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A new round of selling in the big four banks after the South Australian government unveiled its own state-based version of the federal bank levy kept the market suppressed today, holding back the market's recovery after a heavy mid-week sell-off.
The benchmark S&P/ASX200 index ended the session up 15 points, gaining 0.2 per cent to 5715.9. But two days of positive trading weren't enough to overcome Wednesday's large 1.6 per cent drop, as well as Tuesday's smaller one, with the index ending the week down 1.0 per cent. The broader All Ordinaries index ended the week down 0.9 per cent.
The big four banks were heavily sold off in the early part of the week, and initially recovered on Thursday before news of the additional bank levy sent them tumbling again. They ended the week down between 1.2 and 1.7 per cent, wit the exception of CBA which was only 0.8 per cent lower.
"Assuming this levy is implemented, it will cost banks an additional $13 million to $16 million of earnings (0.1 to 0.2 per cent each). However, the significance of this tax is more material as it opens the possibility for other states to try and implement similar measures, effectively doubling the current 6 basis point levy," said Macquarie's analysts in a note to clients.
"We see the current challenging political landscape as an ongoing drag on sentiment for Australian banks and the market. This uncertainty is likely to result in share-price pressures and higher cost of capital for Australian corporates."
A team of Morgan Stanley equity analysts wrote that they feared the threat to bank profitability from governments in Australia was emerging "faster than expected". The additional levy, they said, "raises the risk of unintended consequences for the Australian economy at a time when consumers face a cash flow crunch and the outlook for the mortgage market has fundamentally changed."
Resources and energy stocks did well on Friday, but for the most part finished the week in the red. Oil stocks were some of the major losers on the index, after the oil price's continuing declines plunged the commodity into a bear market. Woodside Petroleum was 4.0 per cent lower over the week, Santos fell 3.6 per cent while Caltex lost 1.9 per cent. The energy subindex of the ASX200 shed 3.5 per cent over the week.
The materials subindex had a relatively stronger week, down just 1.0 per cent. BHP Billiton fell 2.5 per cent while Rio Tinto shed 2.1 per cent.
The West Australian government could follow South Australia and impose its own tax on banks as the federal government rejects accusations from big business that its major bank levy gave the green light to such behaviour.
With the business community furious as what it now regards as open season on anyone turning a healthy profit, WA Labor Treasurer Ben Wyatt said his cash-strapped government was actively considering the idea.
He said adopting a bank tax would not have much impact on his state's share of GST revenue "so that's why perhaps it may be an attractive opportunity for WA".
"I understand the banks would be somewhat unhappy about the proposal being put forward, but I'm assuming that all state treasurers are looking at this now," he said.
However, AFR Weekend contacted the governments of Tasmania, Queensland, NSW and Victoria and all ruled out following suit.
Meanwhile, Westpac CEO Brian Hartzer is fuming about the bank tax and says the bank is reconsidering investments in South Australia.
The shock tax piggybacking on the federal government's bank levy will "call into question" Westpac's interest in backing South Australia, and will "cause us to think carefully about our choices" about where to invest, he said.
The tax also raised questions about whether the federal government is fully in control of tax policy and and would confuse foreign investors in the banking sector about whether to provide the economy with funding, the Westpac boss said.
Is Macron the new Modi?
Certainly there's a lot of hype around France's President, and his resounding victory in round two of the parliamentary elections last weekend has only increased the weight of expectations on his youthful shoulders.
Just like when Narendra Modi took office in India some three years ago, sparking a rally on the Mumbai stock exchange as investors bet his touted reforms would unleash an economic boom, global investors are now hoping Macron will re-energise efforts to reform the French labour market.
"We expect the Macron reforms to transform France like the Thatcher reforms had cured the erstwhile sick man of Europe, the United Kingdom, some 35 years ago," said Berenberg European economist Holger Schmieding.
"And like the 'Agenda 2010' reforms had turned Germany from one of the weakest into one of the strongest economies in Europe almost 15 years ago."
