Markets Live: Aussie slides on RBA speech

Fortescue shares remain under pressure after the Federal Court ruled in favour of an Aboriginal group's claims over land used by the miner to mine millions of tonnes of iron ore in the Pilbara.

Fortescue said is likely to lodge an appeal after the court recognised a native title claimant group has exclusive rights over Pilbara land where the company operates the Solomon iron ore mine.

Shortly after the judgment was handed down yesterday, senior Yindjibarndi lawman Michael Woodley vowed to launch a compensation claim against the company.

But FMG chief executive Neville Power on Friday said the company would look at its options and was likely to appeal the court ruling.

"We're looking at that now and I think we're likely to appeal," he told ABC radio.

"It's a very unusual decision in that the judge found exclusive native title possession on this land, which we think is unlikely to be the case, so we will be looking at it."

Fortescue shares are down 2.1 per cent following the court ruling, and a slump in the iron ore price overnight.

The Aussie dollar bulls have been sent packing by RBA deputy governor Guy Debelle.

Debelle came out swinging at traders who took Tuesday's more optimistic sounding minutes as a sign the Reserve is preparing markets for a rate rise.

But he warned that the recent outbreak of hawkishness among global central bankers didn't mean that Australia would follow.

And, importantly, he dampened speculation that the board's discussion of an appropriate 'neutral' level of rates - which ensure the economy runs neither too hot nor too cold - was a signal the RBA was keen to hike anytime soon.

"Urging traders not to read too much into neutral rate commentary and labelling it as 'no significance' was an attempt to remove it from the minutes all together," said ThinkMarkets analyst Matt Simpson.

"This is akin to ECB officials trying to calm markets following (Mario) Draghi's speech in June when he sent the euro and bond yields into hyperbole."

The Aussie has dropped about half a cent to US78.77¢, while shares have picked up from the day's lows.

The Aussie dollar has dropped below US79¢ on comments after a top RBA said financial markets shouldn't "read into" the RBA's internal debate over the neutral interest rate or assume that near-term rate hikes are inevitable in the wake of tightening by offshore central banks.

Guy Debelle, the Reserve Bank's deputy governor, suggested that while the fact that global central banks aren't set to deliver any additional monetary policy stimulus - which Australia's central bank would be compelled to match - negative factors keeping official interest rates low such as the lingering impact of the financial crisis, weak company investment, low wage growth and weak inflation "are still present'".

"While there are some tentative signs that they are abating, the evidence is inconclusive at this stage."

Debelle, speaking at a lunch function in Adelaide hosted by the Committee for Economic Development of Australia, downplayed the fact that the US Federal Reserve has hiked its key policy rate four times over the past two year to 1 per cent, as well as last week's increase by the Bank of Canada to 0.75 per cent.

"Just as the policy rate in Australia did not need to decline to the very low levels seen in other parts of the world, the fact that other central banks increase their policy rates does not automatically mean that the policy rate here needs to increase," he said.

"The policy rates in both the US and Canada still remain below that in Australia."

Debelle devoted a considerable portion of his speech - titled "Global Influences on Domestic Monetary Policy" - on the significance of a significant decline over the past decade in Australia's neutral interest rate, a topic that was debated at this month's board meeting.

News of the discussion - and the fact the bank now thinks the new normal is 3.5 per cent - was revealed in the minutes of the July meeting released on Tuesday, triggering a surge in the Australian dollar close to US80¢ and heightened expectations for rate hikes early next year.

"No significance should be read into the fact the neutral rate was discussed at this particular meeting," Debelle said. "Most meetings, the board allocates some time to discussing a policy-relevant issue in more detail, and on this occasion it was the neutral rate.

The concept, which Debelle said is not directly observable, is a theoretical level at which the official cash rate would reach once full employment and stable inflation expectations are met.

The dollar slid about four-tenths of a cent to the day's low of US78.90¢ following the release of the speech.

It won't take much for the Fed to raise short-term interest rates too far, triggering an economic reversal making indebted students, corporations and other borrowers unable to repay loans, according to billionaire bond manager Bill Gross.

"Central bankers and indeed investors should view additional tightening and 'normalising' of short-term rates with caution," Gross, who runs the $US2.1 billion Janus Henderson Global Unconstrained Bond Fund, said in an investment outlook published overnight.

The Fed has hiked its short-term funds rate four times since December 2015, including twice this year. The implied probability of another rate hike in 2017 is about 40 per cent. The median Fed target rate is 1.375 per cent this year, rising to 2.94 per cent in 2019.

