Markets Live: Korean tensions spark $23b selloff

That's all for the week - thanks everyone for reading this blog.

We'll be back on Monday from 9am.

Have a great weekend.

The escalating war of words between the US and North Korea weighed heavily on the ASX on Friday with the benchmark index sliding below 5700 points in a broad-based $20 billion selloff. 

Investors took their cue from Wall Street, which posted its biggest loss in three months on Thursday night, and flooded into safe haven assets, such as gold and bonds. 

On the local market, consumer discretionary and utilities stocks were the most savagely sold off this week while telecommunications and technology stocks managed to finished the week in the green.

The benchmark S&P/ASX 200 Index and the broader All Ordinaries Index each finished Friday down 1.2 per cent to 5693.1 points and 5743.5 points respectively. Over the week both indices were off 0.5 per cent.

"You can never discount the risk of bombing or war and the market is appropriately spooked by that," said Kerry Craig, market strategist at JP Morgan Asset Management. 

"And there is broadbased selling definitely fuelled by fear, but there's also a bit of a northern summer lull where a vacuum of information means these geopolitical headlines are heard extra loudly by investors."

Pointing to the dramatic falls in US tech stocks and financials, Craig suggests much of selloff was taking place in already crowded trades. 

Locally, gold stocks performed well, rising along with the gold price. Newcrest Mining, Australia's largest gold producer was up 7.4 per cent for the week, while Evolution Mining enjoyed a 5.9 per cent lift and St Barbara was up 1.7 per cent.

Commonwealth Bank dominated headlines this week, after Austrac announced it was investigating Australia's largest bank for failing to properly enforce its know-your-customer and money laundering practices. 

Despite the negative attention, the bank posted a $9.9 billion profit, which saw investors who had dumped the stock early in the week, pile back in on Tuesday. 

However over the week the bank was down 0.3  per cent and ANZ was off 0.8 per cent, while Westpac was up 0.2 per cent and National Australia Bank closed the week up 0.8 per cent.

Following a 5 per cent slide in Chinese iron ore futures on Friday, resources giants BHP Billiton and Rio Tinto slumped 1.9 per cent and 2.8 per cent respectively, and were down 0.7 per cent and 3.2 per cent for the week. 

What goes up too steeply must fall as abruptly, seems to be the message of the following chart. Australians can think of another asset class that would fit the bill:

How #markets crashed in the past pic.twitter.com/8wqFFrLOIx

— Alex (@alexgt1234c) August 11, 2017

Some investors are turning to an unlikely safe haven as the rhetoric between US President Donald Trump and North Korea intensifies.

Bitcoin, ethereum and other digital currencies, among the most volatile assets around, are gaining in part as traditional refuges such as gold and US Treasuries lose some of their luster.

"We're seeing investors transferring their funds into cryptocurrencies as they try to diversify their risk in case of a severe downturn in the market," said Ron Chernesky, chief executive of trading platform InvestFeed, which is switching from equity trading to cryptocurrencies. "The space has gone from niche to more widely adopted with one of the main draws being that crypto currencies are seen as less correlated with other assets."

With South Korea caught in the middle of the war of words between the US and North Korea, Koreans are seeking shelter in ethereum. Trading volume jumped to $US2.6 billion Wednesday, 60 per cent higher than bigger rival bitcoin's volume that day. Volume has been higher only twice in all of ethereum's history.

Much of that reflects South Koreans buying the digital asset. The Korean won makes up more than 40 per cent of ethereum trading volume, the highest among currency pairs, according to CoinMarketcap. Ethereum rose 4 per cent Thursday to $US304, near the highest since June.

Bitcoin crossed the $US3000 mark this week for the first time and jumped to a record high of $US3486.73, while ethereum has gained more than 30 per cent in four trading days. The biggest digital currencies had been gaining in the previous weeks, as relief that a split in the bitcoin blockchain, agreement on how to scale the technology and regulatory developments boosted prices.

Investors are going into cryptocurrencies even as bitcoin's volatility is about 10 times that of gold, as proponents view their independence from any central authority as a safeguard against central bank meddling or government turmoil. It also serves a means to protect savings in countries that have high inflation, a weakening currency or capital controls.

Societe Generale strategist Andrew Lapthorne calculates that at around 23 the median price-to-earnings ratio for the US sharemarket is as high as it was during the dotcom bubble in 2000. In 2007 it was below 20.

European stocks are trading on a P/E of around 18, roughly equivalent to their immediately pre-GFC highs, although still well shy of the peak reading of 22 around the turn of the millennium.

