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The sharemarket nudged close to 2017 highs in a week marked by a rebound in mining stocks as well as an equities-friendly rates decision by the US Federal Reserve.
The benchmark S&P/ASX 200 index shook off some initial inertia on Friday to close 0.2 per cent higher at 5799.6 points, taking its weekly gain to 0.4 per cent.
Driving the weekly gains were the big miners, which look to have recovered from a month-long slump, with strong commodity prices, a weaker US dollar as well as attractive valuations lifting the materials sector 4.3 per cent over the week.
The benchmark index on Friday rose as high as 5815, just 18 points shy of the year's high struck in February, and some investors think that level is likely to fall soon.
A "big resources rally" combining with rises in the banks in what is traditionally a good time of the year for their stocks will take the ASX 200 through 6000 points within the next six weeks, Bell Potter director of institutional sales Richard Coppleson predicted.
"This time we have everything lined up for this final assault on the 6000 level," Mr Coppleson said. "But when it gets there – driven by momentum as well – it may be the time to sit back and lock in some gains – but we'll deal with that problem in the future."
Not everyone is as bullish though. Perpetual head of investment strategy Matt Sherwood described valuations on the local market as "optimistic" and noted that most of the earnings growth was being delivered by the resources sector.
"I tend to think Australia's a pretty boring story this year, and stock selection outside resources is going to be key. Value exists elsewhere in the world," he said.
While investors took some profits on Friday, BHP Billiton rose 4.9 per cent over the week, by far the biggest tailwind for the index. Rio Tinto added 6.7 per cent over the week, South32 was up 5.3 per cent, Fortescue rallied 9.7 per cent and gold miners Newcrest lifted 6.1 per cent.
Banks were mostly lower over the week, after a fall in global bond yields weighed on the sector. NAB lost 3.1 per cent, Westpac fell 1.4 per cent, ANZ slipped 1.2 per cent but CBA eked out a 0.3 per cent gain.
NAB has sold $500 million of "gender equality" social bonds, amid burgeoning demand for ethical investments.
Proceeds of the NAB issue will refinance loans made to a portfolio of businesses, including law firms and property companies, that have a gender equality citation from Australian government body Workplace Gender Equality Agency.
Gender equality bonds are rare in the responsible investing space globally, but the NAB sale follows similar issues in Japan and Chile.
The self-arranged five-year issue, to be rated AA minus by S&P and Fitch and Aa2 by Moody's, paid a margin of 95 basis points over bank bill swap rate.
Ethical investing in Australia has doubled to $51.5 billion in the last two years, according to the Responsible Investment Association Australasia. But Australia is lagging many of its peers when it comes to responsible bond issuance, with a meagre $3.5 billion worth of debt, nearly all green bonds, sold so far in the country.
And while we're talking commodities: gold is holding firm near a one-week high hit in the previous session and is on course for its first weekly rise in three.
The precious metal is profiting from a weaker US dollar after the US Federal Reserve signalled no increase in the pace of monetary tightening. Spot gold is up 0.1 per cent at $US1227.11 per ounce, after hitting its highest since March 6 in the previous session at $US1233.13.
"The market is not sure about the timing of a rate hike in the future. I would expect gold to trade in a wide band of $US1190 - $US1230 between the French elections and US Federal Reserve meeting in May," said Jiang Shu, chief analyst at Shandong Gold Group. "What's happening now is just an inverse trade against the dollar. If there is a risk averse sentiment, we can see both the gold and dollar rising together, especially after a Fed rate hike."
Gold is highly sensitive to rising US interest rates, as these increase the opportunity cost of holding non-yielding bullion, while boosting the dollar, in which it is priced.
The price rise has contributed to a strong week for gold miners, with the All Ordinaries gold index rising more than 9 per cent, following two weeks of steep declines.
ANZ plans to scale back its commodities market exposure by quitting trading activity in base metals, coal and iron ore, Reuters is reporting citing two people with knowledge of the matter.
The unnamed people said the bank would in future focus on its remaining precious metal, oil, and emissions business. The bank was not immediately available for comment.
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Myer shares have bounced back from yesterday's slump following some positive analyst comments.
Shares were whacked badly after the department store chain reported a disappointing slowdown in sales in the second quarter, but the falls have taken the stock to a level that Macquarie deems worth a buy.
