Markets Live: Banks lead ASX gains

One of the big puzzles facing economists both in the US and here is why decent jobs growth isn't creating wage pressures.

Yesterday's data showed that after three solid months of jobs creation the unemployment rate has dropped to a four-year low of 5.5 per cent, but Morgan Stanley says the economy will need to add many more jobs before wage growth picks up from its current anaemic pace.

"We believe this recovery in jobs growth will need to be sustained for much longer before it translates into any meaningful wage pressure," the broker's economists say in a note to clients.

They point at the global structural trend towards casual/self-employment as well as persistently high underemployment, which remains a fraction below its 48-year highs at 8.8 per cent, as reasons for the absence of wage pressures.

Youth unemployment has edged lower over the last six months, but remains elevated at 12.8 per cent (versus its 20-year average of 12.0 per cent), they add.

"Our analysis of the national income account shows that average compensation has also been depressed by a mix shift towards lower paid industries and positions."

Ardent Leisure's biggest shareholders have set the date for a vote on appointing new directors to the board, saying they have "significant concerns" about how the embattled theme parks operator has been run.

Two companies - Portfolio Services and Kayaal - which control 9.86 per cent of Ardent between them, have called a meeting of shareholders in Sydney on September 4 to ask for four new appointments to the Ardent board.

Ardent has previously criticised the push for new board members, saying it clashes with the company's strategy of expanding its US-based directors, and on Friday said it would consider its response.

a2Milk shares are charging ahead, lifting 8 per cent to $3.615 after the dairy company upgraded sales guidance for the second time in two months due to strong demand for its infant formula.

The company says it now expects revenue for the 12 months to June 30 of approximately $NZ545 million ($518 million), $NZ20 million more than it predicted in April.

The firm, which is dual-listed on the ASX and NZ exchanges, said it has been working with formula manufacturer Synlait Milk to up production for the remainder of the financial year.

Schedule changes also mean that a2, whose first-half profit of $NZ39.4 million was more than it made in the whole of the last financial year, will lift marketing expenditure by $NZ10 million on the first half rather than the previously flagged $NZ15 million increase.

Share have gained more than 75 per cent this year.

Macquarie Group chief executive Nicholas Moore says the investment bank has no plans to move offshore after the government imposed a $6.2 billion levy on major banks.

"We've got no current plans to relocate to Singapore or anywhere else," he told a parliamentary inquiry. "There are absolutely no plans for that."

Macquarie this month had declined to rule out an overseas move after the government introduced the surprise tax on Australia's five biggest banks. 

Shares are off to a strong solid start, with gains across the board apart from the materials sector.

The ASX has added 0.3 per cent to 5781.4, putting it on track for a weekly gain of 1.8 per cent.

The ASX 200 has produced the unexpected this week, CMC chief market analyst Ric Spooner says.

"In the absence of any earth shattering macro news influencing the heavy weight financial or materials sectors, it has managed to produce high volatility. The index has moved by more than 1 per cent on each of the past three days."

Leading the gains today is the utilities sector, up 1 per cent following similar gains by defensive stocks on Wall Street.

Sagging oil prices take their toll on resource stocks, with BHP's 0.9 per cent loss the biggest drag on the benchmark index.

US equities have held up pretty well considering we have seen a changing dynamic in the financial landscape, IG's Chris Weston says:

The backdrop of this claim is that the USD has found its mojo and technical set-up has bene widely noted with the USD index finding solid buyers off the 2 February trend support, aggregated with clear divergence with the oscillators.

The Federal Reserve were the fundamental catalyst needed to pull the USD out of the doldrums, with their clearly hawkish assessment, at least relative to market pricing the trigger. The fact the USD was so unloved was perhaps the biggest red flag to traders and one would expect some mean reversion in positioning to occur in the short term.

The question seems to be around whether we are in for a period of USD outperformance? There is certainly an elevated risk this materialises and if trading is by and large a play on probability I would looking at USD longs with increased convictions.

Of course, today's Bank of Japan meeting (no set time) poses a risk, but little is expected in the way of catalysts, although we have seen some commentary of late from BoJ members and a focus on its "exit strategy". I would take a more neutral stance on AUD/USD .

