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Banks and healthcare stocks led the market higher, capping off a fairly volatile week, and shrugging off a slide in commodity prices.
Investors continued to sell global government bonds ahead of tonight's United States jobs report, which is expected to come in strongly and pave the way for an interest rate hike next week. As such real estate plays, which are inversely correlated to bond yields, traded lower on Friday.
A slide in oil and iron ore weighed on the resources sector, the worst performer over the week, while consumer staples and technology companies enjoyed solid buying support.
The benchmark S&P/ASX 200 Index rose 0.6 per cent and the broader All Ordinaries was up 0.5 per cent on Friday, reaching 5775.6 points and 5811.2 points respectively. Over the week the ASX200 lifted 0.8 per cent and the All Ordinaries rose 0.6 per cent.
Energy stocks traded lower as oil dipped below $US50 a barrel, a level it hasn't seen since the beginning of December. A surge in US production has pushed America's inventories to an all-time high, putting at risk the price-support achieved by a production cap initiated by the Organisation of Petroleum Exporting Countries last year.
"The market will be in limbo for a few days, the question is how low can it go," said Richard Fullarton, founder of Matilda Capital Management. "There's been so much effort by OPEC and non-OPEC to show high compliance, that it would be strange for it to fall apart now."
Woodside Petroleum largely shrugged off the price drop and finished the week up 1.2 per cent. Santos on the other hand, slid 2.2 per cent and Oil Search fell 1.7 per cent.
Iron ore was also slightly off and weighed further on the resources giants. BHP Billiton closed the week down 4.6 per cent and Rio Tinto was off 3.2 per cent at market close.
Rising bond yields around the world helped financials, with the Australian banking sector climbing 2.2 per cent over the week. A lift in yields boosts a bank's profitability.
Commonwealth Bank of Australia finished the week 1.6 per cent higher, while Westpac Banking Corporation bumped up 3.5 per cent. ANZ Banking Group rose 2.5 per cent, and National Australia Bank finished up 3.2 per cent.
A lower price of gold weighed on Australian producers. The country's largest gold producer Newcrest Mining was off 0.8 per cent, while Evolution finished the week down 0.8 per cent and Northern Star was off 7.4 per cent.
Rates are rising, but dividend yields are still too good to give up, the AFR's Phil Baker says:
Talk to anyone over 60 years of age with one eye on retirement and the conversation quickly turns to income, especially now that interest rates are so low.
For sure, it looks like rates are heading higher, but exactly when, and how high they go, is still very uncertain. With the official cash rate at a record low 1.5 per cent, it could double and still be way below its long term average.
Which brings us to dividends. One reason why there was such a spike up in the sharemarket on Friday was the hunt for income.
It is still very much alive despite that talk of higher interest rates and rising bond yields.
The dividend yield for the local sharemarket is around 4 per cent and would be much higher for some investors who enjoy the benefits of franking credits.
Historically February, March and April are also good months for the bank stocks.
Local dividend yields, grossed up for the franking credit, still provide a much higher cash return than government bonds and bank term deposit rates.
But rising yields on government bonds are starting to provide some competition.
Tesla chief executive Elon Musk has responded to a challenge from Atlassian's Mike Cannon-Brookes, and doubled down on his company's pledge to help solve South Australia's energy crisis.
In response to earlier correspondence from the Sydney based software billionaire, Musk tweeted:
@mcannonbrookes Tesla will get the system installed and working 100 days from contract signature or it is free. That serious enough for you?
— Elon Musk (@elonmusk) March 10, 2017
Earlier this week Tesla's vice-president for energy products, Lyndon Rive, said the company, best known for its electric cars, would "commit" to installing the 100-300 megawatt hours of batteries required to prevent blackouts in South Australia within 100 days, if it were asked to do so.
That prompted Mike Cannon-Brookes to pledge to help secure political and financial support for the idea. He told the AFR this morning he would even tip his own money into the project to help it succeed.
"For sure! I'm not sure I could 100 per cent fund it yet but I'd certainly be a big contributor," Cannon-Brookes said.
The possibility of the RBA lifting rates for the first time in more than six years has been rippling through markets this week.