The investment bank's analysts note Myer's "lethargic sales line" and concede that a reduced store footprint will only exacerbate the sales decline. But operating cash flow and net cash were both ahead of expectations, they say.
"Myer has been in a trading range over the last two years as the company executes its 'New Myer' strategy," Macqurie says. "Now back towards the bottom end of its recent range, trading at 13.9x PE and offering a dividend yield of 4%, we believe a short-term trading opportunity is apparent."
The analysts have upgraded the stock to "outperform" with a target price of $1.21.
It's currently at $1.14, up 5.6 per cent for the day.
Westpac has joined NAB in lifting mortgage rates for owner occupiers as well as for investors.
Variable rates for owner occupiers will go up by 3 basis points to 5.32 per cent for customers repaying principle and by 8 basis points to 5.49 per cent on interest-only loans.
Investors will get slugged by a much higher rise of between 23 and 28 basis points, depending on if principal is repaid, to 5.79 per cent and 5.96 per cent respectively.
The bank justified the out-of-cycle step with "economic and regulatory factors".
"Today's changes are in response to increasing funding costs," Westpac Consumer Bank chief executive George Franzis said.
The bank also lifted rates on variable loans for small business by 8 basis points.
The move comes after NAB yesterday hiked interest rates on variable home loans for property investors, while also increasing rates for owner occupiers.
The bank will lift the variable interest rate on owner-occupiers' loans from 5.25 per cent to 5.32 per cent, and on residential investment home loans from 5.55 per cent to 5.80 per cent, from next Friday.
Not much movement in the Australian dollar today after yesterday's big jump and partial retreat, but the currency is on track for a solid weekly gain as the greenback lost steam after the Federal Reserve indicated it was unlikely to speed up monetary tightening.
The Aussie is steady at $US76.79¢, within sight of a three-week peak of US77.20¢ touched early yesterday. Since August, the currency has tried around two dozen times to take a wall a resistance at US77¢, but has failed every time.
"The US77¢ level remains a graveyard for the Aussie dollar bulls," said AxiTrader chief market strategist Greg McKenna. "But, for the moment a weak US dollar is keeping the Aussie a bit steady."
Much of the recent strength came on broad US dollar selling after the Fed signalled fewer interest rate hikes than some investors had expected. Also underpinning are rising commodity prices and optimism about China's economy.
All of which has sent the Aussie 1.7 per cent higher since Monday and if sustained, it would be the first such gain after five weeks of losses. For the year, the Aussie has risen more than four cents.
It is also holding large gains versus the Kiwi at $NZ1.1001, having popped above $NZ1.1000 for the first time since April last year.
Complacency among equity investors is rising after Dutch voters inflicted a blow to political populism and JPMorgan says its a good time to hedge against a slide in stocks.
A selloff in equities is now more likely than not, because investors are underestimating the chances of disruption when France holds presidential elections that start next month, according to Marko Kolanovic.
The bank's global head of quantitative and derivatives strategy in New York says declines of roughly 5 per cent for the S&P 500 Index would make shares worth buying.
Kolanovic's call comes fresh on the heels of Goldman Sachs, which cut its outlook for global stocks this week, and a warning from Allianz Global Investors that equity valuations are becoming stretched.
The defeat in this week's Dutch elections of anti-immigration candidate Geert Wilders is being seen as a blow to populist political leaders, especially France's Marine Le Pen.
Investors should reduce positions in US equities and buy cheaper emerging-market stocks, Kolanovic said in a note to clients. He also says US stocks will be attractive in the longer term, especially for patient investors ready to wait for a better entry point to buy.
"Further complacency may set in in the aftermath of the Dutch elections," Kolanovic wrote. "There will be an increase of uncertainty related to French elections. Near-term, market weakness is more likely than not."
US financial magazine Barron's has taken a closer look at Harvey Norman. saying "leave this retailer on the shelf":
Shares of the company have climbed 161% since 2013 as a booming Australian property market and improved cost controls helped to buoy earnings. But a potential fizzling out of earnings growth this year may cause the stock to lose the spring in its step. Also, Harvey Norman's accounting continues to perplex some analysts.
Valuations are also somewhat pricey at 14 times forward earnings. While the multiple is only a tad above that of JB Hi-Fi (JBH.AU), the Harvey Norman rival is expected to deliver stronger earnings growth in coming years and has a simpler business model.
