The shroud of tranquility that has blanketed asset markets for the last eight months has been pulled back a bit.
Volatility is suddenly proving hard to get rid of in places like semiconductors, whose commercial ubiquity makes them a proxy in some eyes for economic growth. Treasury yields are rising at the same time the US dollar's falling, hinting at anxiety about central bank policy. This year's hottest risk-on trade, the so-called Fang block of US megacaps, has started taking lumps.
It's not that a bout of turbulence wasn't due: volatility in benchmark stock indexes has spent the year hovering at roughly half its average level since 1991. But aspects of the market's action in the last few days suggest investors are a little more bothered than they had been about the economy's ability to withstand a central bank tightening cycle.
"Draghi opened up Pandora's box two days ago and Yellen did not close it," said Andrew Brenner, head of international fixed income for National Alliance Capital Markets. "Both Yellen and Fischer talked about the high level of asset prices a la equities. Perfect storm all at once. Coordinated? No, but inevitable."
Going by the performance of exchange-traded funds, stocks and bonds suffered one of their biggest concerted sell-offs of the year overnight. The SPDR S&P 500 ETF Trust slipped 0.9 per cent while the iShares 20+ Year Treasury Bond ETF fell 0.8 per cent, reprising a lockstep decline from Tuesday that before then hadn't happened since December.
At its highest point Thursday, the CBOE Volatility Index was up 51 per cent before paring the increase 14 per cent. The dollar fell for a seventh day versus the pound and to the lowest in 13 months against the euro, while yields on 10-year Treasuries climbed to the highest in a month.
"The comments from central banks got the markets worried, then there is a concern about valuations, then you have investors pulling money out of some of the best-performing growth stocks," Walter Todd, chief investment officer for Greenwood Capital Associates, said. "There is a lot of market uncertainty throughout the asset classes, and it will likely continue until we reach the earnings season."
Private equity giant KKR has agreed to buy a controlling stake in Australian pub roll-up Dixon Hospitality Group, the AFR's Street Talk says quoting unnamed sources.
It's understood the deal values Dixon Hospitality Group at $190 million, and is scheduled to be signed today, Street Talk says.
"It's understood KKR and Dixon management plan to triple the size of the business over the next three years, before considering a listing on the Australian Securities Exchange," according to the column.
Dixon Hospitality Group boss Bruce Dixon oversaw a run at the ASX boards earlier this year, before pulling the deal and focusing on talks with private equity players.
Dixon Hospitality Group is a pub roll-up, growing to about 50 pubs in its portfolio since inception in 2014, and owns the pub operations rather than property.
The bulk of the pubs came from Lion Nathan's Open Door in late 2015 and the defunct Keystone in late 2016, and the pitch is all about corporatisation of the local pub sector.
Photo: Supplied
ANZ is seeking to uncover who was behind a metals fraud in Asia that cost it "substantial losses" and led to transfers of $US151 million ($106.6 million) to the United States, according to court papers filed in California.
ANZ filed papers on June 6 asking the US District Court in San Francisco to allow it to interview US witnesses about a fraud that involved fake ownership documents for nickel stored in Asian warehouses owned by commodities group Glencore.
As part of a complex series of financial transactions, ANZ ended up with ownership documents for nickel stored in Singapore and South Korea, but discovered they were fraudulent when it tried to sell the metal, the court papers said.
ANZ has not yet filed a lawsuit, but the bank told the US court it planned to do so in Asia once it discovered who was behind the fraud.
ANZ "has every intention of pursuing causes of action against... fraudsters, once their identities are known", the papers said.
This is the second legal action that has emerged following the announcement in January by Glencore's metals warehouse firm Access World that it became aware of fake warehouse receipts circulating in its name.
Before we bring you the start to the morning's trade, let us take a moment to celebrate the two stocks in the top 200 to be in the green thus far.
Yes, a 10 per cent jump in Mineral Resources and a 0.4 per cent gain in Sims Metal Management are the only gains in early trade, as the ASX 200 drops a sharp 71 points, or 1.2 per cent, to 5747 points.
We've seen steeper early falls, but rarely wider ones. The Aussie dollar, in contrast, is closing in on 77 US cents as it climbs to 76.9. That's helped along by an early surge in Aussie bond yields, which have moved from 2.5 per cent at yesterday's close to now sit at 2.57 per cent. That move has also hit bond sensitive stocks such as listed property, which is the worst performing corner of the sharemarket as it drops 2 per cent. Utilities are the next worst, off 1.7 per cent.
CSL is off a hefty 1.7 per cent, and Telstra 1 per cent.