Partly due to a Reserve Bank that shifting its focus from strict inflation fighting to 'financial stability', ie worrying about rapid house price increases and their impact on household debt levels, partly due to strengthening global and local economies the odds of a rate hike by the end of the year have sharply narrowed to 50-50, according to Citi pricing, from a just 1-in-5 chance seen at the start of the week.
Capital Economics has long been in the camp of those calling for more monetary stimulus, and it's base case is still for the RBA to cut the cash rate to 1 per cent this year.
But economist Paul Dales admits it's useful to consider the conditions that could cause him to change his view and force the RBA to hike. He has two main scenarios:
- the global economy, and especially China, would need to remain strong throughout this year and commodity prices would need to stay high. And this would need to lead to higher export volumes, investment and consumption at home, thereby filtering through into a fall in the unemployment rate towards 5.0%, a clear turn-up in wage growth and a sustained rebound in underlying inflation towards the 2-3% target range
- a further strengthening in the housing market heightens the RBA's worries about financial stability in the medium-term. If that were the case, then the RBA may be tempted to "lean against the wind" and start raising interest rates in order to cool the housing market and reduce the chances of a housing collapse further down the road.
"We won't dogmatically stick to our forecast that the RBA will cut interest rates later this year. If and when it becomes clear to us that either one or both of the scenarios described above becomes likely, then we will change our view on interest rates," Dales says.
But he adds he doesn't consider either scenario very likely, pointing a) to commodity prices already turning down and b) macroprudential measures as well as recently rising mortgage rates taking some heat out of the market.
"Overall, while it is possible that the economy and the housing market will be strong enough to prompt the RBA to raise rates this year or early next year, we still think it is far more likely that growth and inflation continue to disappoint and that the housing market cools," he says. "That suggests the financial markets will be caught on the hop either if rates fall or if they just remain on hold for all of this and next."
Bond investor Bill Gross has warned that investors should not be tempted into buying high-flying equities and corporate bonds, given the possibility that US President Donald Trump might fail to enact policies that fuel economic growth.
Wall Street's main indexes have rallied since Trump was elected president and remain close to all-time highs, driven by optimism that his policies may stimulate growth in various industries and push share prices even higher.
"Don't be allured by the Trump mirage of 3-4 per cent growth and the magical benefits of tax cuts and deregulation," Gross said in his latest Investment Outlook, which is released during the first week of every month.
"The US and indeed the global economy is walking a fine line due to increasing leverage and the potential for too high (or too low) interest rates to wreak havoc on an increasingly stressed financial system. Be more concerned about the return of your money than the return on your money in 2017 and beyond."
Gross, who runs the Janus Global Unconstrained Bond Fund, characterised the run-up as the "Trump bull market and the current 'animal spirits' that encourage risk."
Details on Trump's plans remain scarce, however, and equity gains have moderated on growing concerns that stock valuations may be high.
The S&P 500 is trading at about 18 times forward earnings estimates against the long-term average of about 15 times.
Gross said the global economy has created more credit relative to GDP than that at the beginning of 2008's great credit recession.
"In the US, credit of $US65 trillion is roughly 350 per cent of annual GDP and the ratio is rising," Gross said.
"In China, the ratio has more than doubled in the past decade to nearly 300 per cent. Since 2007, China has added $US24 trillion worth of debt to its collective balance sheet. Over the same period, the US and Europe only added $12 trillion each."
Here's is BusinessDay columnist Michael Pascoe's take on what's behind the massive gains on Wall St:
Don't thank Trump for the Australian stock market rally, try Pope Gregory XIII instead.
It's the 16th century pope's Gregorian calendar that's delivering for investors who bet on rising share prices in January, according to Bell Potter's Richard Coppleson.
Coppleson has been going back through the numbers for his Coppo Report to confirm that we are in the middle of the ASX's sweet spot – the three months to the end of April, before the "sell in May and go away" cliché hits.
Over the 17 years of this century, betting on a rising ASX 200 for the April quarter worked 76 per cent of the time and produced an average gain of 2.99 per cent.
In the four years that the April quarter was down, the average loss was 1.8 per cent, but the 13 winning years by themselves produced an average gain of 4.5 per cent. And 2017 is running nicely to form.
Coppleson found that February is generally a good month for the market, March is better and April is best.