JP Morgan's Shaun Cousins says that while the retailer has benefited from a strong Australian housing market, store closures and improvements to working capital management, the environment is now looking less rosy and the next leg of cost cuts less certain. Also, property revaluations contributed a hefty chunk of Harvey Norman's profit in the first half. Capex is also on the rise. It's expected to double year-on-year in fiscal 2017, which ends June, as Harvey Norman ramps up spending on new stores.
Shares are down 1.75 per cent at $4.76, on track for a 3.5 per cent weekly loss. Three analysts have a 'buy' rating on the stock, two a 'hold' and seven a 'sell', with an average price target of $5.00.
Elon Musk's dramatic intervention into South Australia's energy crisis has enthralled the media and politicians of all persuasions (including, weirdly, the Ukrainian Prime Minister).
But for many battle-hardened short sellers – including a string of Australian fund managers – it did little more than elicit a smirk. That's because they have seen this type of thing before.
Musk, an enigmatic 45-year-old South African-born billionaire – who wants to colonise Mars and thinks we might be living in a computer simulation – is the greatest showman in tech, an industry renowned for its CEO showmanship.
So when Atlassian co-CEO Mike Canoon-Brookes publicly dared him to commit to a vague boast made earlier in the week by his cousin (Tesla's battery boss Lyndon Rive), Musk was never going to say no.
"I think it was classic Musk," says Regal Funds Management senior analyst Omkar Joshi. "That's what he does. He goes in and talks things up and capitalises on any situation to promote the brand, himself and the company. And once he runs out of steam, he moves on to the next thing."
The thing is, Tesla's share price and lofty market valuation rely, to some extent, on Musk's undeniable charisma and ability to get some investors to buy into his (admittedly impressive) long-term vision. Rather than, you know, actual financial fundamentals.
This has emboldened many short sellers – including Australian fund managers – to target the company. About 26 per cent of shares in Tesla's free float have been sold short, according to Bloomberg – the highest among Nasdaq 100 constituent companies.
"Elon has got to be credited with building a very sizeable and so far successful business that is a pioneer in several spaces," says Tom King, from Nanuk Asset Management, a sustainability themed fund which has a small short position in Tesla.
"He is a world leader in terms of thinking and acting on these secular shifts in technology, and he believes in the importance of them succeeding for the future of the planet.
"But if you work out what's implied by the current share price, that is substantial profit growth, and there are some significant challenges to achieving that."
The quality of Tesla's cars and batteries is not in dispute. The same can't be said for its finances.
Shares in Slater and Gordon have soared 35 per cent to 12¢ after the distressed law firm confirmed that its new senior lenders are supportive of a restructure of the company, helping it avoid collapse.
Slater and Gordon made the announcement this morning after Fairfax Media reported that its previous senior lenders - Westpac, NAB, Barclays and Royal Bank of Scotland - had onsold its debt to distressed debt buyers.
The share price rise came despite sources telling Fairfax Media that existing shareholders faced being heavily diluted in the restructure. Its shares still remain well below its levels of over $8 in April 2015.
With US employment growth again surprising forecasters and the jobless rate declining to a boom-time 4.7 per cent, below "full-employment", the question is whether central banks, and the Federal Reserve in particular, are "behind the curve", the AFR's Christopher Joye says:
In research this week, Goldman Sachs assessed this using a framework previously advocated by Fed chair Janet Yellen. Goldman found "the Fed's current policy stance is about 1 percentage point easier than prescribed by a Taylor rule that uses a depressed neutral rate" and about 3 percentage points easier when adopting a more normal neutral cash rate of about 4 per cent. The latter assumption "implies that the current policy stance represents the largest dovish policy deviation since the 1970s", which coincided with an inflation break-out.
"The implication that current policy is somewhat 'too easy' is consistent with the fact the [US] financial conditions index remains easier than average and is still delivering a positive growth impulse at a time when the Fed is trying to impose deceleration," Goldmans said.
The investment bank warns "history counsels caution about falling behind" with the experience of the mid 1960s suggesting that inflation increases much more quickly at very low unemployment rates.
Could history repeat itself? Much hinges on policymakers' humility. Central bankers are not fond of acknowledging errors, often rationalising ex post facto via the meme that "this time is different", which can be exacerbated by the desire to propagate an image of infallibility. Remember the once-lionised monetary maven Alan Greenspan?
