Markets Live: Flight Centre takes off

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Sabre-rattling over North Korea's missile weapons program sent investors seeking out safe haven assets such as gold and the Japanese yen today, but strong performances in the mining sector helped keep the ASX's losses small.

The benchmark S&P/ASX 200 opened in the black but lost ground in choppy trade to finish down 0.3 per cent, at 5763.3 points.

Tuesday's stronger-than-expected retail trade figures seemed to still be working their way through the market, with consumer discretionary stocks pulling the index higher despite the risk-off mood.

Leading these was Flight Centre, which soared 10.4 per cent after it told the market its full-year profits would be towards the top of its range. Flight Centre is the ASX's tenth-most shorted stock according to Shortman.com.au, with 12.2 per cent of its shares loaned out to short-sellers, many of whom may have been squeezed by Wednesday's announcement.

Competitor Corporate Travel Management was also pulled higher, lifting 1.7 per cent.

But they were not the only such stocks to trade up, with Harvey Norman adding 0.5 per cent, JB Hi-Fi rising 0.9 per cent, as did Premier Investments.

Several analysts shrugged off Tuesday's stronger-than-expected retail sales figures, with Myer coming in for particular mention. It shed 0.6 per cent on Wednesday.

"The retail sector is still dragged by record low household cash flow", UBS economist George Tharenou said, adding that some of the up-tick could have been related to weather-related restocking. "Declines in department stores bode negatively for Myer, and [are] consistent with our recent negative view on the sector."

Citi's Josh Williamson described the retail figures as being "as good as it gets". They expect rises in unavoidable expenses will sap into household spending on discretionary items in coming months, biting into the profits of major retailers.

Also providing support to the index were the big miners. BHP rose 1.6 per cent, Rio Tinto added 1.7 per cent while Fortescue jumped 1.5 per cent, following a rise in rebar futures to their highest in more than three years amid concerns over tighter supply.

The heavyweight banks were the main drag on the index, but held on to most of their gains from Tuesday, when they rose strongly to fuel the ASX200's largest single-day gain of the year.

Westpac dropped 0.9 per cent, ANZ fell 0.5 per cent, CBA shed 0.4 per cent while NAB was 0.6 per cent lower.

Sonic Healthcare shares took a hit, dropping 3.9 per cent after Bank of America-Merrill Lynch cut the stock to "underperform".

The Tax Office is zeroing in on the "startling" level of rorting by individuals among $22 billion of work expenses claimed in tax returns.

Tax commissioner Chris Jordan foreshadowed a boosted focus on compliance among individuals and small businesses and suggested their tax avoidance through deductions likely topped that of large corporations.

Some 6.3 million people claimed up to $150 for laundry expenses, in their tax returns costing $1.8 billion a year, and which if correct, meant half the workforce was required to wear a uniform for work.

"That would mean that almost half of the individual taxpayer population was required to wear a uniform, suits are not uniforms, or protective clothing, or had some special requirements for things like sunglasses and hats and a variety of other things. Half the population," the commissioner told the National Press Club in Canberra.

"So, while many of these claims are legitimate, I do wonder how many people have simply assumed that they can claim this $150."

The tax chief also said that people wrongly claiming car expenses and the $44 billion in expenses claimed by landlords, which means negative gearing is costing over $3 billion a year, were also "well and truly" in the Tax Office's sights.

"There is about $40 billion in rental income and about $44 billion of rental deductions resulting in around $3.6 billion net rental loss. These are the areas we are going to focus on," Jordan said.

Jordan said the ATO was shifting its focus away from multinationals to the cash economy and rorting of claims by individuals and small businesses.

Here's more at the AFR

Japan's central bank will cut its inflation forecasts but hold off expanding stimulus this month, people familiar with the matter told Reuters, in another sign the bank is retreating from Governor Haruhiko Kuroda's initial pledge to do whatever it takes to achieve his ambitious inflation target.

At a rate review on July 19-20, the Bank of Japan is set to keep monetary policy steady and offer a more upbeat assessment of the economy than it did in June to say it is expanding moderately, said sources familiar with the central bank's thinking.

"The economy is in good shape, so it's time to wait for the positive effects to push up prices," one of the sources said.

