB purchases will be reduced by one quarter from this month on, the analysts say.
4. It's China's stimulus, stupid: Citi is convinced that the recent explosion of credit in China – visible in the monthly total social financing numbers – is of greater global significance than is widely recognised. "At an anecdotal level almost every place you visit from San Francisco to Sydney seems to be awash with stories of Chinese investment propping up prices." Around 80 per cent of private sector credit creation now is coming from China, King says, but he doesn't believe that expansion is sustainable, given that "the absolute rate of growth is already so high" in the nation and credit creation tends to reach a seasonal peak in January.
5. Global growth scepticism: Yes, global growth is picking up, as are inflation and corporate earnings, King says, but he adds good economic news is heavily skewed towards survey data as opposed to actual production and consumption numbers.  Meanwhile, companies aren't reporting significant revenue growth, while  the likelihood that Trump's tax cut and infrastructure spending plans deliver a near-term boost to growth is dimming. Sadly, he says, it seems even equity markets have recognised this: "While the S&P has continued to rally at a headline level, our equity strategists have pointed out that it is again being driven by defensive sectors, not cyclicals."
6. European political risk: Despite the still relatively unlikely probability of an eventual Le Pen victory in the French presidential elections, King reckons that European bond markets remain vulnerable amid growing populism and political uncertainty, arguing among others points that too many investors remain convinced that the ECB will somehow come to the rescue. "We still see too little by way of premia across markets to compensate investors for the potential risks," he says.
7. Valuations look stretched: "Do you really want to be buying credit at post-crisis tights, or the S&P at a cyclically-adjusted P/E which has been exceeded only in 1998-2000 and 1929?"  King says his inclination is more towards reduction and waiting for a better entry point than towards adding at current levels.

The low-point for inflation looks to have been June 2016, TD Securities rates strategist Annette Beacher says, and it may be time to entertain the idea that the March CPI number will come in stronger than expected.

As mentioned in passing below, Beacher is the only economist surveyed by Bloomberg that expects a rate hike this year, in November.

"We have two/three monthly inflation gauge prints for March quarter CPI, and we see plenty of upside with what we've seen so far," she writes following the release of the Melbourne Institute's inflation gauge this morning.

"While there isn't a perfect historical relationship between the monthly and the more comprehensive official quarterly inflation report (see charts) we expect a step higher in both tradeable and domestic inflation for the Mar quarter."

The RBA meets tomorrow, and Beacher doesn't expect any change in rhetoric until the third quarter.Nobody expects Lowe & Co to budge on monetary policy at the meeting.

"These monthly inflation reports are closely watched by the RBA, and we expect the board tomorrow to remain neutral, reiterating that inflation remains low and that current policy settings are 'consistent with sustainable growth in the economy and achieving the inflation target over time'."

The market is pricing in a 22 per cent chance of a 0.25 percentage point cash rate rise by December.

A recent hailstorm in Sydney could cost two of Australia's major insurance companies, IAG and Suncorp, up to $370 million.

IAG, which offers insurance under several brands including NRMA, Swann, CGU and AMI in New Zealand, said it had received more than 20,000 claims in relation to the February 18 hailstorm as of March 5, and expected the cost would be around $160 million.

The insurer expected a maximum possible exposure of up to $200 million, after reinsurance.

IAG said its net claim cost up to the end of February was $650 million, which meant it could absorb about $130 million of net natural peril claim costs in the final four months of the 2016-17 financial year.

Suncorp, whose insurance brands include AAMI, GIO, Apia, Shannons and Bingle, said it had received around 11,000 claims, which would cost between $150 million and $170 million.

That was expected to drive up Suncorp's total natural hazard claims costs to between $610 million and $630 million for the eight months to February 2017.

Suncorp chief executive Michael Cameron said the insurer's hail assessment centres in Wollongong, Bella Vista, and Willoughby were assessing as many as 650 cars a day.

"We are focused on ensuring the safety of our customers and their families, as well as processing all claims as soon as possible," Mr Cameron said in a statement on Monday.