With its high birth rate, France could even achieve a trend rate of growth beyond Germany's current 1.6 per cent pace over time, Schmieding said, adding: "After Germany's golden decade now, it could be France's turn again in the 2020s."
That may be a tad optimistic, considering the power of French unions.
"The scale of the task that lies ahead and the repeated failure of previous administrations to successfully implement reforms may help to explain the relative neutral reaction in markets," ANZ senior economist Tom Kenny says.
Nonetheless Macron's victory comes at a time when Europe is already extremely popular as an investment destination.
"Europe is the market everyone loves to love," says Standard Life Investments head of global strategy Andrew Milligan.
Lots of US money has indeed been flowing into the region's sharemarkets, driving the likes of Germany's DAX to record highs. The 2017 gains on France's CAC-40 may be a bit more modest than in Frankfurt, but at 8.6 per cent they easily outpace the ASX's paltry gains of less than 1 per cent.
And the euro is the best performer among the world's largest currencies this quarter, rising nearly 6 per cent against the Aussie dollar (despite being well down from its peak in early June).
The problem with crowded trades - the ones that are everyone's favourite - is that it doesn't take much for profit taking, Milligan warns.
Milligan says that the current political landscape is "the best that France has faced for years", but he worries that - like in Modi's case - the expectations resting on Macron are just too high, making it very easy to disappoint the market.
Green with Envy, the upper-mid market womenswear chain which calls itself the "Australian destination for fashion", is shutting its doors after almost two decades.
"The end of an era!" the retailer told its mailing this morning. "After 18 years, Green with Envy is closing its doors! Everything is now 50 per cent off."
The news caused the company's website to crash. Its voice mailbox was full and its stores - in the Melbourne CBD and on Chapel Street, South Yarra - did not answer calls. Green with Envy sells dresses ranging in price from about $280 and $600.
The retail sector is "verging on recession", investment bank UBS said earlier this year, as people cut back in response to low wage growth and high utility and housing costs.
Detailed employment numbers released yesterday showed the retail sector had shed almost 20,000 jobs in the year to the end of May.
Wind farm operator Infigen Energy has suffered a share price plunge after warning poor wind conditions, including the group's two worst production months on record, are expected to cut full year earnings by around 7 per cent.
Infigen says poor fourth quarter wind conditions to date and continuing weakness in the remainder of the period have reduced its forecast underlying earnings to $136 million to $138 million, down from the $147 million flagged in April.
The company, which operates wind farms in NSW, South Australia and Western Australia, said the last three months of 2016-17 would be its worst for energy production since establishing its current asset portfolio in 2012.
In a statement to the ASX, Infigen said guidance given in April was based on past production and analysis of weather forecasts.
Shares are down 5.1 per cent at 74 cents. They have been falling since April, when the company announced a $151 million entitlement offer, and are now at their lowest level since October.
The Australian dollar is on track for its worst weekly performance since early April, hurt by weak commodity prices with oil at multi-month lows and no signs of revival in iron ore.
The Aussie is hovering near more than one-week lows US75.53¢. The Aussie had been on an uptrend since the beginning of June but a drop in commodity prices last week saw it falter after touching a 2-1/2-month high of US76.36¢.
The Aussie has also been pressured by an interest rate hike in the United States this month, while the RBA has made it clear it is in nor rush to tighten monetary policy. That has narrowed the rate differential between the two to plus 25 basis points, with some traders speculating the spread might turn negative if the US Federal Reserve continues to tighten further.
"In the past, a negative Australia-US interest rate differential has put considerable downward pressure on the AUD/USD exchange rate," said Richard Grace, chief currency strategist at Commonwealth Bank.
"In fact, the last time the Australia-US official interest rate differential went negative, AUD/USD depreciated an initial 25 per cent, and then after an 18-month recovery, declined another 28 per cent to its April 2001 record low of 0.4776."
However, Grace expects the prospect of a negative rate differential to have limited impact on the Aussie this time around largely thanks to improvement in the country's current account deficit.