Over the past 36 years, the average ASX 200 move for April has been a gain of 2.8 per cent.
The worst month has not been October – generally thought of as the month of headline crashes. It's June that's been the worst performer, down 0.7 per cent on average, followed by November with 0.3 and then October on 0.2. In the shorter time frame of this century, October has actually been the best month on the ASX, averaging a gain of 1.7 per cent, ahead of April's 1.6.
I'm not a believer in astrology, numerology, Pauline Hanson or tea leaf reading, so it's reassuring that Coppleson offers a fundamental basis, not just graph paper coincidences, for the April quarter's strong run.
He points to the February reporting season kicking it off with improved corporate results, followed by portfolio repositioning in March and April, plus the billions of dollars in dividends that are paid out in those two months, much of which looks for a way to get back into the market.
The recent acceleration in investor activity is sure to keep both the RBA and APRA on high alert, as market sentiment shows no signs of easing, ANZ economist Daniel Gradwell says.
The rise in housing finance commitments (see post at 11.52am) was once again entirely driven by the investor segment which grew 4.2 over the month and a whopping 27.5 per cent over the year, the fastest rate of growth since August 2014 - before APRA's macroprudential regulation took effect.
Growth in house prices and investor borrowing continues to be a key concern for both the RBA and APRA, Gradwell says, noting that just this week the RBA said that "supervisory measures have contributed to some strengthening of lending standards", reflecting a mild downgrade from the previous month's assessment that lending standards had been "strengthened".
"While the growth rate in the stock of investor debt remains below APRA's 10% limit, further results like today's are likely to see growth nudge closer over coming months," he says.
JPMorgan economist tom Kennedy agrees the numbers aren't good news for the RBA but says the silver lining is that investor loan shares are unlikely to rival the 2014-15 highs given the macroprudential limits.
"Although there has been somewhat of a resurgence in the investor flow data of late, the stock of investor loans has hardly budged since mid-2016 and remains well below 2014-15 levels," Kennedy says. "We reconcile these two conflicting datasets by taking into account investor churn, which we suspect has been a prominent driver of housing turnover in the latter part of the housing boom."
Genworth Mortgage Insurance shares have dipped as much as 6 per cent after its second largest customer signalled its intention to stop exclusively offering its products.
Genworth, which had already warned investors of the possible exit, said that the unnamed customer is terminating its exclusivity contract from April 8.
Shares in Genworth fell as much as 18 cents, before recovering to be down 0.9 per cent at $280.
The lenders mortgage insurance covered by the contract represents about 14 per cent of Genworth's gross written premium, but the move does not affect its full- year guidance of a 10 to 15 per cent decline in gross written premium.
Mike Cannon-Brookes is dead serious about his desire to see an ambitious Tesla proposal to solve South Australia's energy crisis become reality.
The Atlassian co-CEO took to Twitter late yesterday to signal his support for a surprise proposal by Tesla's vice-president for energy products, Lyndon Rive, to solve South Australia's blackouts this week.
Rive said Elon Musk's company, best known for its electric cars, would "commit" to installing the 100-300 megawatt hours of batteries required to prevent blackouts in South Australia within 100 days, if it were asked to do so.
That prompted Cannon-Brookes to pledge directly to Tesla chief executive Elon Musk to help secure financial and political support for the idea.
Lyndon & @elonmusk - how serious are you about this bet? If I can make the $ happen (& politics), can you guarantee the 100MW in 100 days? https://t.co/av38xcizNo
— Mike Cannon-Brookes (@mcannonbrookes) March 9, 2017
Contacted by the AFR this morning, Cannon-Brookes said his team had spent Thursday afternoon investigating the proposal. And while it looks like a long shot, they concluded it is not unrealistic.
"They [Tesla] could change the energy conversation in this country with a single deal - as well as prove their battery technology in a large scale application. It would be a huge win for them," he said in a message.
Shares in fund manager Hunter Hall International are surging on the planned merger with another fund manager, Pengana Capital, which will significantly boost the level of funds under management.
The move will also provide growth options following the recent messy series of events related to the selldown of Peter Hall's stake in the company he founded.
Hall famously sold a block of 19.9 per cent of Hunter Hall's capital to Washington H. Soul Pattinson and Co for $1 a share, when shares in his company were trading at close to $3.
