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Good morning and welcome to the Markets Live blog for Tuesday.
Your editor today is Patrick Commins.
This blog is not intended as investment advice.
BusinessDay with wires.
Local shares are poised to open slightly lower on a weak lead from Wall Street as geopolitical risk weighs on investment sentiment.
What you need2know:
• SPI futures down 4 points to 5496
• AUD at 93.76 US cents, 95.07 Japanese yen, 69.35 Euro cents and 54.91 British pence.
• On Wall St, S&P 500 -0.2%, Dow -0.3%, Nasdaq -0.2%
• In Europe, Euro Stoxx 50 -0.9%, FTSE -0.3%, CAC -0.7%, DAX -1%
• Spot gold rose $US1.31 to $US1312.19 an ounce
• Brent oil up 46 US cents to $US107.70 per barrel
• Iron ore eases US60c to $US96/tonne
What's on today
• Australia: Speech by Reserve Bank of Australia governor Glenn Stevens at 1pm in Sydney; assistant governor Guy Debelle on a panel this morning
• Japan: industry activity
• US: Consumer Price Index
• Indonesia: election tally to be released.
Stocks to watch
• Santos releases 2Q output
• Macquarie Atlas Roads releases 2Q traffic report
• Newcrest Mining faces a class action: AFR
• While all the attention is on Healthscope's giant $2.5 billion initial public offering, junior training and labour hire company Ashley Services Group is quietly going about a listing of its own.
• Intelligent Investor research director Nathan Bell wonders if Pacific Brands might be a takeover target in the light of recent retail consolidation, such as the takeover of David Jones.
• Deutsche Bank has retained a "buy" recommendation on Asciano with a $7.10 a share target price.
US stocks fell, ending the best S&P 500 rally since April, as concerns that tension in Ukraine could lead to deeper sanctions against Russia kept investors on the sidelines before major earnings reports.
The S&P 500 lost 0.2 per cent to 1,973.63, paring a loss of as much as 0.6 percent. The Dow Jones dropped 48.5 points, or 0.3 percent, to 17,051.73 after losing almost 126 points this morning.
“The geopolitical situation is an overarching damper on the market and underneath that this week we’re right in the heart of second quarter earnings,” Matthew Kaufler, manager of Federated Investor’s Clover Value Fund, said. “While the market is focused on earnings, we’re still trying to keep a pulse on what’s going on around the world.”
Some 145 companies in the S&P 500 report this week. Apple, McDonald’s and Coca-Cola are scheduled to report results tomorrow.
The equities benchmark has advanced almost 7 per cent this year amid better-than-estimated corporate earnings and central bank stimulus as the US economy shows signs of recovering from a 2.9 per cent contraction in the first quarter.
The gauge closed at a record 1,985.44 on July 3 and trades at 18.3 times reported earnings, near the highest level in four years. The index has not had a drop of more than 10 per cent since 2011.
“People are naturally cautious against these geopolitical events and the market having had such a strong rally,” said Patrick Spencer, the London-based head of equity sales at Robert W. Baird & Co. “Markets are nervous given we haven’t had a correction yet so people are thinking we’re overdue. People are just looking for reasons for the market to sell off.”
Ailing carrier Malaysia Airlines may be taken private by its major government shareholder or enter bankruptcy protection to allow it to renegotiate contracts with unions, after its two recent air disasters.
Bloomberg on Monday cited people familiar with the matter as saying those would be among the turnaround options presented by the airline’s board to its majority shareholder, Khazanah Nasional, this week.
While Malaysia Airlines says its focus is on the victims and families of Flight 17, the loss of 537 lives and two planes since March is straining the carrier’s ability to stay in business. Even a month before the latest disaster, Khazanah was estimating that the unprofitable airline only had enough funds to last it about a year.
“They don’t have the luxury of time,” said Mohshin Aziz, an analyst at Malayan Banking, in Kuala Lumpur. “There’s never ever been an airline that had to go through two monumental tragedies in the space of four months.”
Flight 17 was en route to Kuala Lumpur from Amsterdam carrying 298 passengers and crew on July 17, when it was shot down over eastern Ukraine. The disaster occurred four months after Malaysian Air Flight 370 disappeared with 239 people aboard, leading to the longest search for a missing plane in modern aviation history.