But the BoJ is likely to cut its inflation forecast for the current year ending March 2018, and possibly that for the following year, in a quarterly review of its long-term projections to be released on July 20, they said.

The downgrades will likely be minor and reflect the effect of recent oil price falls, companies' reluctance to raise prices and weak inflation expectations, the sources said.

At its April policy meeting, the BoJ said it expects core consumer inflation to hit 1.4 per cent in the current fiscal year and 1.7 per cent in fiscal 2018. That exceeds a Reuters poll projecting inflation of 0.7 per cent in the current year and 0.8 per cent the following year.

The local sharemarket has become more vulnerable to rising bond yields, with Credit Suisse estimating that around 22 per cent of the market cap is in yield-senstive sectors, up from 12 per cent little more than three years ago.

Analyst Hasan Tevfik expects this weight to decline as global bond yields continue their push higher.

This will lead to lower valuations of expensive bond proxies, which are currently trading on 21x forward EPS, up from 18x a few years ago, Tevfik says.

"While we forecast lower valuations we don't think the big de-rating will come until passive investors re-consider their 'overweight' positions in these stocks," he says.

Credit Suisse reckons that passive investors such as ETFs own 12.6 per cent of the bond sensitive sectors, and just 8 per cent of the rest of the ASX 200.

"Stocks in these sectors have gained immensely from falling bond yields and the rise of smart-beta. We think they could suffer immensely as bond yields rise and smart-beta changes its focus to elsewhere, if this happens."

Particularly vulnerable to higher bond yields are the likes of APA, Ausnet, Charter Hall and Sydney Airport, Credit Suisse says.

Sonic Healthcare shares have taken a hit today, after Bank of America-Merrill Lynch cut the stock to 'underperform' and lowered its price target to $22, from $22.90, citing the risk of lower fees.

Shares are down 3.8 per cent at $23.36, after hitting an all-time high of $24.58 last Thursday.

The broker expects fee cuts in the US from early 2018, while Switzerland and Germany businesses may face similar issues over that calendar year. The US and German markets accounted for about 40 per cent of revenue in financial year 2016.

A slowdown in volume growth to just 2.7 per cent over the past year - form an average of 5.1 per cent over the past 15 years - in its Australian pathology division was another issue worrying the analysts.

Three analysts have a 'buy' rating on the stock, four a 'hold and another four rate it a 'sell', with an average price target of $22.96, according to Bloomberg.

A single buyer has snapped up all $800 million of government bonds sold today, the largest ever amount bought by one bidder in auctions that date back to 1982.

The sale of a nominal bond to just one entity hasn't happened since August 2013, according to data from the Australian Office of Financial Management, the government funding arm.

The 3.25 per cent notes maturing in April 2029 went off at a yield of 2.72 per cent, the office said on its website, without identifying the buyer.

A bond fund manager suspected a sovereign buyer behind the deal.

"Not too many outside reserve that could/would buy in that size although it is slightly longer (dated) than they usually buy," he said.

The sale came after government bonds had their strongest one-day rally in six weeks yesterday, when the Reserve Bank dashed speculation it would join global counterparts such as the European and Canadian central banks in talking up policy tightening and flagging interest rate rises.

RBA Governor Philip Lowe also dropped a previous reference to an economic growth forecast of 3 per cent and said the recent slowing in the nation's economic output partly reflected temporary factors, like weather, but not all of it.

"The RBA took a slightly dovish turn on Tuesday, not just relative to the comments coming from global peers, but relative to its own previous stance," said Martin Whetton,  a senior rates strategist at ANZ.

"A longer-dated note like this could be seen as offering good value after the recent steepening in the curve that had been driven by some of that global hawkishness."

Australian new vehicle sales jumped to a record in June, a second straight month of bumper results that, coming the day after higher-than-expected retail trade figures, augured well for consumer demand across the economy.

The Australian Federal Chamber of Automotive Industries' VFACTS report out on Wednesday showed 134,171 new vehicles were sold in June, up 4.4 percent on the same month last year. Both months had the same number of selling days.

June is typically a strong month as dealers clear stock for the end of the financial year.

Sales of sports utilities alone surged 11.7 percent in June, with the upper large segment rising almost 21 percent. Sales of light commercial vehicles climbed 12.2 percent while the heavy vehicle market gained 9.2 percent.