Since then, a series of buyers have emerged vying for control of Hunter Hall, but with Hall yet to offload his remaining 25 per cent stake in his company. He has quit as the chief investment officer after he was wrong-footed by the election of Donald Trump as the US president late last year.
Earlier this week, Soul Pattinson bought a 49 per cent stake in the privately owned Pengana which is now to be merged into Hunter Hall.
The merger will result in Soul Pattinson emerging with about a third of the enlarged group with Pengana's founder, Russel Pillemer holding about 26 per cent. Hall's remaining stake in Hunter Hall will dwindle to around 7 per cent post the merger.
Hunter Hall shares are up 6.6 per cent at $2.58.
Another surge in housing investor lending pushed the number of home loan approvals up 0.5 per cent in January, beating market expectations of a 1 per cent fall.
Loans approved for owner-occupied housing fell 0.2 per cent in January to a record low 7.1 per cent of the total value of commitments, while loans for investment housing rose 4.2 per cent.
That takes the growth in investor lending to 28 per cent year-on-year, a rise that will deeply worry the RBA, which has over the past months repeatedly voiced concern about rising household debt levels.
Gold has dropped back below $US1200 an ounce, extending a slide that began about two weeks ago when US Federal Reserve officials started talking up the likelihood of a March rate rise.
Spot gold is trading at a six-week low of $US1198 an ounce and has dropped nearly 5 per cent since late February.
Analysts are predicting further losses as investors become increasingly certain that US interest rates will rise this month.
Higher interest rates typically pressure gold prices because they raise the opportunity cost of holding non-yielding bullion while boosting the US dollar, in which it is priced.
"You could see the price continuing to drop as more news comes out confirming what the market already knows," said Bernard Dahdah, metals analyst at Natixis.
Investors are awaiting non-farm payrolls data tater today for further clues on the strength of the US economy after Federal Reserve Chair Janet Yellen said last week that the central bank was poised to lift rates, provided that jobs and inflation data held up.
"If the (non-farm payroll) data does come in better than market expectations, it will drag gold prices further," said OCBC analyst Barnabas Gan. "But with fund futures fully pricing in the rate hike story, I'd presume gold will just be supported at the $US1200 handle into next week."
Aussie gold mining stocks have dropped another 1.1 per cent, putting the All Ords gold index on track for a sixth day in the red.
The gold price in Australian dollar hasn't dropped as dramatically as in US dollar, reflecting the slide in the Aussie over the past two weeks, but it still dropped below $1600 an ounce.
Will the latest round of selling in the bond market gradually ease off, or is it a prelude to a major bond market rout?
Not surprisingly, Societe Générale's ultra-bearish strategist, Albert Edwards, is tipping the latter outcome. He points out that the present situation has some striking similarities with the disastrous 1994 bond market crash.
In February 1994, the Fed began the process of nudging US interest rates higher as the US economy showed clear signs of recovery from the recession of the early 1990s. But although the Fed's move was well-telegraphed, bond investors worried this was only the first in a series of rate rises, and started selling.
As prices fell, highly leveraged speculators dumped bonds, which caused yields, particularly for shorter-dated bonds, to soar. By the end of that year, Orange County in California, which had placed huge bets on interest rates remaining low, plunged into bankruptcy.
In his latest note, Edwards warns that global bond markets could be about to witness a replay of 1994.
"I believe the US Fed has created another massive credit bubble that will, when it bursts, lay the global economy very low indeed", he warns.
"The 2007-08 global financial crisis will look like a soft landing when the Fed blows this sucker sky high."
He adds "the seeds for that debacle have already been sown with the Fed having presided over one of the biggest corporate credit bubbles in US history. All that is needed now is for the Fed to sprinkle life-giving rate hikes onto these, as yet dormant, seeds of destruction."
Edwards argues investors had lost confidence the Fed would ever deliver on its projected rate rises. But, this will change if the Fed raises rates next week.
"Accelerated Fed rate hikes will cause tremors in the Treasury bond markets, forcing rates up - most especially in the two-year - just like 1994."
Shares are off to a surprisingly solid start, led up by another round of gains in the big banks, which are profiting from rising global yields.