These risks have certainly spooked interest rate investors, although the adjustment process has a way to run. After the second biggest fall in fixed-rate (as opposed to floating-rate) bond prices in modern history in the December quarter, the spectre of a Fed hike in March - duly delivered this week - has lifted long-term rates further.
In Australia the 10-year government bond yield is nearing 3 per cent, significantly higher than the sub-2 per cent level traders—gripped by "cheap money forever" fever—priced in September 2016. Current 10-year yields are, however, still miles below the 5.5 per cent average since the Reserve Bank of Australia started targeting inflation in 1993.
Some of the best interest rate traders I know, almost all of whom have never experienced a proper inflation cycle, genuinely believe the RBA "will never hike again".
President Donald Trump's first budget outline, calling for a security-heavy realignment of federal spending, drew resistance from his fellow Republicans in the US Congress as many balked at proposed deep cuts to diplomatic and foreign aid programs.
Conservatives have plenty to like in the White House plan, with its 10 per cent increase in military spending next year and beefed-up funding to help deport more illegal immigrants and build a wall on the border with Mexico.
It also takes steps to downsize government, a central goal of conservatives.
But the gaze into Trump's priorities for the next four years proved too savage for many Republicans' taste, foreshadowing an intense battle between Congress and the White House over spending in coming months.
Although Republicans control both the Senate and House of Representatives, Congress holds the federal purse strings and seldom approves presidents' budget plans.
The administration asked Congress for a 28 per cent, or $US10.9 billion, cut in State Department funding and other international programs to help pay for a 10 per cent, $US54 billion hike in military spending next year.
"These increases in defence come at the expense of national security," said Republican Senator Lindsey Graham, who has not hesitated to take on Trump. Republican Senator Marco Rubio, who like Graham ran unsuccessfully for president in 2016, levelled similar sentiments, as did some prominent Republicans in the House of Representatives.
House Speaker Paul Ryan sidestepped reporters' questions about whether he supported State Department cuts, saying the White House blueprint was just the start of the budget process.
The blueprint, a partial budget request that presidents typically release in their first months in office, doesn't account for his proposals to cut taxes, resolve internal Republican disputes over entitlement spending, or reveal what the White House forecasts for economic growth. That is to come as part of a larger document in May.
OPEC and its allies may prolong production cuts after they expire in June if the world's crude inventories remain excessive, Saudi Arabia's Energy Minister says.
The curbs will be sustained if stockpiles are "still above the five-year average, if the markets are still not confident in the outlook, if we don't see companies and investors feel good about the health of the global oil industry," Khalid Al-Falih said in a Bloomberg interview. "We want to signal to them that we're going to do what it takes to bring the industry back to a healthy situation."
The Organisation of Petroleum Exporting Countries will meet on May 25 to decide whether to continue its production cuts, aimed at ending a slump that battered the economies of energy exporters around the world. The strategy is moving global markets in the "right direction" and fundamentals have improved considerably, Al-Falih said.
So far, Saudi Arabia has shouldered the bulk of OPEC cuts, trimming February output to 10.011 million barrels a day, which is below the ceiling imposed by the agreement. OPEC output in February was 1.39 million barrels a day lower than its reference level.
But among the 11 non-members joining OPEC in the accord, compliance is lagging. Led by Russia, the countries reduced their February output by 240,000 barrels a day from October-November levels, or 43 percent of their promised 558,000-barrel reduction.
Dutch banking giant ING's Australian arm expects to increase lending to housing investors this year, allowing it to gain market share as the big four banks pull back for fear of breaching regulatory caps, chief executive Uday Sareen says.
ING is Australia's fifth-largest retail bank when it comes to household savings balances and mortgages. It's now looking to gain ground on its bigger rivals with investor loans and new products like insurance, credit cards and personal loans.
Its past focus on owner-occupier mortgages means it can increase its investor book while rivals including Commonwealth Bank are restricted from doing so as they risk breaching rules limiting growth in investor loans to 10 per cent.
"I don't think we'll be contracting (this year)," Sareen said of ING's investor loan book in an interview. "Our investor share is below 2 per cent. If you have that kind of market share and some of our larger competitors considerably slow down, there is still volume coming through."
Shares have opened flat, with gains in the big banks offset by losses in energy stocks and some miners as sectors reverse some of yesterday's moves.
The ASX is up 5 points at 5791.1, on track for a small weekly gain.
Caution is the watchword in early Asia Pacific trading today, says CMC chief market strategist Michael McCarthy.