"We would be surprised if the AUD/USD fell below its December 2016 level of US71.60¢ simply because there was a negative Australia-US official interest rate differential. It would have to take more than that."
For the near term, ThinkMarkets senior analyst Matt Simpson expects the Aussie to hang onto a 75-handle, partly because the US dollar index has stalled beneath key resistance but also because US data overnight provides the chance of disappointing once more.
Flash manufacturing PMI data is expected to tick higher, but has disappointed over the past months.
Simpson says that the range between US75.00¢ and US75.17¢ remains pivotal.
"(It's) an area which encourages bulls to enter whilst above it, or sellers to step on if beneath it."
As easy money continues to inflate asset prices - witness Wall Street hovering at all-time highs, not to mention property markets around the world - Societe Generale's resident bear Albert Edwards wonders how long it will be before disgruntled citizens turn their rage to central bankers.
"I expect central bank independence will be (and should be) the next casualty of the current political turmoil," he says in his most recent note, released overnight.
Since the GFC central bankers have collectively spent the last decade stepping up the pace of money printing to new extremes in an attempt to drown the global economy in liquidity, while couching their actions in plausible theories such as ‘secular stagnation’, he says.
Edwards laments that there is no recognition at all by central bankers that it may well be their own easy money and zero interest rate policies that are actually causing the stagnation in growth while at the same time wealth inequality surges to intolerable heights.
But the time of reckoning may be nearing,
In the immediate aftermath of the 2008 financial crisis, politicians skilfully diverted the publics’ anger away from themselves by scapegoating ‘the bankers’, Edwards says.
After another eight years of economic stagnation that excuse no longer is tenable and politicians themselves are now taking the flak, as seen in the "shock' outcome of numerous elections over the past year or so.
"But citizen revolutionaries will, I think, soon turn their fire on those who I believe are truly responsible for their plight," he says. "Yellen et al will inevitably be sacrificed at the altar of political expediency as citizen rage explodes."
This will happen when the next "inevitable" economic and financial collapse comes, he says: "(As) a consequence of yet another global asset bubble bursting, politicians will be looking for the next sacrificial lambs to throw to the wolves."
"It's hard to believe Yellen, Draghi and Carney won't be those bleating lambs. But then the mob will devour the very independence of those institutions with the connivance of a political class willing to do anything to save their own skins."
APN Property Group plans to float a petrol station property trust in late July after raising almost $175 million in fresh capital for the listing.
The new fund, to be known at the Convenience Retail REIT, will hold 67 properties in a portfolio worth $323.3 million. The portfolio's average lease expiry is 13 years.
Its initial market capitalisation is estimated at $249.1 million, according to a product disclosure statement lodged with the corporate regulator.
The $3 offer price comes at a 9.9 premium to the new trust's net tangible assets. From that outlay, investors can expect a 6.5 per cent dividend yield in the 2018 financial year.
The distribution return will rise to 6.75 per cent in 2019.
The petrol float has been long anticipated after the Melbourne-based fund manager, led by Tim Slattery, bought a $120 million portfolio of petrol stations from Puma Energy in August last year.
That followed with the launch in December last year of an unlisted fund holding 23 Puma Energy service stations in Queensland and New South Wales.
"While the REIT is very simple, we really like the defensive nature of this asset class, which is underpinned by non-discretionary consumer spending and long term leases with strong cash yields," Mr Slattery said.
APN Property Group was one of the first institutional owners of service stations in Australia, buying a 19-asset portfolio in 2002.
The new trust is 65 per cent leased to Puma Energy Australia and 18 per cent to Woolworths. Its other tenants include 7-Eleven, Caltex, Viva Energy Australia and fast food outlets.
Building products supplier CSR expects a sharp jump in energy costs over the next year and has warned that Australian manufacturing businesses could face plant closures and job losses if the situation continues.
"There will be challenges in the year ahead, particularly as all of our businesses are facing higher energy costs," CSR's chairman Jeremy Sutcliffe told shareholders at the company's annual general meeting.