Elsewhere the main weights on the index are the usual suspects, with the overnight resilience in commodities and US banks failing to do much for our own equivalents.
The big banks are all off, with ANZ the worst as it falls 1.3 per cent, while CBA and Westpac are off 0.9 per cent and NAB 0.7 per cent.
BHP is off 1 per cent, Rio 0.5 per cent, and Fortescue 1.5 per cent.
The worst performer early is BT Investment Management, dropping 5.5 per cent after copping a downgrade from UBS this morning.
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Last night was a bit of a wake-up call for complacent investors, writes IG analyst John Kicklighter:
This past session offered a jolt of volatility to usher in the final leg of the week. Once again, the bulk of the day's move was found during the US trading hours. While there was a carry over of speculation related to this week's more prominent themes – a global shift in global monetary policy chief among them – there was no true lightning rod to attribute the strong intraday drop in equities and temporary surge in volatility measures. Conditions have grown overwrought on speculative appetites for months, so dry heaves are not surprising. What is surprising is that the effort to turn such deeply seated risk beliefs occurred so close to a well-known liquidity drain.
There will be a profound pinch on market activity through the final trading session this week and through the first 48 hours for global markets next week. The US will celebrate its Independence Day holiday on Tuesday. While this is only one country's market holiday, as market participants go, this is the largest.
International investors recognise the implications have having the largest player offline – it is difficult to transmit sentiment around the world and thereby muster a full head of momentum. This recognition often keeps all but the most opportunistic market participants on the sidelines making for "wild west" trading conditions. That is what makes Thursday's volatility surge so atypical.
Friday will close out the week with important economic data on a global scale given the shift in rhetoric from central banks about a building propensity to tighten monetary policy. Of keen focus will be manufacturing PMI from China (exp: 51), German employment data after an encouraging CPI print that boasted large order from other European countries, Canadian GDP, and the Fed's favourite predictor of inflation, the core personal consumption expenditure for May (exp: 1.4%). A large surprise or disappointment has the potential to introduce more volatility into the month- and quarter-end flows.
The Australian dollar has turned into a surprise winner from the drumbeat of hawkish comments by global central bankers this week, jumping to a three-month high just below US77¢.
The currency is profiting from weakness in the greenback, as investors realise that the US Federal Reserve might not be the only game in town when it comes to higher interest rates.
Top central bankers from the eurozone, the UK, Canada and New Zealand have this week, to varying degrees, talked about the need to follow the Fed's lead and take away the punch bowl from the party.
The net result was that the US dollar index - measuring the greenback against a basket of major currencies - fell to its lowest since October, or before Donald Trump's election as US president, while the Australian dollar pushed to US76.86¢, on track for a 1.5 per cent weekly gain and its best monthly performance since January.
Meanwhile, the yield gap between Australian and US 10-year government bonds - a key driver of the exchange rate - has risen over the past week to 30 basis points. Last month, the spread dramatically narrowed to just 16 basis points, sparking fears of a possible dive in the Aussie, as the last time the yield differential was that low was in March 2001, when the Australian dollar purchased fewer than US50¢.
Also boosting the local currency were strong gains in key commodities such as iron ore, with the price of Australia's most important export item jumping nearly $US8, or 14 per cent, this week to $US64.71 a tonne.
Despite the tailwinds, neither economists nor financial markets are expecting the Reserve Bank to shift its steady rates policy for the time being, but the board might adjust its tone slightly when it meets on Tuesday.
"While the RBA is odds-on to leave rates steady next week, the language in the governor's statement is likely to be tweaked to recognise the continuing improvement in the labour market and economic activity," said NAB director of economics David de Garis.
The RBA board will also be wary of the Aussie's recent rise, as it makes the economy's transition more difficult, with many economists seeing a level of around US80¢ as a pain threshold at which the central bank would become worried.
Currently it's deemed unlikely the local currency will climb that far, with most forecasts predicting the Aussie to trade in the mid-70s by year-end.