Dismayingly, we don't come up very well either. In fact, the ASX's median P/E looks high against its 20-year history, as does the median forward P/E – as the chart shows. We are expensive despite our underperformance. Valuations here may lack the heat of European and American counterparts, but they are "still high", Lapthorne reckons.

"Stocks valuations remain remarkably high, but as valuations alone tell us little or nothing in terms of market timing – it seems valuation concerns are increasingly ignored," Lapthorne says.

In other words, other than cries of "it can't go on forever", expensive markets say little about when they are going to collapse. And that, in conjunction with the "there is no alternative" trade, means equities remain the go-to investment class for anybody hoping to achieve anything near their return objectives.

As Deltec strategist Atul Lele is fond of saying, "Everything is expensive, however everything is also relative". By that he means that very high sharemarket P/Es, for example, look less outrageous against developed market bond prices, where you are still likely to get a virtual zero real yield.

Read more at the AFR

Gold prices have edged up to touch their highest in over two months, set for a fourth consecutive day of gains as rising tensions between the United States and North Korea stoked safe-haven buying.

Spot gold is at $US1286 an ounce, after earlier in the session rising as high as $US1289.07.

President Donald Trump ratcheted up his rhetoric toward North Korea and its leader on Thursday, warning Pyongyang against attacking Guam or US allies after it disclosed plans to fire missiles over Japan to land near the US Pacific territory.

"For now, the uptrend is very much intact in gold, reacting to external geopolitical events," said commodities analyst Jonathan Butler of Mitsubishi in London.

Lenders are offering a hand to wealthy property buyers and owners by lowering rates and stretching maximum loans for the nation's hottest property postcodes, despite RBA attempts to cool the market.

Other lenders are offering improved equity release terms for existing owners to ease some of the pressures of rising living costs and static incomes.

Suncorp is lowering rates for existing home owners to draw down cash from accumulated equity in their properties at lower rates than personal loans or credit cards. It is offering a 1.55 per cent discount on its "access equity" – or line of credit – product.

Listed lender Homeloans is the latest to increase multimillion-dollar lending limits by up to 50 per cent for metropolitan Melbourne and Sydney.  Maximum loans for Melbourne are increased to $1.5 million and $2.5 million for Sydney.

And there are plenty of lenders offering principal and interest rates below 4 per cent to borrowers with a big deposit and regular income. 

John Flavell, chief executive of Mortgage Choice, a listed mortgage broker, says: "The reality is, there are still a number of lenders in the market that are happy to write loans and are hungry for this business. The market is still buoyant. And, with interest rates likely to remain low for some time, I would expect to see strong home loan demand over the coming months."

Here's more at the AFR

Here's an early afternoon recap of today's session: the ASX has tried to rebound from early losses, briefly topping 5700 points, only to slide back into gloom.

Investors continue to fret about the escalating rhetoric between North Korea and the United States, choosing to dump shares for safer assets such as gold, bonds and the yen.

While the ASX200 remains close to the day's lows, defensive stocks such as the supermarket chains Woolies and Coles owner Wesfarmers have found some tentative buying. Telstra is another blue chip nudging higher.

Gold stocks are also being snapped up as the precious metal's spot price hovers at a two-month high of $US1287 an ounce. Newcrest shares are up 2.1 per cent.

Tensions in the Korean peninsula escalated further after US President Donald Trump warned North Korea again overnight not to strike Guam or US allies, saying his earlier threat to unleash "fire and fury" on Pyongyang if it launched an attack may not have been tough enough.

"What has changed this time is that the scary threats and war of words between the US and North Korea have intensified to the point that markets can't ignore it," said Shane Oliver, head of investment strategy at AMP Capital.

"Of course it's all come at a time when sharemarkets are due for a correction so North Korea has provided a perfect trigger."

The big banks are leading losses, with ANZ sold of heaviest, down 2.4 per cent. NAB has dropped 1.4 per cent despite posting a 5 per cent rise in its third-quarter cash profit.

"Banks often get sold when markets are concerned about geopolitical risks," said CMC analyst Ric Spooner.

The global tensions spilled over into material stocks as well, as Chinese iron ore futures drop 2.2 per cent.

Big miners BHP Billiton and Rio Tinto are down 1.6 per cent and 2.2 per cent, respectively.

Meanwhile, South Korean shares have dropped more than 2 percent to an 11-week low and the won has extended this week's slide

The first consensus earnings growth estimate for financial year 2020 is in and at +6.8 per cent it would be the lowest initial read since 2011.

"History shows an average 4 percentage point decline in the final delivery, meaning that in the absence of a meaningful up-tick, valuations may lack the earnings they currently demand," Morgan Stanley equity strategist Chris Nicol says.