"The increase in energy costs will be one that many businesses, including CSR, will find extremely hard to recover, notwithstanding efficiency gains and cost control."
The company has estimated the total energy bill for its main building products business will rise by 17 per cent from a year ago, to exceed $100 million in the next 12 months. Its Viridian glass business will be particularly impacted as it faces strong import competition from exporting nations not facing similar energy cost imposts, he said.
Despite the rising costs, CSR has outlined a strong earnings outlook, with earnings for the year to March 2018 expected to be higher than in the previous year.
Earnings would be helped by higher profits from the property division and benefits from hedging positions taken in aluminium, Sutcliffe said.
The company has also used the improvement in short term aluminium pricing to increase its hedging position over the next three years, in an effort to reduce future earnings volatility.
Shares are up 0.7 per cent to $4.26.
Australia's latest population milestone is sure to reignite the immigration debate, Michael Pascoe writes:
In a few minutes, a little after lunch, the population clock on the Australian Bureau of Statistics website will tick over to 24.5 million.
The clock struck 24 million in February last year and, at the present rate of adding a net extra person every one minute and 22 seconds, it will hit 25 million in early October next year. Little Australia – and we are still little – continues to grow up.
With housing prices high in Sydney and Melbourne and national wages growth low, the anti-immigration forces are mustering on claimed economic grounds, as well as the usual populist fringe attacking as "un-Australian" whatever the latest wave of migrants might be.
Yet a strong multi-cultural nation is very Australian indeed. Some 28 per cent of us were born overseas, wave after wave absorbed. The sectarian xenophobes are the un-Australian minority.
Australia's particular problems in coping with population growth partly come from the strength of that growth being unexpected. Property analyst Pete Wargent observes there are some 2.95 million more of us today than was forecast by the ABS to be the case in 1999.
"That's not to decry the forecasts, which must be always be wrong to some extent," writes Wargent.
"Rather this is to show the potential scale of the impact from the mining boom on the creaking infrastructure deficit."
So, throw the new babies out with the infrastructure underinvestment bathwater, or rise to the challenge and fix the infrastructure?
There's been plenty of talk of a looming price war in the grocery market after Coles flagged higher investments at the recent Wesfarmers strategy day, but UBS analyst Ben Gilbert doubts that will happen.
"We view a price war as unlikely, and believe much of Coles increased 'investment' is the result of negative operating leverage, labour investment and to a lesser extent price," he says in a note to clients, calculating the probability of a price war at about 25 per cent (up from 20% previously).
Gilbert views the market as rational and expects industry margins to bottom this financial year, with the outlook for grocery improving following the lowest growth in more than 30 years over financial year 2016.
Gilbert also reckons that consensus margin forecasts for Woolies are too low.
"Woolworths remains the greatest beneficiary of a rational market and improved growth as improved execution drives share gains and margin improvement," Gilbert says, adding he sees scope for an about 7 per cent upgrade to forecast financial year 2020 earnings.
UBS has a 'buy' recommendation on Woolies, despite the stock being "richly valuated", a 'hold' on Wesfarmers and a 'sell' on Metcash, saying that industry feedback suggested share loss for the latter had accelerated and top line pressure remain.
"Outside of a price war, a resurgent Aldi is the key risk to sector earnings, with Amazons entry in Australia/New Zealand fresh some way off, in our view," Gilbert says.
It is one of the heaviest shorted stocks on the market and it is easy to understand why, given lithium producer Orocobre's habit of catching investors off balance.
In February it was problems with evaporation rates at its project in Chile, which forced the company to warn of lost production. Heavy selling pushed the shares below $2.80 before they recovered lost ground.
Now, it is inclement weather, with unseasonably heavy snow which has again hit output with lithium carbonate production. June quarter output is now expected to come in at 2,400 - 2,500 tonnes, with fiscal 2017 production seen at 11,700 - 11,800 tonnes of lithium carbonate.