And here is the overnight action by the numbers:
- SPI futures down 67 points or 1.3% to 5710
- Aussie dollar +0.5% to 76.8 US cents (Overnight range: 76.35 - 76.86)
- On Wall St, Dow -0.8%, S&P 500 -1%, Nasdaq -1.8%
- In New York, BHP +0.3%, Rio +1.4%
- In Europe, Stoxx 50 -1.8%, FTSE -0.5%, CAC -1.9%, DAX -1.8%
- Spot gold -0.3% to $US1244.74 an ounce
- Brent crude flat at $US47.33 a barrel
- Iron ore +3.8% to $US64.71 a tonne
- Dalian iron ore +0.6% to 474 yuan
- LME aluminium +1% to $US1915 a tonne
- LME copper +1% to $US5940 a tonne
- 10-year bond yield: US 2.27%, Germany 0.45%, Australia 2.57%
Stocks to watch:
- ALS may seek buyer for its asset care unit, AFR reports
- BT Investment cut to sell at UBS
- Flight Centre cut to neutral at UBS
- Greencross raised to buy at UBS
- Myer cut to sell at UBS
- TPG cut to neutral at UBS
- iSelect new hold at Shaw & Partners
On the economic agenda:
- May private sector credit data from the ABS at 11:30am AEST
- China manufacturing and services PMIs at 11am
- US core PCE price index (the one the Fed follows) and personal spending data, due midnight
I bet you didn't see this coming a week or so ago: iron ore has entered a bull market!
Together with a recovery in oil prices from their recent doldrums, commodities look set to offset what is expected to be a pretty rotten day on the ASX.
But back to our favourite bulk commodity (coal is still popular, but is no longer invited to parties), RBC Capital Markets is bullish on what lies ahead in the September quarter for iron ore as it expects Chinese mills will seek to boost output, bolstering demand for higher quality ore, to take advantage of a rebound in profit margins.
Ore for delivery to China's Qingdao port rallied a further 3.8 per cent to $US64.71 a tonne overnight, according to Metal Bulletin.
The spot price has risen 14 per cent so far this week and has advanced 21 per cent from the one-year low of $US53.36 reached earlier this month, meeting the common bull-market definition. Despite the recent rise, spot prices have still lost 20 per cent this quarter. The material's 2017 peak of $US94.86 came on February 21.
Despite the collapse in iron ore prices through the June quarter, "fundamentals continue to tell a different story, at least directionally", according to a June 28 report from RBC Capital Markets.
The broker has lowered its third quarter price forecast to $US70 a tonne for the remainder of the year, similar to the first-half average of $US75. That's still at the high end of many forecasts; Citigroup this month cut its 2017 average price forecast to $US61 a tonne and its 2018 forecast to $US50.
RBC sees iron ore averaging about $US73 a tonne this year, before resetting slightly lower next year.
"In 2018, we expect prices will average $US65 a tonne as there will remain a surplus but this should be offset in pricing terms with a structurally improving Chinese steel margin. We expect prices to remain volatile before the market tightens in 2019."
"The move to 'value over volume' from the majors should see sustained low prices less likely through this period," RBC said. "Beyond this, with such low expansion capital spending in the majors, the long-lead times for infrastructure to access scalable resources and a broadening of steel demand globally into more emerging markets, there is significant upside risk to our long-term prices."
The euro and sterling jumped overnight and US bond yields spiked as hawkish comments from central banks signaled an end to ultra-loose monetary policy on both sides of the Atlantic, while technology shares dragged Wall Street stocks lower.
The US dollar index touched its lowest since October, before Donald Trump was elected president, as investors shifted to the view that Federal Reserve might not be the only game in town when it comes to higher interest rates.
With the Fed approving dividends and buybacks in major banks as part of another round of stress tests, American financial stocks rose but not enough to offset declines in technology and interest rate-sensitive sectors.
"Part of the reason why tech is down today is rotation out of some of big tech winners and into banks," said Michael Scanlon, portfolio manager at Manulife Asset Management in Boston.
The Dow Jones fell 0.8 per cent, the S&P 500 lost 0.9 per cent, while the Nasdaq dropped 1.4 per cent.
European shares logged their biggest one-day loss in nine months as a rising hawkish chorus from central banks weighed on defensive, dividend-paying sectors. A measure of the region's sharemarket fell 1.3 per cent, while Germany's DAX tanked 1.8 per cent.
As euro zone bond yields rallied, the euro surged to as high as $US1.1445, its strongest since May 2016.
Bank of England governor Mark Carney surprised many on Wednesday by conceding a rate hike was likely to be needed as the economy came closer to running at full capacity.
That sent sterling above $US1.30 on Thursday for the first time in five weeks, leaving it close to its highest levels since last September. The pound was last trading at $1.3006, up 0.6 per cent on the day.
The Bank of Canada also had its say, with two top policymakers this week suggesting they might tighten monetary policy there as early as July.
The Canadian dollar strengthened 0.30 percent versus the greenback at 1.30 per dollar.
"The shifting monetary policy trajectories of other central banks is making other currencies more attractive relative to the UUS dollar," said Kathy Lien, managing director at BK Asset Management in New York.
Good morning and welcome to the Markets Live blog for Friday.
Your editors today are Jens Meyer and Patrick Commins.
This blog is not intended as investment advice.
Fairfax Media with wires.
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