Analysts have been fretting about high valuation of the local sharemarket, which would, over time, only be justified if earnings rose stronger.

"The ASX 200 continues to trade at a premium to its long-run average (15.8x versus 14.3x) and the muddle-through economic conditions have us continually debating the links and gaps between soft and hard data to justify the current valuation premium," Nicol says.

Morgan Stanley has been fairly bearish on the prospects of the ASX, which has underperformed other global indices for years, and the first projections for earnings growth in three years does little to change that view.

"Our caution around the quantum and direction of ASX 200 index returns has been linked to an absence of Industrial earnings growth. The current outlook leaves us reticent to change that view with the current results season another litmus test for our outlook."

Ardent Leisure's profit for the year to June nearly halved to $76.1 million, as the troubled entertainment group said it was developing a masterplan for the unused 23-hectare portion of the Gold Coast site that houses its Dreamworld theme park. 

Releasing its preliminary operating results on Friday, Ardent said it expected core earnings before interest, tax, depreciation and amortisation (EBITDA) of $76.1 million. The result has been hit hard by the tragedy at its Dreamworld theme park on the Gold Coast last October, where four people were killed in a freak accident on one of its rides.

Ardent closed the park for 45 days and there was significantly reduced visitation after the re-opening.  It said the business's recovery from the incident, which cost it $5.3 million in fiscal 2017, was likely to take two years. 

The group told investors in early June that there was also a significantly reduced contribution from the Health Clubs business after its sale during the year, which was partially offset by growth in its Main Event division as more centres opened.

The company will release its audited full-year results on August 31. Ardent is also locked in battle with its largest shareholder, Ariadne, which has called for a shareholders' meeting on September 4 in a bid to get four new directors appointed to the Ardent board.

As the Aussie dollar falters in its rally against the greenback, bulls may find a better bet by backing it against the New Zealand dollar.

Asset manager Eaton Vance predicts the Aussie will this year advance to $NZ1.15, a level last seen in 2013, as the RBA will probably raise rates before its counterpart , the RBNZ.

At the same time, the kiwi is coming under pressure after the RBNZ took a tougher tone on the currency yesterday, a first step toward possible intervention.

"RBA will continue to act more hawkishly than the market expects, and RBNZ more dovishly," said Eric Stein, co-director of global fixed income at Eaton Vance. "The Australian economy is outperforming the New Zealand economy from a cyclical perspective."

Australia has benefited from a surge in the prices of iron ore and improving business confidence, while New Zealand tussles with a slowing housing market and weaker-than-expected inflation.

The kiwi could also be buffeted by an upset in the general election in September, with support for a new opposition leader picking up.

The Aussie has gained more than 4 per cent against the kiwi since touching a five-month low of $NZ1.0362 on June 26. The Aussie has lost 1.7 per cent against the U\S dollar this month after surging as much as 10 per cent from a May low.

The Aussie will probably climb above $NZ1.10 before New Zealand's September 23 election, according to Keith Dack, a hedge-fund manager who has more than 30 years of trading experience. "The election in New Zealand has taken on a new dimension with Labour changing leadership," said Dack, a senior portfolio manager at Kit Trading Fund in Singapore.

Prams, cots and car seats seller Baby Bunting says it will still deliver mid-single digit same-store sales growth despite slowing in sales in the first weeks of the new financial year.

Shares in the baby goods retailer plunged 12.7 per cent to $1.7025 after the company  reported a 47 per cent lift in full-year net profit to $12.25 million for the year to June 25, 2017, with total sales up 17.4 per cent to $278 million.

Comparable store sales, which strips out new store openings, grew 6.9 per cent in the year to June 25, with the mid-single digit growth number an expected slowdown from exceptionally strong growth of 10 per cent during the 2016 financial year.

However, the company said comparable sales in the six weeks to August 6 were down 4 per cent due to lower pram sales and changes to its promotions. And it has forecast earnings before interest, taxes, depreciation and amortisation (EBITDA) to be in the range of $25.3 to $27 million, excluding employee equity incentive expenses.

The group's pro forma net profit after tax was $13 million, up 21.9 per cent on the prior year and its pro forma EBITDA hit the mid-point of its guidance range at $23 million, up 23 per cent on the 2016 financial year.

Shares in pharmacies supplier Sigma Healthcare have been slashed after the company warned underlying earnings will come in below market expectations, citing "challenging" industry conditions.

Sigma expects full-year pre-tax earnings of around $90 million compared to current market consensus of around $95 million.