Suncorp said it was well protected against further natural hazard events, with additional cover in place.

QBE couldn't immediately provide any claim or financial details about the impact of the hail storm, a company spokesman said on Monday.

Is the music about to stop for iron ore? For all the commodity's price gains defied predictions in 2016 and early 2017, many analysts now believe new supply, high inventories, and insufficient demand are setting iron ore up for sharp losses in the second half of this year.

That's despite the Chinese government on Sunday in its annual 'work report' signalling it would maintain high infrastructure spending - a move expected to shore up steel demand. Iron ore is a key component of steel.

The most traded contract on the Dalian Commodities Exchange rose 1.8 per cent after the speech, last trading at 690 yuan ($US100.02). Friday's spot price of iron ore was $US91.53, down from a high two weeks ago of $US94.86.

Gavekal analysts Rosealea Yao and Arthur Kroeber wrote in a briefing note that iron ore could fall by 30 per cent or more. Meanwhile, a team of analysts at HSBC, led by Anshul Gadia, went so far as to argue that iron ore may fall below the cost of production in the second quarter of 2017 in order to to clear the massive stockpiles of iron ore in Chinese ports, which hit 120 million tonnes at the end of February. 

"The longer prices remain elevated, the greater the likelihood that marginal supply will be added to the market," the HSBC team wrote . "[P]rices may need to fall below the marginal cost of production for an extended period to drive the necessary closures and rebalance the market."

"We do not see economic justification for the iron ore industry to retain excess gains beyond long term margins while the industry remains in surplus."

The Gavekal analysts said that how suddenly an iron ore price fall happens will depend on how skilfully the Chinese government manages its twin objectives of cracking down on financial risk in the Chinese economy while maintaining stable growth.

They pin much of the price spike on speculative iron ore trading on the Dalian Commodity Exchange. "Speculative trading clearly plays a big role, and inventories are rising at a worrying pace," the analysts wrote.

Here's more

Talking housing bubbles, strong price gains for Australian real estate are worrying one global investment house, which lays the blame for what it calls a "frothy" market at the feet of supply and demand trends as well as macroprudential challenges. 

Commenting on global housing prices, economists at Standard Life Investments said that the sharp growth recorded in Australia, New Zealand and Sweden was a concerning development, while the increasing real value of housing stock in the UK and the eurozone was an encouraging trend.  

"Housing indicators are an important barometer of the health of the global economy. Not only are residential investment and house prices highly cyclical themselves, but they also tend to lead the business cycle and are an important source of risk for the financial system," the economists said in their weekly briefing.

Housing markets in most advanced global markets remain healthy but there were some exceptions, they noted.

"Our only real concern is for those economies like Australia, New Zealand and Sweden, where house price growth is beginning to look 'frothy', in part because housing supply cannot keep pace with the demand from strong population growth, but also because of the challenges of implementing effective macroprudential policies when monetary policy is very loose."

Capital Economics' chief Australia and New Zealand economist Paul Dales said the strength of the Australian housing market had exceeded his expectations.

"I'm surprised by the strength of the market...which coincided with the boost from China and interest rate changes," he said at last week's Capital Economics conference in Sydney. "My sense is that it can't go on much longer."

"The housing market will slow...the first thing is what it means for the economy itself. There is some confusion that construction is high by any standard. But that level is not increasing… the large number of units are not coming on quickly."

Last week, the OECD 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 country survey noted that in real terms house prices have climbed to 250 per cent their level in the 1990s, with much of the increase taking place in the past few years, "straining affordability, especially for first-time buyers in Sydney".

"A continued rise of the market, fuelled by both investor and owner-occupier demand, may end in a significant downward correction that spreads to the rest of the economy," it warns.

A Fed rate rise next week is pretty much a done deal after a conga line of Fed officials massaged market expectations last week.

But does that take the RBA any closer to lifting local rates? Not necessarily, economists say.