The potential restructuring comes as the airline reported its passenger numbers and percentage of seats filled fell in June, even before the latest disaster hit the financially troubled airline.
Malaysia Airlines shares were steady in trading on Monday after having closed 11 per cent lower on Friday after the MH17 crash.
The boss of Metcash’s $9 billion food and grocery division has warned the aggressive push into financial services by supermarket giants Coles and Woolworths could pose a serious threat to competition much in the same way their petrol shopper dockets squeezed independent retailers before the competition regulator stepped in to rein in the fuel schemes.
Fergus Collins, who in December was elevated from running wholesaler Metcash’s liquor distribution arm to head its flagship supermarkets business, also said the current supermarket sector was not a level playing field with Coles and Woolworths – who he dubbed the "two big gorillas" – also getting favourable rezoning rulings to build new supermarkets in suburbs where the local population were already flooded with retailers.
‘’I think there are plenty of examples where the planning laws have been inconsistent, where Woolworths and Coles are getting favourable treatment when it comes to rezoning,’’ Mr Collins said.
There were cases in Sydney’s north shore of this as well as elsewhere in Australia.
‘’There is no need for a supermarket [in these places] and I wonder how many supermarkets you actually need in a given area and whether or not the saturation they are doing is beneficial long term. Are they trying to drive every independent, small supermarket, baker and green-grocer out of business so they completely control the market place?’’
Nice headline to this Bloomberg story: “Learn to stop fretting over higher rates and love the Fed”:
If you’re concerned that the Federal Reserve will derail the bond market when it finally starts raising interest rates, the last two tightening cycles suggest those worries may be overblown.
Instead of tumbling, US debt securities from Treasuries to junk bonds gained. They returned an average 5.7 per cent between June 2004 and June 2006, when the Fed lifted rates to 5.25 per cent from 1 per cent. In the seven months ended January 2000, bonds retained their value even as benchmark borrowing costs increased 1.75 percentage points.
With the US economy expanding at a slower pace and less wage growth to pressure inflation, there are fewer reasons for the Fed to raise rates as quickly this time as the central bank moves to end six years of unprecedented stimulus.
Long-term bond yields that offer a greater cushion against higher rates than in previous cycles and demand for fixed income from a burgeoning number of retirees also suggest the inevitable sell-off forecasters have predicted is less likely to materialize.
“It would be a mistake to bet against the bond market,” Priscilla Hancock, global fixed-income strategist at JPMorgan Asset Management, said. “The road to higher rates will be a long, slow march at a time when income is the most important thing. That means fixed income will still be an important place to be.”
As any parent will tell a child, the problem with lying is that you may have to lie again to cover up the lie you told in the first place and, before you know it, you are all tangled up in lies and then you get into trouble.
This appears to be happening to the ubiquitous Google, whose offspring Google Australia is yet to fully resile from the public relations line that it ''paid'' $7.1 million in tax in this country last year. It paid nothing of the sort.
Like a young child, Google Australia has been told by its parent in California that it must not talk to strangers (that is, strange journalists asking rude questions about tax instead of lauding it about its technological brilliance). Hence it still refuses to answer questions put over one month ago.
A small but interesting thing has happened since however. Google sent out an online flier for a conference last week: ''Join us at Atmosphere Sydney for inspiring ideas on culture change, collaboration, agility and innovation in the new digital workplace.''
In this flier, the title of its local boss appears to have changed. Maile Carnegie has now been anointed ''country director Australia and New Zealand''. Previously she had been referred to as ''managing director Australia and New Zealand'', until it was pointed out that in fact she was not actually a director of Google Australia, let alone ''managing director''. Carnegie is accomplished enough. She was formerly the managing director of Proctor & Gamble Australia/New Zealand but her role at Google Australia is not a statutory one.
This legal role of director falls to the mysterious Mark Stewart Tucker, Google's sole Australian director, who lives on Sydney's northern beaches and refuses to respond to questions. The other two directors live in California, where Google Inc, the puppet master for its web of tax-conniving global entities, pulls the strings.
Google Inc is one parent that is in complete and utter control of its children. The reason that Carnegie is treated as a corporate child has everything to do with tax and the way that the Californian parent runs its global empire of smoke and mirrors.