The company referred to a previous announcement warning that sales this fiscal year will be "more challenging" given industry conditions.

Shares in Sigma are down 8.5 per cent at 85 cents, taking its losses in 2017 to more than 33 per cent.

The first half of RBA governor Philip Lowe's testimony has wound up, giving the MPs time to grab tea and biscuits.

So far the governor's main messages are:

• the next move for interest rates is more likely to be up than down, but that it won't be for quite some time because inflation is still too weak and unemployment too high
• on wages, Lowe argues that growth of "three point something" should be possible, compared to the current sub-2 per cent rate. And if we get our acts together - Lowe told the MPs - wages growth of 4 per cent could be possible
• On energy, it's time for Canberra to give the industry the policy certainty it needs
• Inequality is an issue, but not like it is in many other countries, Lowe and fellow officials argue, as they point out that surveys show the number of households experiencing financial distress is far lower than it was 15 years ago
• Yes, wealth inequality has widened as asset prices have risen, but "consumption inequality" is far less of an issue, thanks to the tax and transfer system, in which the top 10 per cent pay 50 per cent of income taxes. Furthermore, while income inequality changed in the 1980s and 1990s, the more recent changes have been modest
• On bank culture, Lowe says there needs to be more focus on service over profits, and a rebuilding of trust.

It's not a big day for earnings results, but among the heavyweights is News Corp, which has swung into the red following write-downs in its Australian and UK newspapers as well as Foxtel, as the Rupert Murdoch-controlled company becomes more reliant on profits from its digital real estate assets.

News Corp posted a loss of $US643 million for the year ended June 30, compared with a year-earlier profit of $US235 million.

The conglomerate took on nearly $US1 billion in non-cash impairments and write-downs - about $US785 million came from the write-down of the value of its UK and Australian newspapers, including The Australian, The Daily Telegraph and The Herald Sun.

The company also flagged at least another $40 million in cost savings across its Australian newspapers, after taking out $40 million in the last financial year.

The value of News Corp's Australian newspapers was written down by $US310 million during the second quarter, taking the book value of its local mastheads to $US420 million.

Digital real estate, including REA Group and Move, accounted for nearly 40 per cent of News Corp's profit and the company said it expects that number to grow in the coming years.

REA, which also reported its results today, delivered a 19 per cent slide in net profit to $206.3 million.

However, excluding one-offs – including a $182.8 million write-down on its Asia businesses and proceeds from the sale of its European operations – profits rose 12 per cent to $228.3 million.

News Corp shares have dropped 5.7 per cent to $17.345, facing their biggest slide in 1-1/2 years while REA Group have shed 5.4 per cent to $64.70, after earlier slumping as much as 9.4 pre cent.

Over at the parliamentary testimony (see also post at 10.08am), RBA governor Philip Lowe has slammed the culture prevalent in the banking sector, saying trust in the industry has been "strained".

"On trust, it's fair to say that trust in banking has been strained," Lowe told the federal parliament house economics committee, adding it was also fair to say service has taken a back seat to sales in the banking sector.

Australian banks have by-and-large done okay on risk management, Lowe said, but added there are examples where desire for short-term profit has probably led to not enough attention being paid to risk management issues.

Lowe also weighed in on the accusations of money laundering and financing extremism levelled against CBA, calling it a "very serious matter".

There needs to be accountability at CBA if shortcomings are identified, Lowe told a parliamentary economics committee.

Financial intelligence agency Austrac launched civil penalty proceedings against Australia's No.1 lender last week for "serious and systemic non-compliance", in the biggest case of its kind in Australia and the first against a major bank.

The sharemarket has plunged below 5700 points in early trade, in a broad-based selloff that has wiped about $23 billion off the market's value.

The ASX is down 1.4 per cent at 5681.2, with all the main sectors in the red.

The latest threats over North Korea have finally escalated to the point where market has been obliged to react, said CMC chief market analyst Ric Spooner.

"This has injected the first note of volatility into US stock markets for some time. US markets had previously been becalmed amidst the Goldilocks scenario of strong profit growth, low interest rates and full valuations," he said. "Difficult to assess political risk is now intruding on this scenario."

Weighing heaviest on the index are losses in the big banks, which are all down around 1 per cent, despite NAB posting a solid third-quarter profit update.

It should come as no surprise that seven out of the eight stocks in the ASX200 posting a gain are gold miners, following a jump in the precious metal's price to a two-month high as investors seek safe havens.

Australia's biggest gold miner, Newcrest, has added 2.8 per cent, on track for a fourth straight day of gains.

Outside of gold miners just Telstra is in the positive, rising 0.2 per cent.