If short-term rates rise faster than long-term rates, it causes a flattening yield curve, historically often a precursor to recessions, such as the 2007-09 financial crisis that was underway long before the collapse of Lehman Brothers. Because rates have been so low for so long, it could take a small move on the short end to trigger an economic reversal, according to Gross.

"Most destructive leverage — as witnessed with the pre-Lehman subprime mortgages — occurs at the short end of the yield curve as the cost of monthly interest payments increase significantly to debt holders," he wrote.

Yields have already flattened since the Fed ended its asset purchases under its quantitative easing program, leading to higher short-term rates, he wrote. Post-crisis global quantitative easing has led central banks to "overstuff" their balance sheets by more than $US15 trillion, according to Gross.

"My analysis shows me that the current curve has flattened by nearly 300 basis points since the peak of Fed easing in 2011-12," Gross wrote. "Today's highly levered domestic and global economies which have 'feasted' on the easy monetary policies of recent years can likely not stand anywhere close to the flat yield curves witnessed in prior decades."

The go-slow warning marks a subtle shift for Gross, who has repeatedly argued for hikes because persistently low rates harm banks, insurers and individual savers while distorting the economy with inflated asset prices. Now he's warning that borrowers with short-term debt may be among the biggest risks to the economy.

Primary Health Care shares have clawed back most of this morning's slump following a cut to guidance and after it flagged a major impairment.

Shares in the medical centre and laboratory operator fell as much as 5 per cent before recovering to be down 0.8 per cent at $3.57.

Primary Health Care said it expects underlying profit for the year to June 30 to come it at $92 million, or the lower end of its guidance.

The country's biggest owner of doctor's surgeries is heavily reliant on government subsidies and has struggled to retain medical staff since some lucrative rebates were frozen in 2015.

Its stock price was also roiled when chief executive, Peter Gregg, resigned in January after the corporate regulator filed court proceedings alleging he falsified documents while an executive at Leighton Holdings. Gregg denied the allegations.

The company also said it expects to book a non-cash impairment of approximately $575 million mostly against the value of its medical centres, as the division has been underperforming.

To reduce its reliance on government subsidies and exposure to policy changes, Primary has been seeking to expand beyond general-practice services at medical centres and grow its medical imaging business.

It has also recently embarked on a cost-cutting program, firing a slew of management – including group head of strategy and growth, Alex Smith – as the medical centre operator looked for savings ahead of the arrival of its new chief executive Malcolm Parmenter in September.

Optus has confirmed plans to spend $1 billion to improve mobile coverage in regional Australia.

The country's second largest telco said it will build 500 new mobile sites across regional and remote parts of Australia, including 114 sites under the federal government's Mobile Blackspots Progam.

Optus chief executive Allen Lew said the investment, to be made by the end of June 2018, will improve network performance for residents, businesses and wholesale partners and build resilience to support emergency services during natural disasters.

Optus said it will help propel regional businesses into national and international markets by providing network reliability, high speed connectivity and advanced technologies such as cloud and cyber security services.

The next global crisis is further away than you think, says an usually optimistic Ambrose Evans-Pritchard:

Global economic expansions do not die of old age. Outside war or violent energy shocks, they are invariably murdered by central banks fearing inflation.

The fact that the post-Lehman business cycle in the US is already the third longest since the mid-19th century tells us little. The more relevant point is that consumer price growth has been falling relentlessly this year and has dropped to 1.4 per cent.

The US future inflation gauge published by the Economic Cycle Research Institute has also rolled over, and this underlying indicator suggests that it will stay low for a long time. The US has turned Japanese.

Goldilocks growth might well continue for another two years or more, even though the cyclically adjusted price to earnings ratio of Wall Street equities has reached a vertiginous 30.12.

This stock market metric is higher than in mid-2008 and is exactly where it was before the great crash in October 1929. These are disturbing thoughts. Yet it takes a catalyst to trigger such events.

Central banks are currently so frightened of market tantrums that they are treading with extreme care. The recent brief moment of resolve has already passed. The US Federal Reserve and the European Central Bank are rowing back.

"Calling business cycle tops is like playing a slot machine. To win the forecast jackpot you need three 'macro' cherries to drop at the same time," say Kevin Gaynor from Nomura.

None are yet in place. The output gaps in advanced economies have closed but are still far short of previous peaks. It may take another twelve months to get there.

Nomura's gauge of investor exuberance is "flashing amber" but nothing worse. What is really missing is accelerating inflation. "This cherry is not yet anywhere near amber or red, and it ain't over until the last cherry drops," he said.

Here's the full article

Shares have opened sharply lower, suffering broad-based losses amid growing global worries over US politics and softer commodity prices.

The ASX has dropped 0.8 per cent to 5715.1, putting it on track for a weekly loss of 0.9 per cent.