The ASX is up 0.4 per cent at 5766.3, with most sectors in the black in early trade.
The gains come despite another lacklustre session on Wall Street, which eked out the smallest of gains, as well as falling commodity prices. But US financials rose amid rising yields, which are good for their profitability, as well as more signs the US administration remains determined to slash regulation in the sector.
Meanwhile, global bond yields continue to push higher, with Australia's 10-year yield hitting another 15-month high of 2.96 per cent this morning, as markets brace for a US rate hike next week.
"I think the breakout in the 10-year bond yield, and the FOMC tightening next week, will be the catalyst that brings on the long-awaited correction in the stock market," said Fat Prophets CEO Angus Geddes. "Equity markets are tired from the Trump led rally and are in need of a rest. But I think the corrective phase in stock markets will be confined to no more than 5%, maybe 10% at an absolute stretch."
CSL is one of the best performers among blue chips this morning, up 1.2 per cent, while the big banks are all up around 0.4 per cent.
BHP remains on the way down, falling another 0.6 per cent after yesterday's 5 per cent slump (which was partly due to the stock trading ex-dividend.
The Aussie dollar remains under pressure and is struggling to hold onto a US75¢-handle following another selloff in commodities overnight.
The dollar is currently fetching US75.00¢, after having slipped as low as US74.91¢. It's been just one-way traffic for the Aussie these past two weeks, falling 2 cents since the beginning of March.
A number of hawkish statements by Federal Reserve officials over the past 10 days have ramped up expectations of a US rate rise next week and at least two more this year, buoying the US dollar.
This in turn is weighing on commodities, which are mainly priced in US dollar.
Less than three weeks ago, iron ore was close to $US95 now is at $US86.8, oil was at $US54.5 and now is at $US48.96.and copper is also down almost 8 per cent from its mid-February peak, NAB currency strategist Rodrigo Atril said.
"Unsurprisingly then, commodity linked currencies are the G10 underperformers overnight."
Markets are waiting for the US jobs data due overnight, says IG analyst Gary Burton:
USD strength has again waned overnight with the dollar basket easing back to 101.88, at the same time the commodities complex also moved to consolidate some recent falls. There seems to be risk off sentiment moving through the markets as traders wait to see the change in Non farm payrolls due at 12.30 am AEDT, the forecast figure is an additional 200K, any number higher than this may spur the markets higher as a sign President Trump has put the US economy on the path of exponential growth.
US Treasury Secretary Steven Mnuchin has written to Congress to ask the debt limit be raised, he stated the Treasury will needed to start taking "extraordinary measures" to prevent the United States from defaulting on its obligations. Currently the US debt to GDP ratio is standing at 104%, it's been recently higher. For the history buffs it was 120% in the late 1940's under the weight of war bonds, the remedy at the time was letting inflation run up to 18%.
Currently on a global basis inflation is moving running at 2% in the US it is currently 2.5%. The cost of Oil and the associated gasoline products is an underlying contributor to the inflation rate, with Oil falling below the key $US50bl level over night for the first time since December 7 th 2016, this inflation figure looks to be in check for now.
European Central Bank president Mario Draghi left rates unchanged overnight with a statement that asset purchases will reduce to 60 billion euros from April 2017 until December 2017. His commentary focused on increasing confidence that ongoing economic expansion will continue. The EUR/USD moved back over 1.06 has clearly found support in the past 2 weeks above the 1.05 level, a sign of strength, the parity party for the Euro may be on hold for now.
In the commodities complex Copper traded at $2.57lb well under the key $US2.70 level of the past weeks, a potential 200,000 tonne shortage of Copper concentrate would put the price of Copper on notice with traders, if this shortage firm up the copper price would be set for a move higher with some estimates suggesting $US3.00lb. Gold stocks may see some support today although the Gold price fell to a low of $US1201 overnight, down nearly 5% over the past 10 trading session, the AUD price still remains above the key $US1600 oz level. This may be short lived, as the Gold price resumes its Primary down trend from the July 2016 highs of $US1375.
