Markets Live: Retailers cop discount

Toronto's hot housing market has entered a new phase: jittery.

After a double whammy of government intervention and the near-collapse of lender Home Capital Group, sellers are rushing to list their homes to avoid missing out on the recent price gains. The new dynamic has buyers rethinking purchases and sellers asking why they aren't attracting the bidding wars their neighbours saw just a few weeks ago in Canada's largest city.

"We are seeing people who paid those crazy prices over the last few months walking away from their deposits," said Carissa Turnbull, a Royal LePage broker in the Toronto suburb of Oakville, who didn't get a single visitor to an open house on the weekend. "They don't want to close anymore."

Home Capital may be achieving what so many policy measures failed to do: cool down a housing market that soared as much as 33 per cent in March from a year earlier. The run on deposits at the Toronto-based mortgage lender has sparked concerns about contagion, and comes on top of a new Ontario tax on foreign buyers and federal government moves last year that make it harder to get a mortgage.

"Definitely a perception change occurred from Home Capital," said Shubha Dasgupta, owner of Toronto-based mortgage brokerage Capital Lending Centre. "It's had a certain impact, but how to quantify that impact is yet to be determined."

Early data from the Toronto Real Estate Board confirms the shift in sentiment. Listings soared 47 per cent in the first two weeks of the month from the same period a year earlier, while unit sales dropped 16 per cent. Full-month data will be released in early June.

A couple months ago amid robust demand, it was common for sellers to price their homes on the low side to spur bidding wars. Such tactics won't work now, according to Century 21 Millennium brokerage owner Joanne Evans.

"The frenzy is over -- it's over," said Evans, who focuses on Toronto suburbs such as Brampton. "Sanity is returning to the marketplace."

The average selling price in the Toronto area was $C890,284 through May 14.

Oil prices just keep on rising ahead of today's OPEC meeting where the cartel is expected to extend a production cut aimed at tightening the market well into 2018.

Brent crude has added nearly 1 per cent to $US54.45 a barrel, and has now rallied more than 16 per cent since hitting a five-month low of $US46.69 less than three weeks ago.

That's contributing to the rally in the local energy sector, which has gained more than 5 per cent in May.

Prices have risen on a consensus that a pledge by OPEC and other producers, including Russia, to cut supplies by 1.8 million barrels per day (bpd) would be extended into 2018, instead of just covering the first half of this year.

The production cut, introduced in January, was initially only to cover the first half of 2017, but an ongoing glut has meant that OPEC and its allies who are meeting in Vienna today are expected to extend the cut by nine or potentially even 12 months.

"A strong consensus has developed that producer supply cuts will be extended. The only question is the choice of the duration," French bank BNP Paribas said.

"This (extension) has been highly factored into the price of oil, and at this stage it is unlikely that we will see a deepening in the level of production cuts, with OPEC officials preferring to wait and see the impact of an extension in helping rebalance the market prior to taking any more drastic actions," said James Woods, analyst at Rivkin Securities.

Energy consultancy Wood Mackenzie said "a nine-month extension would have little impact on our price forecast for 2017, which is for an annual average of $US55 per barrel for Brent".

Wood Mackenzie estimated that a nine-month extension would result in a 950,000 bpd production increase in the United States, undermining OPEC.

US oil production has already risen by more than 10 per cent since mid-2016 to over 9.3 million bpd as its drillers take advantage of higher prices and the supply gap left by OPEC and its allies.

Should the meeting in Vienna result in a cut extension to cover all of 2018, Wood Mackenzie said the tighter market could push average 2018 Brent prices up to $US63 per barrel. Brent has averaged $US53.90 per barrel so far this year.

Should the meeting in Vienna fail to agree an extended cut, traders expect oil prices to fall as this would result in ongoing oversupply.

Just a week ago it looked like Donald Trump's presidency would prove too unstable for markets to maintain the buoyancy that had lasted for six months. The S&P 500 dropped 1.8 per cent in a day, the worst rout in eight months, as contents of a memo written by James Comey when he was FBI director surfaced, alleging that Trump asked him to drop an investigation of his former national security adviser.

Yet the decline turned out to be one of the biggest buying opportunities in a year, as stocks rose for five straight days. Bolstering optimism was an earnings season where companies solidified a profit rebound that took first-quarter growth above 14 per cent.