The willingness to splash out on big-ticket items follows upbeat reports on retail sales for both April and May and points to a likely rebound in consumption for the second quarter after a muted start to the year.

Toyota Motor Corp retained first place on the sales ladder with 18.3 percent of the market, while Mazda Motor Corp had another strong month taking 9.3 percent.

Hyundai Motor took third spot with an improved share of 9.1 percent. The Holden unit of General Motors tied with Mitsubishi on 6.9 percent, while Ford trailed with 6.6 percent. (Reporting by Wayne Cole; Editing by Sam Holmes)

The market may be down today, but veteran Bell Potter stockbroker Richard Coppleson is far from gloomy.

He told clients yesterday he has high hopes for July - a traditionally strong month for the ASX. 

Almost $10 billion in dividends - mostly from the big four banks - is being paid to investors in large ASX companies this week. If these are reinvested into the market, it should provide some support in coming days, he told clients. 

"The market did very well almost every time there were over $9 billion of dividends paid that month," he wrote after analysing months with large dividend payouts. 

In July last year, $9.6 billion in dividends was paid, helping boost the market 6.3 per cent. The year before, it was $9.5 billion in dividends - the market rose 4.4 per cent. 

Over the past 36 years, July has tended to be the second-best month of the year - with the market on average rising 2.1 per cent, according to Mr Coppleson. 

He attributes this not only to dividends, but also to investors jumping back in after tax-loss selling in June. 

"You can tell it's happening by the fact that buying is across the board - typical of a large cash injection."

This month marks two decades since the Asian financial crisis. Three stock markets in the Asia-Pacific have never returned to the peaks they achieved leading up to the crisis, which triggered a region-wide sell-off two decades ago.

Japan's Topix Index reached a record high in dollar terms in December 1989. On Tuesday, it was trading 29 percent lower. Thailand's SET and Taiwan's TWSE make up the trio of gauges that have failed to regain past glories since the 1997 crisis.

One market that has performed well is South Korea. The Kospi Index soared above its pre-crisis peak in 2006 and reached a new high the following year. Despite ongoing tension between the country and its neighbor North Korea, stocks continued to prosper, and reached a 10-year high on June 30.

The crisis had its origins in Asian economies that maintained pegged exchange rates and failed to control swelling private-sector dollar debt. When Thailand wasn't able to maintain its currency fix and devalued, it set off an exodus of capital from the region, tipping nations into economic and in some cases political crises.

Hong Kong's Hang Seng, India's S&P BSE Sensex and NSE Nifty 50, Indonesia's JCI Composite, the Philippines' PSEi and Malaysia's KLCI are among other indexes that have topped their peaks since 1997.

It's a hard life for savers. While the banks raise interest rates on those with risky mortgages, they've only lowered them for those putting their money into term deposits.

Term deposit interest rates have been declining since 2010, and are now at their lowest point in recent memory.

According to research by financial comparison company Canstar, only 15 of 75 lending institutions have increased the interest rate on any of their term deposits since August, when the Reserve Bank lowered the cash rate to a record low of 1.5 per cent.

The major banks rely on deposits for around 60 per cent of their funding, while the figures are often higher for second and third-tier lenders. But for the most part, they're not paying much for this funding, even as the average differential on lending for mortgages swells to 350 basis points above the cash rate, a figure that's doubled since 2007.

Banks are charging a rate of around 5 per cent per annum for mortgages. But even five-year term deposits for a $25,000 deposit are only, on average, earning savers 2.73 per cent per annum, with the best-in-market rate being 3.15 per cent.

These rates are significantly below those paid by banks during the global financial crisis, rates of above 3 per cent were common, even on short-dated term deposits, while rates over 7 per cent could be had a decade ago.

Canstar group executive for financial services Steve Mickenbecker said it was the lowest he'd ever seen term deposit rates. While, he believes, savers in long-term deposits in previous years have done well out of it, putting your money into a five-year account would be a "brave call" now.

"Savers are the big losers from what's going on here," he said of the current monetary environment.

Here's more

Gold will probably trade in a range of $US1200 to $US1300 an ounce in the short-term as the metal tracks US real interest rates, according to UBS's wealth management unit.