The Reserve will no doubt be "very happy" with this more hawkish tilt from the Fed, as it keeps a cap on the Aussie dollar's strength, says Colonial First State Global Asset Management chief economist Stephen Halmarick, adding that it was unlikely to spur an early rate hike by the RBA.

"The best way to think about the US rate hike is that it makes another rate cut from the RBA less likely – or less needed – rather than thinking about rate hikes at this stage," says Halmarick, who expects the Reserve to remain on hold this year and start thinking about lifting rates in the second half of 2018.

TD Securities chief Asia-Pacific macro strategist Annette Beacher, the only economist in Bloomberg's latest survey to predict a rate hike later this year, agrees the RBA will welcome a faster pace of Fed tightening as it puts pressure on the Aussie, but says it's not essential for her rate-rise scenario.

Beacher remains worried about fast rising house prices and investor lending and reckons the RBA will eventually hike in November to take the heat out of the housing market.

"A small rise sends a message that money is no longer free. I certainly do not want a house price crash – and only a slump in employment will spark that – but less rapid appreciation is long overdue," she said.

So with the local economy growing at a solid pace and house prices taking off again, at least in key markets Sydney and Melbourne, why not lift earlier?

UBS economist Scott Haslem the RBA won't want to risk the nascent recovery by hiking prematurely.

"The downside risks of stymieing Australia's economic recovery by lifting rates and sending the Australian dollar above US80¢ (from around US76¢) suggests an on-hold rates mantra will persist from the RBA for much of the rest of this year."

And when is the time right for a hike?

The RBA Governor has made it clear that he is looking at three factors in determining the path for monetary policy: inflation, the labour market and household balance sheets, Halmarick says:

"One of these factors - the labour market - looks to be supportive of another rate cut. One of these factors - household balance sheets - would argue for a rate hike and one of these - inflation - would argue for no change," he says. "So perhaps a rate hike would be justified for the housing market, but it could also do unnecessary damage to the labour market."

Markets are currently pricing in an about 20 per cent chance of a rate hike by the end of the year, moving up to around 50 per cent in the first quarter of 2018. No change to the cash rate is expected at tomorrow's board meeting.

The big Aussie banks are existing within "a fragile equilibrium" but are "priced for a sweet spot", Morgan Stanley analysts say, but this happy state of affairs is "at risk of breaking".

Earnings per share need to come in around 13 per cent ahead of the broker's FY18 earnings expectations on average in order to justify the current valuations. Hence their view that the market is being too sanguine around the challenges facing the sector.

"Our 'what's in the price' analysis shows that this would require ~11bp of margin expansion, flat loan loss rates of ~17bp and [dividend reinvestment program] neutralization for the next three dividends," they write.

"In our view, such a scenario is plausible, but still unlikely."

So here's their breakdown of the "fragile equilibrium" that has reined:

• Higher house prices and investors have supported loan growth;
• Home loan re-pricing is mitigating the impact of other margin pressures;
• The reflation trade has boosted markets income;
• Low interest rates and a commodity price rebound have kept loan losses low; and
• The global disagreement on Basel IV has delayed the capital build and deferred a decision on dividend sustainability.

This pleasant combination of factors drove EPS upgrades over the February reporting season and meant investors were happy to bid the shares higher.

But this state of affairs is "at risk of breaking", the analysts say, pointing to a number of challenges on the near horizon:

• Deposit margin squeeze continues;
• Further home loan re-pricing risks slowing loan growth;
• Higher debt levels,higher house prices and tighter lending standards increase risks in the housing market;
• Weak income and employment trends weigh on the outlook for the economy and credit quality;
• APRA's new capital rules are due in coming months;
• Ongoing scrutiny of pricing and conduct is likely; and
• And the nation's AAA and the banks' AA credit ratings are under review. 

The MS analysts have an overweight call on ANZ, and equalweight on Westpac and are underweight NAB and CBA.

Blackmores has come back to the global pack with a thud. The $220 share price it reached in January, 2016 seems like a dream now.