So we have rising real yields, a potentially rising USD, falling inflation expectations and a focus on falling credit supply. What could go wrong? Not much, according to the equity markets who are still happy to buy the dip and are seemingly happy to do so as long as high grade and investment grade credit spreads remain at such low levels.

Equity follows credit. It does feel that some element of caution is warranted if this dynamic continues. I am surprised we haven't seen the US volatility Index ("VIX") up more than 2.4% and while the S&P 500 has not really moved too greatly there has been a rotation into more defensive sectors.

Asia looks interesting for the final day of the trading week. Japan is your natural hedge against USD appreciation, so this is where we could see outperformance today, although macro traders will be focused on commentary from the BoJ and will be keen to watch moves in the Japanese bond market.

Here's more

In corporate news, BHP Billiton has named former Amcor CEO Ken MacKenzie to chair its board as the world's biggest miner grapples with a mounting challenge from restive investors and slowing growth in China, its top customer.

MacKenzie replaces outgoing Jacques Nasser, who has held the job since 2010.

Nasser, who led BHP through a $US9 billion spin off of unwanted assets and a downturn in commodities prices, said last October he would step down from the board.

MacKenzie will take the role in September. The 53-year-old joined BHP's board as a non-executive director in September following 23 years with global packaging company Amcor - 10 of them as CEO and managing director.

Senior independent director Shriti Vadera said MacKenzie had a proven track record of delivering value for shareholders and extensive global executive experience.

Here's the overview of how major markets performed while you were sleeping:

• SPI futures up 19 points or 0.3% to 5723
• AUD -0.1% to 75.80 US cents (Overnight range: 75.68 - 76.32)
• On Wall St, Dow -0.1%, S&P 500 -0.2%, Nasdaq -0.5%
• In New York, BHP -1.8%, Rio -1.4%
• In Europe, Stoxx 50 -0.6%, FTSE -0.7%, CAC -0.5%, DAX -0.9%
• Spot gold -0.5% to $US1254.08 an ounce
• Brent crude -0.2% to $US46.92 a barrel
• Iron ore rises +1.5% to $US55.23 a tonne
• Dalian iron ore +1.4% to 429 yuan
• Steam coal +0.4% to $US80.80, Met coal -0.3% to US144.00
• LME aluminium -0.6% to $US1872 a tonne
• LME copper bid down 0.7% at $US5661 a tonne
• 10-year bond yield: US 2.16%, Germany 0.28%, Australia 2.35%

A few changes in analyst recommendations:

• Centuria Metropolitan REIT (CMA): Cut to hold at Shaw and Partners, price target $2.43
• CSL: Cut to hold at Morgans Financial, PT $140.17
• Galaxy Resources (GXY): New neutral at UBS,  PT $1.80
• Orocobre (ORE): New buy at UBS, PT $5
• Sirtex (SRX): Cut to hold at Morningstar
• Syrah Resources (SYR): New buy at UBS, PT $3.80

Sterling surged after as many as three members of the Bank of England's policy committee surprised financial markets by voting for a rise in interest rates.

Trading below $US1.27 before the BoE's decision, the pound leapt by a full cent to $US1.2795 after it emerged that Ian McCafferty and Michael Saunders had voted with existing policy hawk Kristin Forbes for higher borrowing costs.

At a time when the BoE has blamed a rise in inflation past its 2 per cent target on a weak pound, traders read the split vote as warning that officials could seek to defend the currency with rhetoric or action even as the economy overall slows.

It was also just the latest surprise in a week which has seen the pound slump after British Prime Minister Theresa May lost her parliamentary majority in an early election.

"There is a clear emphasis on the risk of a sustained inflation overshoot and the Bank of England probably does not want to be seen as being dismissive of such concerns," UBS Wealth Management's head of the UK investment office, Geoffrey Yu, said.

Two-year gilt yields hit their highest since May 10 as prices tumbled, and the eurozone's benchmark German 10-year bond yield also hit a day's high of 0.265 per cent.

But the implications for growth and company profits in an economy already slowing sharply were evident in a slump for both Britain's main FTSE 100 index and more domestically focused mid-caps.