Unsurprisingly, the shares are off 5.3 per cent at $3.37.
Citi has taken the opportunity to downgrade its rating to neutral from 'buy', even though it has retained a $3.90 share price target for the shares.
It expects the announcement from late Thursday will have only a limited impact on the valuation of Orocobre's shares, especially since the poor weather is likely to help sustain the price of lithium carbonate, which is up around 11 per cent over the past few months.
Can you really blame South Australia for following Canberra's lead to the treasure chest?
The federal government has dismissed accusations from the business community that its bank tax "let the genie out of the bottle" and led to the South Australian government following suit in its budget released yesterday.
With the business community furious as what it now regards as open season on anyone turning a healthy profit, Prime Minister Malcolm Turnbull said the SA government was free to do as it wished. But he warned SA would put itself at a disadvantage by going it alone.
"The major bank levy that we imposed is a national and consistent levy on major bank liabilities," he said.
"The South Australian tax, that was announced yesterday, of course it's limited only to South Australia and the question that (Premier Jay) Weatherill has got to answer, is that, is his decision going to make business in South Australia more competitive or less competitive?
"That's one thing to have a tax that covers the whole country, but when a state imposes higher business taxes within its own jurisdiction, is that going to drive investment, support jobs within that state or is in fact going to make it less competitive?"
Ultimately, however, the Prime Minister did not condemn the move.
"The states have taxing powers and they can raise such taxes as they wish and they do," he said.
NAB has followed its peers by raising its variable rates for interest-only mortgages in a bid to slow down riskier lending, while cutting rates by a smaller amount for people paying down debt on a house in which they live.
NAB lifted interest-only rates for both owner-occupiers and investors by 0.35 percentage points as it looks to keep interest-only lending below less than 30 per cent of new residential mortgages, as demanded by APRA.
That compares with Westpac's 0.34 percentage point increase for the same types of customers this week, and ANZ's 0.3 percentage point rise two weeks ago.
NAB also dropped principal and interest variable rates for owner-occupiers by 0.08 percentage points following similar moves by ANZ and Westpac over the past two weeks.
Banks have in recent months charged people with interest-only loans a higher premium, after the Australian Prudential Regulation Authority in March introduced a new cap for this type of loan, which is most popular with property investors.
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Shares have edged higher at the open, following the lead from global markets, but some losses in the big banks are holding the ASX back.
The benchmark index is up 0.3 per cent at 5722.3, with financials the main drag.
The big banks and Macquarie are all down around 0.5 per cent with the exception of Westpac, which has gained 0.6 per cent.
That may be because Westpac's shares were hit hardest late yesterday when news of South Australia's new bank levy first.
However, losses in the banks were higher in the first minutes of trade, showing that the reaction may be overdone.
The overall impact of the tax on the banks' earnings is likely to be negligible but investors are worried about the possibility of other states introducing similar taxes.
"In general terms this serves as a reminder that Australian shareholders generally and bank shareholders in particular, are in a period of heightened political risk that needs to be factored into investment decisions," says CMC chief market analyst Ric Spooner.
Most other sectors are posting gains, led by healthcare, which may be profiting from another record session for US stocks in the sector. CSL has gained 1 per cent to a new all-time high of $142.36.
The big miners are all higher thanks to gains in commodity prices overnight.
Bank analysts are really not liking the SA government's new levy on the big banks, warning of an "alarming trend" that's likely to keep the pressure on shares of the big four and Macquarie.
Assuming this levy is implemented, it will cost banks an additional $13 million to $16 million of earnings, or 0.1 to 0.2 per cent each, Macquarie analysts reckon.
But the bigger worry for the analysts is that it opens the possibility for other states to try and implement similar measures, effectively doubling the federal 6 basis point levy.
"We see the current challenging political landscape as an ongoing drag on sentiment for Australian banks and the market. This uncertainty is likely to result in share-price pressures and higher cost of capital for Australian corporates," the analysts warn.
Raiding the banks because they are "very profitable" is a concerning trend that, in Macquarie's view, is likely to alarm the investment community both domestically and offshore.
