Markets Live: Aussie dollar bounces as GDP hits mark

There's been a lot of talk about Australia's record-breaking spell of economic growth without a recession.

At last count it's now been 103 quarters since the 1991 recession (the one "we had to have"); that's close to 26 years without two consecutive quarters of shrinking economic output.

While there's some nit-picking around the international comparisons (apparently Japan's post-WW2 growth period was longer), it's clearly a remarkable run.

However, it should be mentioned that one factor contributing to our long stretch without a recession is Australia's relatively strong population growth of around 1.4 per cent a year.

BetaShares chief economist David Bassanese notes that on a GDP-per capita basis, the economy has in fact experienced two technical recessions since the early 1990s – one in 2000 and again in 2006 (see chart).

Here's what economists are saying about today's first-quarter GDP numbers, which came in as weak as predicted:

Felicity Emmett, ANZ:

Some of the weakness in Q1 is likely to prove temporary, although a bounce in Q2 looks unlikely at this stage. More broadly, there looks to have been a sustained step-down in the pace of consumer spending growth as households adjust to the new world order of very low wage growth. On that front, wages growth actually picked up in the quarter, but growth in unit labour costs remains negligible, which suggests that inflation is likely to stay low. On this whole, this confirms our view that the RBA is on hold for some time.

Paul Dales, Capital Economics:

The small 0.3% q/q rise in GDP in the first quarter won't worry the RBA too much as some of it was due to the temporary influence of the severe weather. Nonetheless, we believe that GDP growth will be weaker than the RBA expects both this year and next, although that probably still won't prompt it to cut interest rates further. More generally, the 4.3% q/q rise in mining investment was the first since 2013 and is an encouraging sign that we are getting close to the end of the mining bust.

Paul Bloxham, HSBC:

The key challenge remains that, although corporate profits and nominal GDP have picked up, largely driven by the rise in commodity prices, this has yet to show up in wages growth. Compensation of employees rose in Q1, following a fall in Q4 2016, but is still running at a weak 1.5% y-o-y. At this stage there is little evidence of the boost to national incomes is flowing through to households. However, history suggests that it will. Yesterday's decision to lift the minimum wage by more than in previous rounds may very well be the first sign of this starting to happen.

Rahul Bajoria, Barclays:

Despite the slowdown in growth, there are a few positive takeaways for policymakers in today's GDP print. First, growth in household income, which has been a key focus, rebounded in Q1, despite a decline in hours worked and anemic wage growth. Second, private non-mining business investment expanded for the first time in more than 11 quarters, supporting the RBA's view that the mining-related adjustment in capex is coming close to an end. Finally, the strong revival of nominal GDP growth is a positive for national income and should have positive spillovers for both the public sector and, eventually, households. 

Su-Lin Ong, RBC Capital Markets:

Digging through the accounts, we would make a few observations. Firstly, the weaker real vs. stronger nominal/income story largely reflects upside surprises to commodity prices for much of the period since mid 2016 and is unlikely to continue. Secondly, the gain in national income remains very much skewed toward corporates. Thirdly, the composition of domestic demand in Q1 hints at a profile further into 2017 and more so in 2018, which likely shifts away from residential construction, which has been a key contributor to both growth and employment. Fourth, the wage, consumption, and household savings dynamics remain worrying. And finally, the persistently weak trend in unit labour costs, which are the key driver of non-tradable inflation and feed into the inflation outlook over the next 4-6 quarters, suggests that the risk lies in core inflation staying below the floor of the RBA's 2-3% target range for longer. 

Craig James, CommSec:

The Australian economy has had to contend with a lot of factors in the past year – geopolitics, weather events, the on-going unwinding of the mining construction boom and variable housing markets. So economic growth has trekked a zig-zag path. But importantly the record expansion remains on track. Especially positive is the health of the business sector with business conditions the best in nine years. The hope is that employment and investment will continue to lift, maintaining economic momentum.

Ben Jarman, JPMorgan:

The 1Q national accounts add to the string of data on the activity side showing that the economy is below trend and will not be reducing excess capacity soon. With the household sector subject to further headwinds from rising interest servicing costs, the pressure on the RBA's 3% and above GDP forecast continues to mount.