Speculation that political turmoil would prompt the Federal Reserve to slow its pace of monetary tightening may have also underpinned the equity recovery.

According to the minutes of the central bank's last meeting released Wednesday, policy makers pointed toward a rate hike as soon as the meeting in mid-June, though they added the caveat that "it would be prudent" to wait for evidence that a recent slowdown in economic activity had been transitory. The central bank dropped the language pertaining to concerns over equity valuations and noted the bullish earnings forecasts from analysts.

"We're in a win-win environment here," Smith said. "If we get some degree of modest fiscal policy, that'd resolve in faster GDP growth and be celebrated by the market. If Trump gets paralysed with investigations and can't get any thing done, then we're stuck in a 2 per cent economy and in that case, the Fed would slow down even more the trajectory of rate hikes."

Not many benefited from the rebound. According to Bank of America, its clients remained net sellers of US stocks last week. Institutional clients such as pension funds have been net sellers for 14 straight weeks, while wealthy individuals reduced holdings after two weeks of purchases.

Broadly, investors continued to pull money out of stocks despite the recovery. They took almost $US2 billion out of exchange-traded funds focused on US equities over the past five sessions, pushing withdrawals for the month to $14 billion, data compiled by Bloomberg show.

The biggest source of demand was companies themselves, which raised share repurchases last week to the highest level of 2017. Hedge funds also partook in the spree after spending most of the time since mid-March scooping up shares.

The outlook for the Aussie consumer sector is "deteriorating", and the entrance of online behemoth Amazon is only going to make life harder for local retailers, JP Morgan analysts say.

In response to their analysis - released to clients this morning - the broker has switched its recommendations on a trio of retailers from "overweight" to "underweight". The affected stocks are JB Hi-Fi, Myer and Super Retail Group. Harvey Norman retains its lowest possible rating.

The analysts identify three key risks for the consumer outlook:

1. Aussies are heavily indebted, increasing our sensitivety to changes in income and wealth, while recent macro-prudential intervention increases mortgage costs by around $7bn which reduces disposable income;
2. Energy prices are set to rise for consumers while also providing input cost inflation which can weigh on consumer prices (for example, food); and
3. Despite unemployment remaining low, wage growth is at multi-year lows while underemployment remains a concern. Both factors weigh on income growth and moderate the appetite for consumption

If that wasn't enough, Amazon may be a boon for consumers but the entrance of a new, powerful competitor (whatever the timing) will hurt the earning potential of the incumbents. There's less to worry about for listed property trust investors, the analysts reckon.

"The short-term impact on income is much less for the shopping mall owner than the retailer," they write, reiterating their overweight call on Scentre Group.

As a result of all that, the broker's downgrades to forecast earnings per share (EPS) are pretty severe:

• Harvey Norman now forecast to earn 3.1% less than before in FY18 and 12.2% less in FY19;
• JB Hi-Fi forecast EPS is 14% lower for FY18 and 20.7% lower in FY19;
• Myer the downgrades are 14.9% and 30.1% in FY18 and FY19; and for
• Super Retail EPS downgrade is 7.2% in FY18 and 16.5% in FY19

Is George Soros "nuts"? Israeli mining magnate Beny​ Steinmetz thinks so, accusing the billionaire investors of trying to upset his hopes of developing the Simandou iron ore mine in Guinea, according to a report in the London Telegraph.

The claim was made during testimony given by Steinmetz during an arbitration panel in Paris between BSG Resources and the government of Guinea.  Soros has outlaid "$US40-US50m out of his own pocket to destroy me", Steinmetz claimed, according to the newspaper report of the proceedings.

BSGR claims Soros, when advising to Alpha Condé, president of Guinea, was instrumental in the decision to strip the company of its mining licences in 2014, due to a personal grudge against Steinmetz.

"He has an obsession with me… he's nuts," Mr Steinmetz said, according to the report of the hearing. "He met Condé, he corrupted the process [of issuing mining rights]. When he came, there was a mining industry. Now the mining industry is shut up."

Last month, BSGR said it would sue Soros for at least $US10bn in damages for his alleged role in conspiring to deny the company its rights to half of Simandou, believed to be the largest untapped iron ore deposit in the world.

Guinea claims BSGR used bribery to gain the rights shortly before the death of the former president, Lansana Conté, in 2008.

BT Investment Management shares are being sold down today after Westpac sold a $600 million stake in the funds manager.