The company is trading on a forward-looking price-earnings multiple of between 22 and 23 times, which puts it around the same level as most of its peers in China and Asia, and in some cases lower.

It is still regarded by most investors as a well-run company with strong brands, but its lost the lustre of being the Australian wonder-company able to deliver windfall gains for shareholders who had their timing right.

Three years ago it was trading at $22. The daigou traders, that opaque group of Chinese entrepreneurs who drove an extraordinary demand spike in a vitamins buy-up frenzy in late 2014 and 2015 in Australia, have quietened down, victims themselves of shifting Chinese e-commerce regulations and over-exuberance.

The stock now hovers at just above $102 and even though most experts believe it has robust prospects over the longer term, the chance of another charge upwards towards those lofty heights appears remote in the short-term.

Credit Suisse analyst Ben Levin has a 12-month target of $110 on the stock. Strong earnings momentum is a must for companies like Blackmores who were afforded lofty multiples in the glory days and he expects it will be difficult for the company to generate substantial increases in sales volumes over the next six months. He has a "neutral" rating on it.

The focus in Australia is on Blackmores because it is where investors have had the most direct exposure to the "clean and green" vitamins demand from middle class Chinese in a $20 billion market.

On Credit Suisse numbers, at a $110 share price valuation the stock trades on a P/E multiple of 23.5 times forecast 2017-18 earnings per share.

Now trading at a little below that valuation, puts the multiple at between 22 and 23 times which is at a similar level to Chinese company By-Health and another firm, Conba.

Read more at the AFR here.

Speaking of retail sales, supermarket giants Woolworths and Coles have poured big money into cutting prices to fend off challenger Aldi, but have not paid enough attention to service levels and the appearance of stores, a pricing expert says.

Woolworths has spent about $1 billion on reducing prices over the past two years, and Coles' owner Wesfarmers invested more into price last quarter than it ever had.

The price cuts were not enough to put their prices within a cooee of US chain Costco, according to investment bank Morgan Stanley.

But Christoph Petzoldt, partner and managing director at pricing consultancy Simon-Kucher, said price was not the be-all and end-all.

"A lot of consumers they decide [where to shop] based on price perception and not on actual dollars and cents," he said.

"While price levels and price promotions are important drivers of price perception – which ultimately will define where and what shoppers buy – non-price elements such as range, location, appearance of a store, service, opening hours all play a role in creating the price-value perception."

Mr Petzoldt said the big chains needed to focus on what they want to be in three to five years, instead of building market share or increase quarterly sales.

"Do you want to be the biggest who doesn't earn money?" he said.

His comments echo that of former Aldi executive Paul Foley, who said Woolworths and Coles needed to spruik their huge product range and focus on the things Aldi cannot offer, such as delicatessens, rather than try to compete on price. 

While much of the market is focused on Aldi, Costco is 27 per cent cheaper than Coles and 24 per cent cheaper than Woolworths on a 27-product basket of basic household items, Morgan Stanley recently told clients.

Read more.

While retail sales came in on target, job ads disappointed on the low side, but only backtracked a bit from hefty gains in the previous month.

ANZ job advertisements fell 0.7 per cent in February, after recording a solid 3.9 per cent rise in January. Ads were still 6.9 per cent higher than in February last year, from 7.1 per cent in January.

"Some moderation in job ads is not unexpected given the strong January result and may reflect the tricky nature of seasonal adjustment at this time of the year," said ANZ head of Australian economics, David Plank.

"Looking ahead, strength in business conditions, firms' profitability and an increase in capacity utilisation all point to an improvement in labour market conditions in our view," he added. "Overall, we expect the unemployment rate to slowly edge downward through 2017."

The official jobless rate remains relatively low at 5.7 per cent, though employment growth slowed last year and hiring was skewed toward part-time positions.

The Reserve Bank, which meets tomorrow, has cited a rise in unemployment as one of the few developments that could make it consider a further cut in interest rates.