A number of analysts emphasised that the vote may be chiefly a way of the BoE supporting the pound without actually changing policy conditions, noting also that Forbes is due to leave at the end of the month.

"With the economic outlook still challenging, wage growth will likely remain weak which should act as a drag on longer term inflation once the currency impact passes," Oanda analyst Craig Erlam said. "(That's) assuming we don't see further dramatic shifts lower in sterling."

Oil prices settled lower for a second straight session overnight, as the market was unable to rebound from Wednesday's decline on the back of a surprise build in US petrol inventories and ongoing worries about heavy global supply.

The US dollar rose to its highest in more than two weeks, further weighing on oil by making it more expensive for buyers using other currencies.

Still, Brent crude fell to a session low of $US46.70 a barrel, its weakest since May 5 and near six-month lows. It settled down 8 cents at $US46.92 a barrel.

Oil has slumped despite output cuts of 1.8 million barrels a day by OPEC and non-OPEC producers including Russia. On May 25, the countries said they agreed to extend the cuts nine months through next March. Yet crude prices have slid about 12 per cent since that day as other countries have boosted output.

Saudi Arabia's oil exports are expected to fall below 7 million barrels per day this summer, according to industry sources familiar with the matter, and Russian oil exports were seen as broadly flat in the third quarter.

"Libya and Nigeria have brought more oil online and that's really hindering" OPEC's efforts, said Tariq Zahir, crude trader and managing member at Tyche Capital Advisors in New York.

A recent slump in technology stocks continued overnight, dragging on major US indexes, while investors fretted about the economy's health after the Federal Reserve lifted interest rates.

The S&P technology sector fell 0.5 per cent, extending a slide that began last Friday. The sector cut steeper losses from earlier in the session, as did the benchmark S&P 500.

Apple shares ended down 0.6 per cent while Google parent Alphabet dropped 0.8 per cent after separate bearish analysts reports on the two tech heavyweights.

The consumer discretionary sector dropped 0.5 per cent, as Amazon shares closed down 1.3 per cent. Nike fell 3.2 per cent after the company said it would cut about 2 per cent of its global workforce and eliminate a quarter of its shoe styles.

Tech, still the best-performing group this year, and consumer discretionary have been among the sectors that have fuelled the S&P 500's 8.6-per cent rally in 2017.

"You seem to be losing some momentum in the big growth names that have led the market so far this year," said Walter Todd, chief investment officer at Greenwood Capital Associates. "At the same time, the economic data has just not been good enough to get investors excited about buying into other areas of the market."

The Dow Jones Industrial Average fell 14.66 points, or 0.07 per cent, to 21,359.9, the S&P 500 lost 5.46 points, or 0.22 per cent, to 2,432.46 and the Nasdaq Composite dropped 29.39 points, or 0.47 per cent, to 6,165.50.

Financials and energy, sectors that should thrive during economic expansions, also sold off. Financials slipped 0.4 per cent and energy fell 0.7 per cent.

Utilities and real estate, which are high-dividend paying groups known as "bond proxies", gained 0.6 per cent and 0.5 per cent, respectively, making them the best performing sectors along with the 0.6 per cent rise for industrials.

"If your best-performing sectors are real estate and utilities, it's a good sign that interest rates are dominating the equity market," said Brian Nick, chief investment strategist with TIAA Investments, an affiliate of Nuveen.

Long-dated US Treasury yields had tumbled to their lowest since early November on Wednesday after surprisingly weak data on inflation and retail sales overshadowed the Fed's interest rate hike.

Following that disappointing economic data, a report on Thursday showed the number of Americans filing for unemployment benefits fell more than expected last week, pointing to shrinking labour market slack that could allow the Fed to raise interest rates again this year despite moderate inflation growth.

"Monetary policy got hawkish," said John Augustine, chief investment officer at Huntington National Bank. "Fiscal policy is getting delayed and inflation will not cooperate the way the markets and the Fed want it to."

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

Your editors today are Jens Meyer and Patrick Commins.

This blog is not intended as investment advice.

Fairfax Media with wires.