"We're not saying we have a bullish bias; we're not saying we have a bearish bias," Wayne Gordon, executive director for commodities and foreign exchange, said. "We're saying that tactically, people should be buying it somewhere near $US1200 and selling it again somewhere near $US1300, and it's because we have a view that real rates go sideways. So the pickup in nominal rates will be equally matched by the pickup in inflation."

Bullion climbed almost 9 per cent in the first quarter, buoyed by worries over Donald Trump's presidency and geopolitical risks. Prices have since fallen and posted their first monthly decline this year in June.

But bullion has risen 0.6 per cent in two days as North Korea's rocket launch revives geopolitical concerns. US Secretary of State Rex Tillerson called the act a "new escalation of the threat" and the United Nations Security Council plans a closed session later on Wednesday after the US requested a meeting. It's up 0.4 per cent to $US1228 an ounce in Asian trade today.

If US unemployment keeps falling, and the Federal Reserve keeps raising interest rates no matter what the inflation data show, that will be negative for gold in the short term, Gordon said.

Still, solid demand this year and weaker output, coupled with a lower US dollar, are positive for prices, he said. If equity valuations start to drop, investors could turn to gold too, he added..

Pepper Group has dropped as much as 7.5 per cent to $3.47 following a $655 million bid from US buyout firm KKR.

The indicative offer of $3.60 per share represents a 4 per cent discount to yesterday's closing price of $3.75. It comes just as signs of stress start to emerge in the previously red-hot housing market.

Today's drop comes after a rally yesterday in anticipation of the bid.

Mortgage lending is a highly lucrative business and lenders such as Pepper have helped fill a recent void left by the major banks decreasing their exposure to investor loans. The non-bank lender reported a 36 per cent expansion in new loans for 2016.

The following chart nicely shows investors' sometimes baffling fixation with "round" numbers, bringing to mind the ASX's own 6000-point complex.

Lazy? Irrational? Traders cluster around "clean" numbers. (Examples like these are why I hesitate to bail out on technical analysis.) pic.twitter.com/dRXyfJDKOE

— JP Koning (@jp_koning) July 4, 2017

The US dollar has slipped further against the yen on rising tensions between the United States and North Korea while the Canadian dollar held firm after the nation's central bank chief backed an interest rate increase.

The greenback shed 0.3 per cent in early trade to fetch 112.95 yen, slipping further from Monday's 1-1/2-month high of 113.48.

Meanwhile, the South Korean won lost 0.5 per cent against the US dollar overnight, hitting its weakest level in more than three months, with further losses in store, according to Bank of Singapore. It's trading flat this morning, as is South Koreas sharemarket.

The yen tends to be bought back at times of heightened global uncertainty because of expectations Japanese investors may repatriate their foreign investment, despite the country's proximity to North Korea.

Pyongyang confirmed it had conducted a test of a newly developed intercontinental ballistic missile that can carry a large and heavy nuclear warhead, triggering a call by Washington for global action to hold the isolated nation accountable for its pursuit of nuclear weapons.

The Pentagon condemned the missile test and said it was prepared to defend the United States and its allies against the growing threat from North Korea.

What comes next is what really matters for investors, said Sim Moh Siong, a currency strategist at Bank of Singapore.

"It's a ratcheting up of the situation that has been simmering for a while," he said. Bank of Singapore sees the won weakening toward a key support level of 1160 per US dollar, from 1150.70 on Tuesday.

"Investors have a case to be worried but whether the worry will turn into something more serious we need to see what develops on the political front."

All eyes will be on the G20 summit in Germany this week, where US President Donald Trump is set to meet his Chinese counterpart Xi Jinping and discuss the tensions.

For the first time in a very long time, the euro area is delivering the strongest growth of all the major regions, Deutsche notes.

Leading indices such as PMIs are hovering in the mid-50s, showing the benefit of moving past the de-leveraging phase, the analysts say.

"Credit growth continues to edge up, and the 'credit impulse' suggests solid growth continuing."

While the Aussie has risen against the greenback this year, it has actually dropped against the euro, delivering an earnings boost for companies with European operations, they note.

Euro-area exposed stocks that are set to benefit according to Deutsche include Amcor, Link and Resmed. Other companies with exposure include Brambles, Ramsay, Ansell, Sonic and CSL.