Riki Polygenis, NAB:

Today's data are consistent with monetary policy remaining on hold. The RBA will look through the volatility in GDP, however mixed labour market outcomes and weak wages and inflation data will prevent any hike. Meanwhile, there is tentative evidence that macroprudential and policy changes are leading to a softening in dwelling price growth, which will help to mitigate economic risks associated with rising household debt levels should it continue.

The tide has well and truly turned on Blackmores, the vitamins group, with its shares sliding today to $90, a level not seen since August 2015.

Just in case you've forgotten, the shares hit a peak of $220.90 at the start of 2016, as optimism over Chinese demand for its products was at its highs.

Since then, the shares have suffered a severe reality check although earlier in the week Morningstar reminded clients the slide in the share price to below $101 put them firmly with its 'accumulate' zone.

It remains keen on Blackmore's leverage to Asian demand.

Shares are down about 3 per cent at $89.64, after earlier dropping to $88.18.

And here is a round-up of the day's action so far on the ASX:

Citi analysts have branded the private equity offer for Vocus at $3.50 a share "an opportunistic offer based on depressed earnings".

They estimate the KKR bid values the telco on an enterprise-value-to-EBITDA ratio of 8, and a P/E of 13.3.

"However, we do not believe that our FY18 estimate is reflective of a normalised performance of the business," they write. "In our view, it will take more than 12 months to get Vocus back on track, and if Vocus had been able to maintain the sales of the pre-merger businesses, and extract just half of the synergies management had expected, earnings would be closer to $435m (our FY19 estimate)."

On those, more "normal" earnings estimates, the KKR bid values the company at an EV/EBITDA of 7.4. Still, the offer is above Citi's current valuation of $3.40 per share. And the market had pushed the share price 20 per cent higher today to $3.41.

The Citi analysts conclude:

Given the highly conditional nature of the preliminary offer, we think this is unlikely to be sufficient for VOC to grant due diligence. With the current share price depressed due to recent earnings downgrades and capex commitments bringing debt covenants into play, in our view the key motivation is the opportunity to buy underperforming assets at an attractive price.

Deepening concerns that public investors in Murray Goulburn will bear the brunt of the costs of the planned restructure of the milk processor saw units in the co-operative pushed to new lows.

In late morning trading, units in Murray Goulburn were down 15 per cent at 62c, a new all-time low. That followed a 12 per cent dive on Tuesday, when the company signalled a deeper than expected restructuring. The stock is now trading well below its 2015 float price of $2.10.

The latest restructuring may see the company's profit sharing mechanism and the payout ratio altered, which will see much of the milk processors' woes borne by investors, analysts warned. 

Bell Potter warned clients the foreshadowed comprehensive strategic review "is extremely ambiguous and could mean anything from collapsing the existing corporate structure to announcing a shift in the profit sharing mechanism and payout ratio (to retain capital)".

"In our view the strategic review possess a material risk to the current earnings model, creating material uncertainty around any earnings and dividend forecasts in FY18-19."

Even though the turn in the dairy cycle should favour investing in Murray Goulburn's units, there is "limited visibility on the possible effect the strategic review", the analyst warned.

"We are therefore cautious [Murray Goulburn] will not provide investors with the same operating leverage to a rising [milk price] that it currently does under the profit sharing mechanism and reflect this risk in both our target price and rating," the analyst said as he cut to 'hold' from 'buy' his rating for the shares, while slashing to 73c from $1.11 the price target.

It's getting to that time of year when fast money fund managers and trading desks go looking for reporting season surprises. 

Macquarie analysts weighed into the debate this morning, running the numbers on the last reported franking credit balances of Australian stocks. 

Perennial table-toppers BHP and Rio Tinto were carrying the most franking credits as at their most recent financial year end on an absolute basis.

Macquarie noted that both companies make most of their earnings in Australia, however their dual-listings meant only a partial payout of franking credits.

In terms of surprises, Macquarie analysts said Westpac had grown its franking balance strongly, while Newcrest Mining's had been in retreat since 2013. 