Sentiment was hurt by news overnight that the sprawling US investigation into Russian meddling in the 2016 presidential election has widened with a new focus on Donald Trump's business transactions. 

The potential for a lengthier investigation by special counsel Robert Mueller further clouds efforts by the Trump administration to move forward on its pro-growth economic agenda.

"The immediate concern for markets is the potential for a state of political paralysis where the Trump administration is left without the political capital to achieve its tax reform and infrastructure spending programs," said CMC chief market analyst Ric Spooner.

All sectors are in the red this morning, led by a 1.2 per cent slump in materials.

BHP is the biggest drag on the main index, falling 1.9 per cent, while Rio has lost 2 per cent and South32 is down 2.2 per cent.

The big banks are also giving back some of the big gains they racked up over the past two sessions in the wake of APRA's favourable capital requirements decision, falling around 1 per cent each.

The spot price of iron ore dropped 3.1 per cent overnight, following a retreat in steel and iron ore futures in China, which was linked to profit taking.

Among the winners are gold miners, as investors seeking a safe haven pushed up the price of the precious metal. Newcrest has added 1.8 per cent.

A number of yield-sensitive stocks are also in the winners' list following sinking global bond yields.

Transurban is up 0.3 per cent and Sydney Airport has risen 0.3 per cent.

Hold your horses, rates traders!

The RBA's discussion at this month's board meeting about how a cash rate of 3.5 per cent may be the new "normal" was part of a regular monthly "deep dive" into key policy topics and was planned six months ago.

On Tuesday traders reacted dramatically to the Reserve Bank's research on the decline over the past decade in the so-called neutral cash rate - which it estimates is now eight rate hikes above today's 1.5 per cent level - to almost double the chance by May next year of the first rate increase since 2011.

Traders also pushed the dollar to just shy of US80¢ for the first time in more than two years, complicating the Reserve Bank's attempts to keep the economy accelerating without producing a real estate crash.

Many in markets appear to have over-interpreted the central bank's decision to discuss at this month's board meeting its research into the neutral nominal cash rate.

Its inclusion was not intended as a hard signal over the current or near-term stance of monetary policy, but was aimed at informing board members about more longer-term issues.

Markets have proved deaf to the protestations, however, with the Aussie strengthening a touch overnight to last fetch US79.6¢. As we've mentioned, Debelle's speech around lunchtime will give the RBA its opportunity to further hose down expectations of a hawkish turn.

While the research was scheduled six months ago, it still provides a pointer to the likely next move as discussions of neutral rates are a hot topic among most other central banks, as well as the Bank for International Settlements. In almost every case policymakers are facing the challenge of crafting a credible justification for why they have kept rates so low for so long, as they prepare the ground to normalise settings.

Officials announced in last year's Reserve Bank annual report, following a review of the board's operation and processes, that policymakers would spend more time discussing "medium-term issues relevant to monetary policy at a number of meetings each year".

Here are the overnight market highlights:

• SPI futures down 11 points or 0.2% to 5688
• AUD +0.1% to 79.57 US cents (Overnight range: 0.7898 - 0.7989)
• On Wall St, Dow -0.1%, S&P 500 flat, Nasdaq +0.1%
• In New York, BHP -1.5%, Rio -1.8%
• In Europe, Stoxx 50 flat, FTSE +0.8%, CAC -0.3%, DAX flat
• Spot gold +0.3% to $US1245.02 an ounce
• Brent crude -0.5% to $US49.47 a barrel
• Iron ore -3.1% to $US68.05 a tonne
• Dalian iron ore -3% to 510 yuan
• Steam coal +1.0% to $US86.70, Met coal +0.6% to $US164.00
• LME aluminium -0.2% to $US1916.50 a tonne
• LME copper -0.1% to $US5958.50 a tonne
• 10-year bond yield: US 2.26%, Germany 0.53%, Australia 2.73%

And some changes to analyst recommendations:

• Australian Pharma (API): Raised to buy at Morningstar
• Credit Corp (CCP): Cut to hold at Morgans Financial, price target
  $19.35
• Fletcher Building (FBU): Cut to neutral at JPMorgan, PT $8.05
• OceanaGold (OGC): Cut to hold at Haywood, PT $C4.40
• South32 (S32): Cut to neutral at Citi, PT $1.70
• Westpac (WBC): Cut to hold at Morningstar
• Woodside Petroleum (WPL): Cut to underperform at RBC, PT
  $26

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Central bankers are talking the talk, but don't appear set to walk the walk, writes IG strategist Chris Weston:

Morgan Stanley elegantly put it that the RBA is "bullish, but not hawkish", and that seems a fitting statement not just for the Reserve Bank, but also the likes of the Federal Reserve and now the European Central Bank (ECB).