The big banks are all around 0.2 per cent higher, following some gains among their US peers, which had dropped sharply the previous session after global bond yields fell.
The miners, meanwhile, are mixed, with BHP down 1 per cent, the biggest drag on the index, and Fortescue slipping 0.5 per cent, while Rio is up 0.6 per cent.
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Money is getting tighter, writes IG strategist Chris Weston:
It was all about the Federal Reserve on Thursday, although there is still some conjecture and strong market debate as to whether the event had a hawkish or dovish tone to it.
However, as we got into the latter stages of Asian trade we saw China lift a number of its interbank tools, hiking the rate on reserve repos (the rate at which its central bank borrows money from local commercial banks on 7-day, 14-day and 28-day contracts), as well as its medium-term and short-term lending facilities.
China's central bank has been quick to detail this is not seen as a tightening of monetary policy, but in effect, these measures raise the cost for financial institutions to borrow for different maturities and it will reduce liquidity and act as a handbrake on credit expansion. One suspects a hike to its lending and deposit rates could be on its way.
Locally, NAB got much press for lifting the cost of home loans, and investors are asking which bank will be next off the rank as NAB's standard variable rate is now the highest of the big four and just shy of the Band of Queensland's. It was certainly interesting to watch prices of financial stocks on Thursday, even more so as around 11:30am traders really started selling into the banks, which obviously coincided with the soggy employment data.
CBA's US traded shares edged up 0.3 per cent, which suggests Aussie banks could actually find small buyers on the final trading day of the week.
Today's Agenda
Local data: NZ performance of manufacturing index February, ANZ consumer confidence March
Trading Ex-Div: PRY, RFG, SVW, SWM, TRS
Overseas data: Euro zone trade balance January, Euro zone construction output January; US industrial production February, US capacity utilisation February, University of Michigan confidence March, US leading indicators February, Baker Hughes weekly oil rig count
And here are the overnight market highlights:
- SPI futures down 8 points or 0.1% to 5777
- AUD -0.4% to 76.79 US cents (Overnight range: 76.64 - 77.17)
- On Wall St, Dow -0.1%, S&P 500 -0.2%, Nasdaq flat
- In New York, BHP -0.1%, Rio -0.3%
- In Europe, Stoxx 50 +0.9%, FTSE +0.6%, CAC +0.6%, DAX +0.6%
- Spot gold +0.6% to $US1226.96 an ounce
- Brent crude -0.3% to $US51.64 a barrel
- Iron ore +1.8% to $US92.61 a tonne
- Steam coal -0.7% to $US81.10, Met coal -0.2% to $US158.75
- LME aluminium + 0.7% to $US1900 a tonne
- LME copper +0.7% to $US5908 a tonne
- 10-year bond yields: US 2.54%, Germany 0.44%, Australia 2.81%
On the economic agenda:
- US industrial production and consumer sentiment tonight
Stocks to watch:
- Another boost to iron ore price overnight could boost miners..
- ...but persistent oil oversupply worries may weigh on energy names
- Blackmores fined in China for breaching advertising law
- Fletcher Building raised to buy at UBS
- Macquarie agrees to buy Cargill petroleum-trading unit, reports AFR
- OZ Minerals rated new sell at Canaccord
- Rio Tinto raised to add at Morgans Financial
- Sandfire Resources rated new hold at Canaccord
- Western Areas rated new buy at Canaccord
Embattled law firm Slater & Gordon has confirmed the majority of its debt has traded hands from its original lenders to distressed debt investors.
The announcement comes following reports that the law firm's major lenders Westpac, NAB, Barclays and Royal Bank of Scotland held auctions of their loans this week in which they accepted losses of up to 80 per cent on their debt.
It is understood that New York based hedge fund Anchorage, an active player in the Australian distressed debt market, will be the largest owner of the personal injury firm, which was the first legal practise in the world to float on a stock exchange.
Slater & Gordon said that it had recently been notified that in excess of 94 per cent of its debt facility has been traded. It said that they had been informed that the new owners "fully intend to implement a solvent restructure of the company" and to ensure the company has a sustainable level of debt and a stable platform for its future operations in both Australia and the United Kingdom.
Slater & Gordon said it believes the debt for equity restructure was in the best interests of all stakeholders. It said it was in confidential discussions with the new lenders about the terms of the restructure and provide an update in the coming weeks.
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