"To this extent, we see a discount valuation relative to history as justifiable with the banks currently trading at an about 6 per cent discount to their average 5yr price-earnings ratio relative to industrials."
Ardent Leisure has cut its second-half distribution to 1¢ from 5.5¢ last year and lowered its full-year earnings forecast as a result of falling sales at its key US business and reduced business at its Australian Dreamworld theme park.
Shares have opened 3 per cent lower at $2.07.
The troubled entertainment company forecast EBITDA profit at its Main Event Entertainment to fall to between $US44 million to $US45 million for the year to June 2017, well below the $US64 million it posted last year.
"Like-for-like [Main Event] constant centre sales growth for the fourth quarter is negative, but represents a solid improvement on third quarter trends," Ardent said in a statement.
"The trend has improved progressively through the second half of the year, with sequential month on month improvement during the fourth quarter.
"In addition, one planned FY17 store opening has been delayed into July and new store openings have been weighted towards the end of the year, with five of the 10 new stores opened in FY17 opening in the fourth quarter. Management believes the underlying Main Event proposition remains very positive."
The total 3¢ dividend for this financial year is less than a quarter of last year's total 12.5¢.
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As investors suffer the slings and arrows of outrageous fortune, IG analyst John Kicklighter sees some recurring patterns:
The market's are – so far – living out the expectations set by seasonality statistics. Last week's volatility charged by a round of major central bank announcements continues to deflate into this week. While we are not currently at the multi-year or record lows for the range of volatility measures for equities, FX, commodities, emerging markets and other key asset types; we are within stones throw. Historically speaking, June sees on average the lowest reading for the VIX of any calendar month.
Yet where activity may seem to be fulfilling deeply held beliefs by the seasoned trading rank, the backdrop speaks to less complacency and obliviousness than the popular measures suggest. Where key equity indexes are pushing to record highs and volatility measures to their lows, open interest behind Euro, VIX and Pound futures – all seemingly bound to range – while open interest behind the favourite S&P 500 emini futures levelled out a few years ago, despite the continued charge higher. What does that mean: a seemingly quiet surface, but concern and exceptional exposure beneath the surface.
Chinese equity markets are still glowing from the news earlier this week that the world's top ETF purveyor MSCI had decided to accept a range of A-shares from the country's stock market into its popular emerging market products. This is the financial market equivalent of the IMF's acceptance of the Yuan into its SDR basket.
In other words, it legitimises the country's markets and solidifies its place as a global player. That said, the world will accept its risks along with its opportunities. An official at the China Banking Regulatory Commission warned that a some large companies could pose a systemic risk to the country's banks. It is unusual to see such concerns aired openly, which has global investors even further unnerved.
The Norwegian crown was the main mover in an otherwise dormant market in major global currencies overnight, getting a lift after the country's central bank removed its explicit easing bias.
The bank also lifted its rate forecasts for 2017 and 2018, pushing the Norwegian crown, also known as the "Nokkie" by traders, half a per cent higher against the US dollar and the euro. It last stood up 0.4 per cent at 8.4987 crowns per US dollar and 9.4853 crowns per euro.
"It's (the move) is all about the change in their rate path - no longer seeing a possible probability of a rate cut but now moving their rate path unchanged for this year, next year, and then higher in 2019," said Niels Christensen, currency strategist with Nordea in Copenhagen.
Echoing comments from the Bank of Canada and from our own RBA governor, the statement said there were "signs of impending reversal in the decline in petroleum investment" with the prospect of a modest rise in the near term.
"It is clear that there has been a shift in central bank policy amongst the advanced commodity countries, who are seeing the drag from the mining/oil downturn bottoming and possibly becoming a tailwind in the near future," says NAB economist Tapas Strickland.
"The missing ingredient of course remains inflation and the Norges Bank forecasts inflation will hold below its target of 2.5 per cent through at least 2020 (note core inflation is currently 1.6 per cent)."
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