Here are the overnight market hightlights:
- SPI futures up 7 points or 0.1% to 5758
- AUD -0.3% to 75.09 US cents (overnight range: 74.91 - 75.34)
- On Wall St, Dow flat, S&P 500 +0.1%, Nasdaq flat
- In New York, BHP -2.1%, Rio -1.2%
- In Europe, Stoxx 50 +0.6%, FTSE -0.3%, CAC +0.4%, DAX +0.1%
- Spot gold -0.4% to $US1203.48 an ounce
- Brent crude -1% to $US52.59 a barrel
- US oil -1.1% to $US49.73 a barrel
- Iron ore -0.5% to $US86.79 a tonne
- Steam coal -0.6% to $US78.20, Met coal -0.8% to $US161.50
- LME aluminium -0.5% to $US1868 a tonne
- LME copper -1.4% to $US5690 a tonne
- 10-year bond yields rise: US 2.61%; Germany 0.42%; Australia 2.92%
Oil fell about 2 per cent overnight in heavy trade, extending the previous session's slump to prices not seen since an OPEC-led pact to cut production was agreed, as record US crude inventories fed doubts about the effectiveness of the deal to curb a global glut.
US crude prices fell through the $US50 a barrel support level, with market participants unwinding some of the massive number of bullish wagers they had amassed after the deal.
The losses followed Wednesday's slide of more than 5 per cent, the steepest in a year, after data showed crude stocks in the United States, the world's top oil consumer, swelled by 8.2 million barrels last week to a record 528.4 million barrels.
But several analysts remained bullish on oil for the long term.
"Headline risk can capture the imagination of the market over the near term, but we see dips as short-lived, key buying opportunities," RBC analysts said in a note.
"Record high inventory levels are reason for pause, but we believe that the market is overly focused on US stocks ... The US will be the last of the major regions to rebalance stocks given that storage capacity remains abundant, cheap and US shale is extremely elastic in a $50-per-barrel price environment."
Brent crude settled 92 cents, or 1.7 per cent, lower at $US52.19 a barrel. On Wednesday, the benchmark slumped 5 per cent, its biggest daily percentage fall in a year. US West Texas Intermediate crude (WTI) extended Wednesday's 5.4 per cent losses by 2 per cent, or $US1, to end at $US49.28 a barrel, the first time below the $50-mark since mid December.
Trading volumes soared with a record high of more than 487,000 lots changing hands in front-month Brent crude, according to Reuters data that extends back to 1988. Over 1 million contracts in front-month WTI traded, the highest since the OPEC cuts were announced on Nov. 30.
Brent and WTI hit respective session lows of $US51.50 and $US48.59, levels not seen since the OPEC cuts.
Both benchmarks, however, were still within a tight range of about $US3-$US5 that they have been trading in since the Organisation of the Petroleum Exporting Countries agreed with other major producers, including Russia, to curb output during the first half of the year in a bid to lift prices after a two-year rout.
"I still think we will stick in a fairly narrow range with the current levels reflecting the average price for the remainder of the year and a bottom of around $US40 and a top end of somewhere around $US60," said Chris Gaffney, president of EverBank World Markets.
The sell-off in bonds continued overnight, while US stocks finished little changed as European Central Bank optimism on global growth bolstered the euro.
Oil also weighed as it dropped below $US50 a barrel for the first time since November, with crude prices now down by more than 6 per cent over the past two days amid worries that US oil production is again adding to a global glut, despite OPEC production curbs.
The S&P 500 index eked out a gain for the first time in four days, as healthcare shares lifted the measure in late trading before tonight's key jobs report. Thursday marked the eighth anniversary of the bull market that's seen the index more than triple since 2009.
Real estate stocks on Wall St tumbled, as the yield on 10-year Treasury notes passed 2.60 per cent for the first time since mid-December, a level Bill Gross suggested would usher in a bond bear market.
Meanwhile, across the pond, the euro strengthened after ECB president Mario Draghi said risks to growth are more balanced. The crude selloff rippled through the junk-debt market with a gauge for the high-risk securities poised for the worst week since November.
Tonight's jobs report is the last major piece of economic data before the Fed meets next week with markets poised for a rate increase. Still, signs are mounting that the reflation trade sparked by Donald Trump's election is fading, with the sell-off in oil rekindling concern that energy inflation won't persist.
At the same time, the ECB meeting fuelled speculation the central bank won't add to stimulus as growth picks up.
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