Retail sales grew 0.4 per cent in January, ABS data shows, in line with the consensus economist forecast and after sales slipped 0.1 per cent in December. In trend terms, turnover rose 3.2 per cent in January 2017 compared with January 2016.

The numbers provide the first look at nominal spending in 2017 after GDP data released last week showed consumption rebounded strongly in the last quarter of 2016. Without pre-empting the economists, the as-expected result may bolster hopes that consumption remains relatively healthy despite somnolent wage growth and a nuanced jobs market.

The Aussie dollar was easing into the release and kept on easing after, last fetching 75.8 US cents, so no drastic move there.

Alright we are back and shares have failed to run with a positive lead, as the ASX goes through its post-reporting season, ex-dividend slump.

The top 200 index is off a few points at 5727 as most stocks trade lower. Miners are doing their bit to buoy the market, with BHP up 1.2 per cent, Rio 1.3 per cent and Fortescue 2.5 per cent. That may be a China bump after policymakers recommitted to sustainable growth. South32 is up 1.3 per cent, but Whitehaven Coal is only ahead a modest 0.7 per cent.

The big banks are weighing overall, with ANZ down 0.2 per cent, CBA and NAB marginally lower, although Westpac has climbed 0.6 per cent.

As mentioned, Navitas is the worst performer this morning, down close to 15 per cent after the company said it wouldn't be getting as much government work as previously.

EDs: Sorry all we have a fire alarm so have to evacuate. Be back in a bit.

Education services provider Navitas expects its earnings to fall by at least $12 million next financial year if the federal government reduces the number of regions the company is contracted to teach English to migrants

The news has sent the company's stock plunging 15 per cent in early trade to $4.22.

Chief executive Rod Jones says earnings are likely to fall between $12 million and $14 million, but the company will understand the full impact of proposed changes to its tender to deliver the Commonwealth's Adult Migrant English Program by April 4.

"The proposed reduction in contract regions is disappointing news as Navitas has been delivering this important program to a high standard since 1998," Mr Jones said in a statement.

The company's English language unit accounted for close to a quarter of the company's revenue in FY16, on Bloomberg data. Navitas had said in January it still expected FY17 EBITDA "broadly in line" with FY16's $164.6m on a constant
currency basis.

Here's The Age's economics editor Peter Martin's more positive take on the Victorian government's proposed housing package:

Stamp duty is the worst tax in Australia, so bad that according to calculations by the federal Treasury for the aborted tax white paper, it destroys 70¢ of economic value for each dollar collected. Yet more than most governments, Victoria is addicted to it.

So the state has done the next best thing to axing it. It's cut it where it will most help people get into the housing market, and reimposed it where it's lack has been most hurting them.

Until now there's been a stamp duty exemption for off-the-plan buyers of apartments. From July this will be axed for investors, and available only to buyers who intend to live in the property or are eligible for the first home buyer stamp duty concession.

Cleverly, reimposing stamp duty for off-the-plan investors will raise almost as much as axing stamp duty for low-price first home buyers will cost, leaving the budget little changed.

First home buyers shelling out up to $750,000 will be better able to outbid investors and existing home owners, and investors in off-the-plan units will be less able to outbid them.

Will that extra buying power push up prices? Possibly, but only to the extent that it actually helps first home buyers.

And if it's not enough, the government is also offering HomesVic, a pilot program in which 400 people will get a chance to co-purchase a home with the government, which will take an equity share of up to 25 per cent and get its money back (plus price growth) when the property is eventually sold.

This is modelled on a scheme recommended to prime minister John Howard in 2003 but never adopted.

The 1 per cent tax on vacant properties won't hurt either. It will encourage owners to either sell them or fill them by renting them out.

Premier Daniel Andrews and Treasurer Tim Pallas have paid attention to the needs of renters too, recognising that people who can't buy their own houses need the same sort of security of tenure as those who can.

It's a sign of just how well thought out the Victorian package is that north of the border, NSW Premier Gladys Berejiklian is talking about making parts of it her own.