Reserve Bank chief Philip Lowe says the next move for interest rates is more likely to be up than down, but it won't be for quite some time.

Lowe said says the central bank's main priority is stoking growth and inflation in a way that doesn't trigger financial risks from an overheated household sector.

Speaking before House of Representatives economics committee hearing in Melbourne, Lowe reiterated his optimistic outlook for the economy, even as households come to terms with what may be a permanent slowdown in wages growth. 

"There is an adjustment going on, with many people getting used to lower growth in their real wages," Lowe said in a prepared statement. "Many now see this as more than just a temporary development, with wage increases of 2 point something per cent now the norm. 

Lowe says the question of why wage growth is so weak is the most frequently asked question among his global central banking peers.

— Jacob Greber (@jacobgreber) August 11, 2017

"At the same time, the household sector is also dealing with higher levels of debt relative to income. Higher electricity prices are also affecting household budgets.

"This all means that consumer spending behaviour is something we continue to watch carefully."

​The official cash rate has been left at 1.5 per cent since August last year, and financial markets don't see a material chance of a hike before the first quarter of 2018.

Lowe: "I don't want to dissuade anyone from [market expectations]. Next move up, but a while away. "They are both reasonable assumptions" pic.twitter.com/kMsZAK71Wt

— Jacob Greber (@jacobgreber) August 11, 2017

"This setting of monetary policy is supporting employment growth and a return of inflation to around its average rate of the past couple of decades.

"The Board is seeking to do this in a way that does not add to the medium-term balance-sheet risks facing the economy," Lowe said.

"It has been conscious that a balance needs to be struck between the benefits of monetary stimulus and the medium-term risks associated with rising levels of debt relative to our incomes."

Lowe said he expects the inflation rate to "gradually" move higher, but warned that increased competition in retail from new entrants (such as Amazon) is likely to work in the opposite direction.

He also warned that further gains in the dollar would slow the pickup in inflation and retard the progress in employment.

It's shaping up for a rather ugly start, with the ASX 200 eyeing an open below the 5700 level, IG strategist Chris Weston says:

Around the region, the Nikkei 225 is clearly going to build on yesterday's losses, with an open closer to 19,400 and around 1.6% lower. Korean assets, such as the KRW and Kospi are also in focus and it's hard to see buyers here, but if we do it could be somewhat of a leading indicator and provide stability for other markets – a big 'if' under the circumstances.

SPI futures were trading close to 5700 when the ASX 200 officially closed, so if we use this as our guide we can see the Aussie futures index trading some 67 points or 1.2% lower. It's not a great day if you are reporting earnings numbers, such as REA or providing a trading update such as NAB, as its times like this when macro absolutely dominates bottom-up issues. Although that said, NAB's update will obviously certainly garner attention from shareholders and investors. 

ith such uncertainty why buy today, when there is still weekend news and a heightened risk of a gap lower in SPI and S&P futures on Monday? If we look at the period between 02.40am AEST and 04.30am some stability was seen and even brave buyers stepped in, but as soon as Donald Trump came out speaking in New Jersey, insisting that his "fire and fury" statement, "maybe wasn't tough enough", then risk turn lower again.

There is a rhetorical war between the two nations and traders (as are most human beings) are nervous. So why buy risk asset as (such as equities or credit) when the thematic at hand isn't going to resolve itself in the immediate short-term?

Iron ore futures have held in fairly well, so this may lend some support to the iron ore plays today, but it seems logical that equity will likely be shunned all around unless in a really defensive name or gold a stock. AUD sensitive stocks will find some relief that the AUD/USD rate hasn't found any bids in this market and maintain a sub-79 level, although they will be open lower.

Volatility has kicked in again, which is nice to see the market with a pulse even if the backdrop is a very concerning one.

Here's more

In a quarterly update, NAB said its third-quarter cash profit rose 5 per cent, helped by credit growth as well as a fall in bad debt expenses.

NAB's unaudited cash profit was $1.7 billion in the three months to June 30, according to a trading update, compared with $1.6 billion a year ago. Bad and doubtful debt charges fell 12 per cent to $173 million.

The company said its revenue for the quarter inched up 2 per cent. Net interest margins rose, aided by lower funding costs.

Its Common Equity Tier-1 ratio was 9.7 per cent at the end of June, compared with 10.1 per cent in March.

NAB said it was well placed to respond to new capital benchmarks, following a requirement by the Australian Prudential Regulation Authority for the "Big Four" banks to have Tier 1 capital ratios of 10.5 per cent by 2020.

Earlier this week, CBA reported a 4.6 per cent rise in its full-year net profit.