The move has reduced Westpac's stake from 29 per cent to 10 per cent, with the company to eventually sell out completely.

The lender said that while BTIM will remain a strategic partner, "some changes" in the arrangements between Westpac, BTFG and BTIM will occur over time following the selldown.

Westpac's remaining stake in BTIM, worth 30.8 million shares, was to be placed in escrow until after BT's results for the first half of the 2018 financial year at which point they could be offered for sale.

Westpac first indicated it was lowering its exposure to funds management in June 2015, when it said it would cut its holding in the separately listed BTIM from 59 per cent to between 31 per cent and 40 per cent. That deal was worth about $700 million at the time.

BTIM shares are down 6.8 per cent at $11.35, with part of the slide due to the stock trading ex-dividend (19 cents) today.

Moody's has downgraded Hong Kong's local and foreign currency issuer ratings just hours after it cut China's credit ratings for the first time in nearly 30 years.

The US ratings agency downgraded Hong Kong's rating to Aa2 from Aa1 and said credit trends in China will continue to have a significant impact on Hong Kong's credit profile due to close economic, financial and political ties with the mainland.

Moody's changed Hong Kong's outlook to stable from negative, denoting that the risks to the city's rating are balanced.

The move came late on yesterday and was widely expected after Moody's downgraded China, saying it expects the financial strength of the economy will erode in coming years as growth slows and debt continues to rise.

Moody's said financial ties between Hong Kong and the mainland were becoming deeper through platforms such as the Shanghai-Hong Kong stock connect scheme, the Shenzhen-Hong Kong stock connect scheme and the bond connect which is expected to be launched this year.

"While these connects bring benefits including, it is hoped, enhanced liquidity, they also risk introducing more direct contagion channels between China's and Hong Kong's financial markets," Moody's said in a statement.

The Hong Kong government criticised the move, saying the Chinese-ruled city was well equipped to deal with any challenges.

"Moody's has overlooked the sound economic fundamentals, robust financial regulatory regime, resilient banking sector and strong fiscal position that Hong Kong has," Financial Secretary Paul Chan said.

"These elements will continue to enable the economy to embrace the challenges ahead arising from the changing external environment."

Investors have thumbed their noses at the relatively upbeat overseas lead amid enthusiastic selling of the big banks, while stocks exposed to the discretionary consumer dollar cop a hiding.

The ASX 200 is off 14 points or by 0.2 per cent at 5755, as BHP and Rio add 0.5 per cent and help stabilise the early losses. Fortescue, however, is off 0.4 per cent after recent iron ore price weakness. The selling is pretty even across the top 200, with more or less equal number of stocks up and down.

ANZ and CBA are off 1 per cent and NAB and Westpac are down 1.5 per cent. The latest worry for analysts and shareholders is the looming release of details around APRA capital requirements, which are speculated to come out in late June or early July.

Macquarie is off a much more modest 0.3 per cent.

In reporting companies, Aristocrat Leisure has climbed 1.8 per cent and Ansell is up 2 per cent on its announcement (for more info see below).

Listed property, utilities and gold miners are all higher as investors bet on a very gradual path of US rate rises. Healthcare is also higher as CSL advances 0.7 per cent while energy stocks are also receiving support.

Retailers are bearing the brunt of worsening conditions and growing investor and analyst discomfort. In the sector:

• Myer -3.8%
• Super Retail -3.4%
• Bapcor -2%
• JB Hi-Fi -2.5%
• Harvey Norman -1.5%

Automotive Holdings has tanked close to 10 per cent on its profit warning.

The true outlier, at least on the Bloomberg screen, is Henderson Group, which apparently has jumped ten-fold. But that looks the result of the ASX-listed stock transforming into a CDI, or Chess Depository Index, with the prime listing now in London. That's just an educated guess at this stage.

That move Bloomberg is telling us has added 10 points to the ASX 200 this morning, so the market may be artificially inflated by that.

A bit more on bitcoin: the digital currency hit a fresh record high overnight, surging above $US2500, as demand for crypto-assets soared with the creation of new tokens to raise funding for start-ups using blockchain technology.

Bitcoin rose more than 10 per cent to an all-time high of $US2537.16, taking its gains to more than $US500 gain since Saturday, when the digital currency first topped $US2000.The cryptocurrency is up nearly 90 per cent just this month.