The analysts said Salmat had the highest franking balance as a proportion of its market capitalisation. 

Franking credits, which are created when company's pay tax in Australia and can pass that benefit on to Australian shareholders, are one factor that can spur a company to pursue capital management and return those credits to shareholders in the form of off-market buybacks or special dividends. 

Qantas's share price, which has risen meteorically this year, will continue to "look after itself" as long as the airline sticks to its cost-cutting targets and delivers consistent earnings, chief executive Alan Joyce says.

Mr Joyce said constant reinvention was needed to remain competitive and profitable in the tight-margin industry, even as Qantas finishes a three-year cost-cutting drive to save $2 billion and grows more popular with investors. The airline is now trying to save $400 million a year in further cost cutting. 

"Three years ago we said we would deliver on $2 billion in transformation, and we've now given ourselves our targets for the next three years and  management's focused on delivering on that," Mr Joyce said from the sidelines of the International Air Transportation Association's annual general meeting in Cancun, Mexico.

"When we deliver on that, the share price will certainly look after itself."

Qantas' share price has risen almost 60 per cent in the past six months, from $3.34 on January 1 to $5.09 on Wednesday.  A bullish forecast at an investor day in May further encouraged the market and saw Moody's up its credit rating.

Major savings will come from the first of its Boeing 787-9s, which are more fuel efficient and have lower operating costs than the 747s they will replace, Mr Joyce said. 

The first Qantas 787 will start flying Melbourne to LA in December, with the second to pick up the new non-stop service between London and Perth from March.

That new Kangaroo Route will start in Melbourne and replace Qantas' existing Melbourne to London service, which operates on A380s and stops in Dubai.

Read more.

And here are some of the hot takes from the Twitterverse:

Yes, we are not quite the new "no recession" record holders:    

And while the GDP figure wasn't as bad as we feared (remember there were a few economists predicting a negative print), it wasn't all sunshine and lollipops:

GDP numbers have come in pretty much as predicted, but there's not denying the economy slowed sharply in the first quarter, as consumers cut spending and resources export volumes were hit by bad weather.

Gross domestic product rose just 0.3 per cent in the March quarter from the previous three months, when it climbed by 1.1 per cent.

Year-on-year growth slowed to 1.7 per cent, from 2.4 per cent.

Economists had forecast growth of 0.3 per cent and 1.6 per cent respectively.

The Aussie bounced about a third of a cent to a fresh one-month high of US75.29¢, as traders had been bracing for a disappointment.

Ignore the fanfare, the Adani coal mine is no closer to lift-off, writes BusinessDay columnist Elizabeth Knight:

In the real world of finance, listed companies must adhere to strict rules on disclosure.

Indian conglomerate Adani isn't covered by these rules but, if it were, Tuesday's media release headline – Adani Project gets green light – would be misleading to say the least.

It seems the $16 billion, highly controversial Carmichael coal mine is no closer to lift-off than it was last month, or last year, and, it can be argued, it has not progressed that far beyond where it was even five years ago.

It was merely an announcement that Adani wanted the project to go ahead.

But, realistically, that is only one hurdle this project faces. Finding the finance for it is a bigger issue and one that cannot be addressed with a media release.

Yes, there was a media conference in northern Queensland and, yes, federal and state politicians turned up for the photo opportunity as a show of support for a new mine and rail line that would create jobs.

But not even a sod of earth was turned.

Meanwhile, a far more reliable indication of whether Tuesday's announcement should be taken seriously can be found in the response to Downer EDI's share price. This is the company Adani said on Tuesday had been given the very large and valuable contract to build the mine. The share price didn't move.

Indeed, Downer, which is subject to ASX disclosure laws, released a far more circumspect statement in which it said the "letter of award [of the Adani contract] continues to be subject to the parties executing a binding mining services contract".

In other words, the contracts with Downer and others Adani had earmarked as being parties to this giant project were all hostage to the project actually going ahead. And that requires financing, which Adani still does not have.

And the fact that Adani wants to source steel from the bankrupt Whyalla Arrium steelworks means little if its Carmichael mine cannot get finance.

Read more here.