Central banks in a 'bullish' mood: To suggest these central banks were hawkish would imply a concern about inflationary trends and while these institutions still believe in their models and therefore optimistic about the inflation outlook, they would absolutely prefer these same accommodative financial conditions, with inflation looking like it at least wanted to go near target.

So "bullish" seems fair and there seems little reason to rock the boat, with Europe's economics on the mend, the political system, while still casting a beady eye on future Italian elections, is moving from one risk to another with seemingly positive resolution and we are actually staring at a more united Europe than at any stage in years. We may even see Greece issue sovereign debt again in the near-term and pension and hedge funds may actually even buy it!

Today's highlight will be RBA deputy governor's speech in Adelaide at 12:40 AEST. The speech will centre on how global influences impact the domestic economy, but there seems little doubt that Mr Debelle will be probed on the RBA minute's neutral rate calls in the Q&A session.

He will be prepared for this and he will likely speak on behalf of the collective that if the market has overinterpreted the notion that mortgage holders need to seriously consider higher rates in the future, then naturally this could be the forum for the AUD/USD to trade north of US80c or into and below US79c.

Read more.

This story spooked Wall St when it came out around midnight last night:

The US special counsel investigating possible ties between the Donald Trump campaign and Russia in last year's election is examining a broad range of transactions involving Trump's businesses as well as those of his associates, according to a person familiar with the probe.

FBI investigators and others are looking at Russian purchases of apartments in Trump buildings, Trump's involvement in a controversial SoHo development in New York with Russian associates, the 2013 Miss Universe pageant in Moscow and Trump's sale of a Florida mansion to a Russian oligarch in 2008, the person said.

The investigation also has absorbed a money-laundering probe begun by federal prosecutors in New York into Trump's former campaign chairman Paul Manafort.

John Dowd, one of Trump's lawyers, said that he was unaware of the inquiry into Trump's businesses by the two-months-old investigation and considered it beyond the scope of what Special Counsel Robert Mueller should be examining.

"Those transactions are in my view well beyond the mandate of the Special counsel; are unrelated to the election of 2016 or any alleged collusion between the Trump campaign and Russia and most importantly, are well beyond any Statute of Limitation imposed by the United States Code," he wrote in an email.

Major US stock indices, which had been trading higher in the morning, fell as traders worried that the probe could derail Trump's growth agenda. The US dollar fell against the euro and US government bonds rose.

The president told the New York Times on Wednesday that any digging into matters beyond Russia would be out of bounds. Trump's businesses have involved Russians for years, however, making the boundaries fuzzy.

The euro strengthened to its highest level in nearly two years against the US dollar overnight after Europe's central bank chief said officials would discuss possible changes to its bond-buying scheme this autumn, while a gauge of stocks globally gained for a 10th straight session.

Though European Central Bank President Mario Draghi set no date for changes to the bond-buying plan and said that officials were unanimous in their decision not to change their guidance on monetary policy, investors suspected the talks would lead to tightening next year.

The euro was up 1 per cent to $US1.1625, and poised for its biggest single-day percentage gain in more than three weeks.

NAB economist David de Garis describes the overnight action nicely:

The seeds for a weaker US dollar were partly set earlier overnight, especially after ECB President Draghi's press conference following the central bank's meeting.  The formal released statement (pre-press conference) from the Governing Council re-affirmed that "if the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the programme in terms of size and/or duration". 

The EUR (and yields) drifted a little lower, but the price action heated up – the Euro soaring - once Draghi's press conference got underway.  He said that policy measures have continued to secure the very favourable conditions necessary to help the 'process towards' a sustained convergence. Last month the words 'process towards' were not there.  Perhaps a point of semantics, but that did set the bar a bit lower. 

He was firm in saying that it was unanimous in setting no precise date for when to discuss QE changes, but he did add that discussions should take place in the fall or the autumn or the fall.  Bingo!  The market was looking for any reasonable indication that the upcoming September 7 meeting would/could be the meeting when the ECB would announce a firm program to begin winding down QE.  And that was enough for the market to run on.  It's at that meeting when there will be a full forecast review. 

The ECB President also appeared not to push back too hard on the appreciation of the EUR.  Instead, in response to a question on the exchange rate, he said that overall financial conditions include bank lending surveys, rates, corporate bond spreads, equities and household wealth had been broadly supportive.  So not overly pushing back too hard on the Euro.  That preceded the announcement of the expansion of the Mueller investigation that further took the edge off the USD. 

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.