Contributing to the surge was an announcement earlier in the day from the Digital Currency Group which eased worries about a fractious debate among cryptocurrency investors and tech developers, CNBC reported.

Fifty-six companies around the world and 83 per cent of bitcoin miners supported the "Bitcoin Scaling Agreement," according to the Digital Currency Group. The document lays out an upgrade that should increase bitcoin's transaction capacity.

A key reason for bitcoin's dominance is its popularity in the nefarious online underworld, say technologists and cybercrime experts, noting that its size - the total value of all bitcoins in circulation is more than twice that of the nearest of hundreds of rivals.

Also, a big part of bitcoin's recent surge is the increase in demand for other digital currencies being sold in so-called "initial coin offerings", or ICOs. Under ICOs, blockchain start-ups sell their tokens directly to the public to raise capital without any regulatory oversight.

Bitcoin up 100% in under 2 months. Shanghai down almost 10% same timeframe, compared to most global stocks up. Probably not a coincidence!

— Jeffrey Gundlach (@TruthGundlach) May 23, 2017

Strong demand for bitcoins in Japan has also fuelled the rise of the virtual currency that can be moved like money around the world quickly and anonymously without the need for a central authority.

Looking at bitcoin's phenomenal rise, the following chart comes to mind:

Both of Australia's big listed car dealership firms have downgraded profits in the last 24 hours because of softness in new vehicle sales, in a troubling sign for the broader economy.

Automotive Holdings Group warned this morning that softer trading in April on the previously strong eastern seaboard, a weak Western Australian market, and tightening consumer credit conditions in the automotive financing sector had been behind a slowdown. It runs 109 dealerships in NSW, Victoria, Queensland, Western Australia and New Zealand, and a refrigerated logistics division.

It came just a day after Queensland-based AP Eagers warned of a likely decline of first half profit before tax of between 7 to 9 per cent because of an unexpected decline in vehicle buying by consumers, business and government.

Martin Ward, the chief executive of AP Eagers, said yesterday that vehicle sales in Queensland, where the company derives 45 per cent of its profits, had fallen by 5.9 per cent in the first four months of calendar 2017.

Mr Ward said Queensland was the second worst performing state behind Western Australia. "The industry expectations for the first four months of the year were for an equal or better market than last year's, so the whole industry has been caught by this unexpected decline," he said.

AP Eagers has a close interest in the fortunes of Automotive Holdings Group, because it has a 22.8 per cent stake in the company.

Auto Holdings Group managing director John McConnell said this morning the "tightening conditions in the automotive market have been an increasing challenge in the half". 

He said in Western Australia, the new vehicle sales market was now down 10 per cent on a year-to-date basis in calendar 2017 and conditions were very tough in that market. A weakening east coast automotive market combined with the tighter credit conditions to buyers using finance, meant the east coast dealerships weren't able to offset the strife in WA.

"Tightening consumer credit conditions in the automotive financing market have contributed to lower margins across the industry," AHG warned in its statement to the ASX.

SPONSORED POST

While the Fed was the big overnight event, the talk of the town is how much money you could have made by investing in crypto-currencies, writes IG strategist Chris Weston:

Bitcoin is trading like a small cap miner that the market feels is ready to make game-changing announcement.

The number of social posts I have seen in the past week about how much a $1000 investment made in 2016 would now be worth is everywhere and I genuinely can't wait to see young tech heads driving down Collins Street in a new Aston, because they had the stones to be able to hold their exposure through what has been an exponential move without ever having taken profit. While I haven't be involved in the rally in Bitcoin it should be seen a case study for budding new traders in the art of letting profits run, while trailing the stop loss without emotion forcing the issue of crystallising the profit prematurely.

Bitcoin is up another 11% on the session, and up for an impressive eighth straight day. While I haven't seen the news flow overnight it seems to me that this is the mother of all FOMO (Fear of Missing Out) trades and it has been great to see retail genuinely following the trend here and not consistently trying to counter trend this move. Perhaps the fact I am putting so much focus on Bitcoin suggests a top has been seen and I am the taxi driver contrarian indicator. We shall see, but our flows in Bitcoin have been huge.

In terms of ASX drivers there will be a central focus on the materials space today given the huge move lower in iron ore futures through yesterday's trade.

Spot iron ore closed 2.4% lower, while Dalian futures fell a further 2.3%, with steel futures also down on the night session. BHP's American Depository Receipt (ADR) closed up 0.5%, but the attention will be placed on the pure plays such as Fortescue and Atlas Iron, where we saw a reasonable pick-up in shorting activity yesterday.