Heads up: we get first-quarter GDP numbers in about 20 minutes.

Economists have been busily revising their forecasts down, with consensus at 0.3 per cent quarterly growth and 1.6 per cent annual growth, according to the latest Bloomberg survey.

But after yesterday's disappointing GDP partials government spending and net exports, which will both weigh on the final number, it's quite possible that the 'whisper numbers' doing the rounds among traders are actually lower than the consensus estimate. 

Many economists resist revising their forecasts too many times and quite possibly held off from a final downgrade yesterday following the partials.

Plus, after the RBA yesterday downplayed the likely softness for Q1, any reaction in the Australian dollar will likely be muted. 

Still, a negative reading is unlikely to resound well with traders, and could well pull the Aussie back below US75¢.

One thing to look out for is annual change in unit labour costs, which is likely to remain in negative territory.

"This ongoing weakness in unit labour costs will continue to feed through to lower inflation and puts a question mark over the RBA's view that inflation is likely to accelerate back into the 2–3% target band over the next couple of years," says ANZ's Daniel Been. 

If Wesfarmers wanted to build a case for investors at its strategy day, it's not succeeded, with shares falling more than 2 per cent to just above $40.

Two themes out of the briefing seem to be worrying the market: Coles flagging further pressure on margins and some disappointing news out of the UK.

CEO Richard Goyder said Wesfarmers' 18 month-old Homebase business in the UK had experienced significant disruption and was likely to lose money in the second half of 2017 as well as the first half of 2018.

While trading in the key months of April May and June had been good, it was not enough to offset losses in the first half.

"We are still dealing with issues re  bathrooms and kitchens - that will have some second half impact in that business," he said.

And Coles boss John Durkan indicated that the food and liquor retailer's margins would come under further pressure in the June-half, saying the supermarket chain had stepped up investment in price and service in the third and fourth quarters ahead of cost savings.

"The rate of investment in the second half is notably above that in the first half," Durkan said.

Coles invested about $65 million into reducing prices and improving service in the December-quarter and second-half investment was "triple that".

"It remains today as strong as it did in Q3 - it's a high level of investment but cost savings will come out over time," he said. "We believe our strategy will leave Coles well positioned for continued growth over the long term."

So much for the rebound: a slump in Wesfarmers is weighing on the overall market, with investors hesitant to step in ahead of today's local GDP data and key global events tomorrow.

The ASX is down 0.1 per cent at 5659.4, hovering at four-month lows as losers in the benchmark index outpace winners two-to-one in early trade.

The performance of blue chips is mixed: while the big miners are posting gains thanks to rises in commodity prices, consumer staples and health-care stocks are heading south.

The biggest drag on the benchmark index comes from Wesfarmers, down 2.2 per cent, after the conglomerate told investors at its strategy day it will ramp up investments in Coles.

James Hardie is down 2 per cent, trading ex-dividend.

The big banks are flat to slightly higher, taking a break from the sell-off of the past sessions.

"While major international stock markets remain relatively firm, the ongoing rally in bonds and gold plus the weak US dollar is interesting," says CMC chief market analyst Ric Spooner. "It suggests caution ahead of this week's major risk events and a view that the US Fed is going to be constrained by "stubbornly low inflation as it moves into next year."

On 'Super Thursday' tomorrow, we get the UK election, an ECB meeting plus ensuing press conference by Mario Draghi as well as former FBI chief James Comey testifying  before the Senate Intelligence Committee.

Global markets find themselves in a holding pattern, IG chief strategist John Kicklighter says:

On the one hand, we are heading into a familiar seasonal vortex of inactivity for the developed world's markets. And yet, conditions are reflecting more than the traditional mid-year lull with a market that has positioned itself for a progressive and extreme reach for return.

There is a tangible sense of doubt among many bulls about the exposure that they have built up over the months and years, but little will to jump off the train. Though, given the increasing number of economic, geopolitical, monetary and financial threats popping up around the globe; a passive obliviousness is not a wise approach to managing one's investments.