British steelmaker and industrial firm Liberty House and its stablemate, IMEC, have emerged as the buyer of the Arrium assets including the Whyalla steelworks, after making a third offer on Tuesday night.

The British duo, bidding under the entity of the GFG Alliance, has signed a binding agreement with administrators KordaMentha to buy the Australian assets of Arrium. It now needs to be approved by the committee of creditors.

The British duo, which had been an underbidder earlier in the process, lodged a much higher bid late on Tuesday night.

It won out over the Korean consortium of Newlake Alliance and JB Asset Management. KordaMentha's Mark Mentha said the GFG option was "superior" to the conditional offer from the Korean consortium.

Liberty House and SIMEC, who are bidding through a vehicle known as GFG Alliance, are proposing a modernisation of the Whyalla steelworks and a power plant, which also would feed extra electricity back into the fragile South Australian power grid. 

The group of economic doves predicting another Reserve Bank rate cut is getting smaller, as the global central banking tide begins to change direction.

Su-Lin Ong, a seasoned economist at RBC Capital Markets, is the latest to join the shift, saying she now expects the cash rate to stay at its current 1.5 per cent through until 2019.

Despite the "challenging" domestic outlook, Ong argues the recent hawkish stance among central banks around the world makes it more difficult for the Reserve Bank to move in the opposite direction/

RBC had previously forecast one more rate cut.

Reserve Bank board members refrained on Tuesday from joining counterparts in Canada, New Zealand and Britain in signalling plans to normalise monetary policy, citing weak wages growth and concerns about highly-indebted households.

The Reserve Bank is also conscious of not putting upward pressure on the Australian dollar, a concern that would diminish as other central banks tighten policy, creating scope to hike if regulatory efforts to curb risky borrowing falter.

Ong said a key reason why the Reserve Bank would no longer pursue any further rate cuts is because of its increased focus on financial stability.

"Financial stability remains at the top of the RBA's watchlist and while there is some evidence of moderation in Sydney and Melbourne house prices, some easing in finance for investor activity and credit growth, it remains modest.

"The recent financial accounts confirmed another rise in household debt/disposable income to 190.4 per cent in Q1, a new record.

"Thirdly, some resilience in the housing sector – both activity & prices – coupled with firmer labour market data point to a mixed activity picture at present."

Forecasters at most of the big four Australian banks have held for some time that the current 1.5 per cent cash won't be reduced further.

Bank of America, HSBC, ING, Societe Generale and TD Securities are among those predicting at least one rate hike by the middle of next year.

Financial market betting this morning implies there will be no more rate cuts and that the chance of a rate increase by April of 2018 is now 38 per cent.

Shares have opened lower as investors take a breather following yesterday's strong rally.

The ASX is down 0.3 per cent at 5768.9 points, with most sectors in the red apart from materials.

"Recent days have seen an unexpected sell-off followed by a violent rally, leaving traders more than usually uncertain about what today has in store for the ASX 200 index," CMC chief market analyst Ric Spooner says.

"Markets have a watching brief on global tensions following North Korea's missile test. However, there has been little evidence of support for safe haven assets at this stage."

The banks are the biggest drag on the index, all down about 0.5 per cent following yesterday's surge in their share prices.

Meanwhile, gains the big miners are preventing bigger losses in the index, with BHP and Rio both up around 0.9 per cent.

Flight Centre is the biggest percentage gainer among the top 200, jumping nearly 10 per cent following an improved profit outlook.

Home loan provider Pepper Group has received a $660 million takeover bid from private equity firm KKR.

Amid rumours of a deal in recent months, Pepper this morning confirmed an indicative non-binding proposal of $3.60 a share, with permission for directors to also declare a dividend of 3c a share.

Rumours of the deal appear to have already influenced trading this week. Pepper's shares were up 9 per cent on Tuesday and closed at $3.75, higher than KKR's offer.

Pepper said it had given KKR permission to conduct due diligence and potentially come up with a binding offer.

Pepper is non-bank lender that specialises in "non-conforming" home loans, such as to self-employed customers who can find it harder to get credit from a bank.

It floated in 2015 with an initial offer price of $2.60 a share. Shares are not yet trading due to a takeover adjustment.