Read more.

And here are the overnight market highlights:

• SPI ASX futures up 12pts or 0.2 per cent, to 5786 points 
• AUD +0.4% US75.06¢
• On Wall St, Dow Jones +0.4%, S&P 500 + 0.3% , Nasdaq Composite +0.4%
• In New York, BHP -0.5%, Rio -0.9%
• Spot gold +0.6% to $US1258 an ounce
• Brent crude -0.4% $US53.92 a barrel 
• Iron ore -2.4% $US60.52 a tonne

In economics today:

• NZ government unveils its budget at midday, AEST
• RBA assistant guv Debelle speaks at FX conference in London
• This evening UK's second GDP estimate for the March quarter
• Tonight US unemployment claims

Stocks to watch:

• JP Morgan downgrades the retailers: JB Hi-Fi, Myer and Super Retail Group to underweight from overweight
• But Morningstar went the other way on Super Retail, upgrading to buy
• Morgan Stanley downgraded AP Eagers to underweight
• WorleyParsons raised to outperform at Macquarie

And here's another one: Ansell will buy back 10 per cent of its shares after selling its condom division for $US600 million ($800 million) to a Chinese consortium. 

The company has said it will buyback around $356 million of its stock following the deal, which will result in net proceeds of $US529 million ($705.5 million). 

Ansell chief executive Magnus Nicolin said he was "delighted with this outcome, following a thorough and competitive process, which realises significant value for Ansell shareholders. 

The "sexual wellness" division was acquired by Humanwell Healthcare and CITIC Capital China Partners.

Quick early corporate news: gaming machine maker Aristocrat Leisure has continued its run of strong profit growth, lifting underlying earnings by 53 per cent to $272.9 million in the six months to March 31. 

The first result under new chief executive Trevor Croker was ahead of expectations from broker JP Morgan, which had forecast underlying net profit after tax and before amortisation of acquired intangibles of $252.9 million.

Aristocrat's total revenue rose 24.6 per cent to $1.2 billion.

Mr Croker took over from Jamie Odell in February. He is based in Las Vegas. 

US stocks have ended slightly higher, with the S&P 500 hitting a record high close, after minutes of the Federal Reserve's latest meeting showed policymakers view a rate rise as coming soon.

But, according to the May 2-3 meeting minutes, they also agreed they should hold off on raising interest rates until they know a recent US economic slowdown was temporary.

Stocks were volatile following the minutes' release, but eventually added to small earlier gains. The S&P financial index, which fell right after the minutes came out, rebounded to end fractionally lower. Banks tend to benefit from higher borrowing rates.

Interest rate futures imply traders see about an 80-per cent chance of a quarter-percentage-point rate hike at the Fed's next meeting in June.

"Their plan is in place to gradually phase out reinvestments beginning in the fourth quarter," said Matt Toms, chief investment officer of fixed income at Voya Investment Management in Atlanta.

"Even though the Fed is reducing stimulus, I think this gives the market some comfort. It won't lift the rate structure much," he said.

"Absent a material slowdown in the economy, Federal Reserve officials, acknowledging support from strengthening global growth, appear poised to stay on track toward interest rate normalisation," said Quincy Krosby, chief market strategist at Prudential Financial.

The Fed minutes also sent the US dollar index tumbling 0.3 per cent, though it held near 6-1/2-month lows. That move inspired a push above 75 US cents for the Aussie equivalent.

The yield gap between two-year and 10-year Treasuries shrank over 1 basis point to 96 basis points, not far above the level last seen on Oct. 27. This implied traders did not expect that fewer bond purchases from the Fed would push up longer-dated yields.

The Fed minutes also helped lift the Mexican peso to its strongest level since the election of Donald Trump in November.

The peso has tracked upwards since Mexico's central bank unexpectedly hiked its benchmark interest rate by 25 basis points to 6.75 per cent on Thursday.

In contrast, European shares, stuck just below 21-month highs for more than a week, struggled to gain momentum overnight, with strength in banks and big oil majors offset by weakness in miners and autos.

Good morning and welcome to the Markets Live blog for Thursday.

Your editors today are Jens Meyer and Patrick Commins.

This blog is not intended as investment advice.

Fairfax Media with wires.