By the time US liquidity took the yoke, there was already a mild risk aversion hanging over the world's capital markets. The S&P 500 eased back for the second consecutive session on the open – though we are still an easy stone's throw to record highs. It is worth noting that the US benchmark has gone 13 trading days (excluding weekends and holidays) without a 1 per cent drop, 329 days without a 10 per cent correction and 2,069 since the last 20 percent correction – the technical 'bear' market. The question traders need to ask themselves is whether such long breaks make a rebalancing more imminent.

While the docket ahead has a range of impressive event risk,  anticipation will keep drawing traders' attention forward. Thursday's explosive mix between the ECB rate decision, the UK's general election and former US FBI Director James Comey's testimony before Congress can readily stir up hornets' nests individually or collectively. We shouldn't be too surprised if the market decides to hold off on major changes in exposure until the lightning has struck.

Here's more

The Australian dollar hit a one-month high overnight, breaking through the US75c barrier after the Reserve Bank reaffirmed its expectations of strengthening economic growth in its monthly statement.

The dollar is trading at US75.12¢, after hitting what NAB economist Tapas Strickland called a "wall of confusion" over the past 24 hours. It initially fell 0.4 per cent on the release of weaker-than-expected net export and government spending figures at 11.30am yesterday, then fully reversed the decline as traders digested the latest RBA statement.

As it kept interest rates on hold at 1.5 per cent for the ninth straight month, the central bank indicated it would look through any weakness in the first-quarter GDP figures, due out at 11.30am today.

"Economic growth is still expected to increase gradually over the next couple of years to a little above 3 per cent ... despite quarter-to-quarter variation in the growth figures," the central bank stated, a counter to some of the gloomier predictions on the figure made in recent days by private sector economists.

However, a figure below 0.1 per cent could still trigger a retreat for the currency, said Patersons Securities economic strategist Tony Farnham. 

"If a negative print is delivered, investors are bound to show some concern (even if some of this softness can be explained away by one-off issues such as inclement weather)," he said. 

Regardless of the GDP outcome, the global outlook may quickly shift for the Australian dollar, said Westpac chief currency strategist Robert Rennie. He wrote the currency appeared "fairly priced", for now. 

"[But] with the Fed set to raise rates next week and commodity prices expected to weaken as we move through the end of the year, strength into the US75.00¢/75.50¢ region is seen as a sell opportunity."

In local corporate news, private equity group KKR has made a $2.2 billion buyout proposal for former market darling Vocus Group.

KKR has made a $3.50 per share offer, valuing Vocus at $2.2 billion - it currently has a market capitalisation of $1.78 billion. 

$VOC receives $3.50 #takeover offer, +22% above last traded price, 14% of the register is #short #sold 6th most #shorted on #ASX200 #ausbiz pic.twitter.com/CBiFnwcZjS

— Matt Felsman (@mattfelsman) June 6, 2017

The proposal is subject to KKR being satisfied with due diligence, availability of finance of recommendation of Vocus' board.

It also assumes no dividends will be paid before the implementation of a scheme, performance rights acquired or cancelled, Vocus has no less than a normal level of working capital upon completion of the deal, net debt does not rise above $1.1 billion by the end of this financial year, and full-year EBITDA comes in between $365 million and $375 million.

"The Vocus board notes that there is no certainty the indicative proposal will result in an offer for Vocus, what the terms of any offer would be, or whether there will be a recommendation by the Vocus board," Vocus said.

The approach from private equity should come as no surprise and is likely to draw out more suitors, both private equity and trade, for a potential bidding war.

After a flurry of corporate activity over the last two years - Vocus has completed a $1.2 billion merger with Amcom, a $3.8 billion merger with M2 Group and finally bought Nextgen for $807 million – the company has failed to live up to investor expectations, with the stock crashing 69 per cent in the last 12 months. 

Gold rose to the highest in seven months overnight, flirting with the $US1300 level, on a slump in the US dollar to a seven-month low and safe-haven demand driven by a rift in the Middle East, an upcoming European Central Bank meeting and the British election.

Investors were also drawn to gold, seen as a safe place to park assets, by uncertainty around the testimony to a Senate committee by former FBI Director James Comey.

A weaker US dollar makes gold cheaper for holders of other currencies, while lower yields reduce the opportunity cost of holding non-yielding bullion. Weak economic data from the United States has reduced expectations of rapid US interest rate rises this year, but the Federal Reserve is expected to hike rates at its June policy meeting next week.

Interest rate rises push bond yields higher and tend to strengthen the dollar. Spot gold was up 1.1 per cent at $US1294.34 an ounce, having earlier touched its highest since November 9 at $US1295.97.

The US dollar index, which tracks the greenback against six major rivals, was down 0.18 per cent at 96.624.

Gold has risen more than 6 per cent since a low of $1,213.81 in early May as political turmoil in the United States created doubts that President Donald Trump could enact economic stimulus, pushing down the dollar and bond yields.

"Gold surged to highs since Election Day as geopolitical concerns with the UK election and Comey testimony both due Thursday as well as fresh tensions on the Arabian peninsula triggered strong buying in spot as well as options," said Tai Wong, director of base and precious metals trading for BMO Capital Markets in New York.

From a technical standpoint, gold may be poised for further gains, analysts said.

"The long-term bearish trend line that had been in place since the year 2011 has broken down and this could pave the way for significant long-term gains," said Fawad Razaqzada, market analyst at Forex.com. "A decisive break above the last swing high at $US1295 is what the bulls want to see now."

And here are the overnight market highlights by the numbers:

• SPI futures up 7 points, or 0.1 per cent
• AUD up 0.33 to US75.08c.
• On Wall St, Dow down 0.2 per cent, S&P500 down 0.3 per cent, Nasdaq down 0.3 per cent
• In New York, BHP up 0.7 per cent, Rio up 1.2 per cent. 
• In Europe, Stoxx 50 down 0.8 per cent
• Spot gold up 1 per cent to $1292.91.
• Brent crude up 1.5 per cent to $50.21
• Iron ore up 0.2 per cent to $US56.03
• Dalian iron ore down 1 per cent at 427.5 yuan
• LME Copper down 1.5 per cent to $US1,903.00
• 10-year bond yield: US 2.14%, Germany 0.25%, Australia 2.37%

On the economic agenda:

• Q1 GDP data from ABS at 11:30am AEST

​Analyst rating changes:

• Australian Vintage (AVG): New buy at APP Securities, PT
  $0.60
• HFA Holdings (HFA): New buy at Ord Minnett, PT $2.85
• Regis Resources (RRL): Cut to sell at Morningstar
• Sky Network TV (SKT): Raised to buy at Morningstar

ALS and James Hardie trade ex-dividend

Major US stock indices ended near their session lows overnight as traders shied away from risky assets ahead of major political and economic headlines expected tonight.

Britain's general election as it maps its exit from the European Union, the European Central Bank's policy meeting and former FBI Director James Comey's testimony before a Senate panel could all affect investor sentiment.

Comey was investigating whether Donald Trump's presidential campaign and Russia colluded to sway the 2016 USelection when he was fired by Trump in May. His testimony could dampen already flagging momentum for the President's agenda of rolling back regulations and overhauling the tax code.

British Prime Minister Theresa May could increase her parliamentary majority, an opinion poll showed on Tuesday, shortly after another survey suggested the race with the opposition Labour Party was neck-and-neck.

Investors will also watch out for the European Central Bank's meeting, where policymakers are expected to take a more benign view of the economy, according to sources.

"We have a lot of stuff on Thursday. If you're looking for days where we can see some long-awaited volatility, I'd say that's probably going to be Thursday and Friday," said Anthony Conroy, president at brokerage Abel Noser in New York.

"You got to position yourself to whatever could happen Thursday so you take a little bit off the table."

While the major Wall St benchmarks fell around 0.3 per cent, safe-havens were bid up as traders sold out of stocks. Gold rose 1.1 per cent to $US1293.47 an ounce after earlier touching its highest since November. US 10-year Treasury yields touched a session low of 2.129 per cent, their lowest level since the days following the November US Presidential election.

Investors had already taken a defensive stance this week following a diplomatic spat among energy producing nations in the Middle East and the weekend's terror attack in London.