China’s total debt load has climbed to more than two and a half times the size of its economy, underscoring the difficult challenge facing Beijing as it seeks to spur growth without sowing the seeds of a financial crisis.
The total debt-to-gross domestic product ratio in the world’s second-largest economy reached 251 per cent at the end of June, up from just 147 per cent at the end of 2008, according to a new estimate from Standard Chartered bank.
Such a rapid build-up is far more of a concern than the absolute level of debt, since increases of that magnitude in such a short period have almost always been followed by financial turmoil in other economies.
While calculations of the ratio vary depending on exactly what types of credit are included, several other economists agreed with the new figure. Even those with slightly different calculations said the general trend was clear.
“China’s current level of debt is already very high by emerging markets standards and the few economies with higher debt ratios are all high-income ones,” said Chen Long, China economist at Gavekal Dragonomics, a research advisory. “In other words China has become indebted before it has become rich.”
By comparison, the US had a total debt-to-GDP ratio of about 260 per cent by the end of last year, while the UK’s ratio was at 277 per cent. Japan topped the world table at 415 per cent, according to Standard Chartered calculations.
Newcrest Mining has confirmed that law firm Slater & Gordon has commenced a class action against the gold miner, the company said in a statement to the ASX.
The proceeding is brought on behalf of persons who acquired Newcrest shares between 13 August 2012 and 6 June 2013, the company said.
During that period shares in Newcrest fell 45 per cent.
The claim alleges that Newcrest had no reasonable grounds for the gold production guidance it released on August, 13, 2012, and further mislead and deceived investors leading up to a June 2013 downgrade announcement.
Newcrest downgraded its production forecast on June 7, 2013, flagging $5 billion to $6 billion of impairments, blaming a steep drop in the gold price.
Following an ASIC investigation, the company copped an $1.2 million fine for continuous disclosure breaches between May 28 and June 7, 2013, relating to its production and capital expenditure guidance.
However, Monday’s class action claim alleges that Newcrest’s wrongdoing occurred as early as August 2012.
“While our clients welcome Newcrest’s admissions, we allege that these contraventions form part of a wider course of misconduct,” Slater & Gordon senior class action lawyer Ben Phi said.
“We have been retained by a significant number of retail and institutional shareholders and the losses claimed are substantial.”
Newcrest intends to vigorously defend the proceedings, the statement said.
According to the statement of claim Slater & Gordon is focusing its case on five-year forecasts made by Newcrest on August 13 in 2013.
The law firm alleges that Newcrest was “aware” at this time its gold production projections were not as high as they stated they were, with scale-backs looming at its Lihir mine in Papua New Guinea.
Shares have opened broadly flat, with energy stocks outperforming.
The ASX 200 is 1 point higher at 5540.9, while the All Ords is up a couple to 5530.9.
Banks are mixed, while QBE is 0.9 per cent lower after enjoying some strong gains yesterday.
Miners are generally higher, and Oil Search has added 1.4 per cent on its quarterly production report, with its PNG LNG partner Santos climbing 0.6 per cent, adding to some positive energy in the market this morning.
Silex Systems is in a trading halt to enable the company to “confirm proposed changes to the commercialisation arrangements in relation to its SILEX laser-based uranium enrichment technology,” the company said in a statement to the ASX.
The shares will resume trading when an announcement is made or by market open on Thursday.
Oil Search has released its second-quarter production report, and investors like what they see, bidding the stock up 0.8 per cent to $9.58 in a flat market early.
Operating revenue over the June quarter was $339.7 million, against $204.9 million for the same period a year ago.
Quarterly production reached 3.69 million barrels of oil equivalent, against 1.63 mmboe a year ago.
The company said it expects annual production from the PNG LNG to plateau at around 21 mmboe by end-2014.
The company maintains its June forecast FY14 total output of 17-20 Mmboe
Oil Search said it expects to complete strategic review in 3Q, with the review to focus on structure, cost base, operating model, growth opportunities.
The role of Australian banks in helping to fund foreign investment in real estate is coming under scrutiny, as politicians investigate overseas buyers' activity in the housing market.
The trend highlights the global pressure on banks to know more about their customers' financial dealings, amid allegations wealthy Chinese citizens are secretly transferring money into overseas property markets, including Australia's.
As foreign investment in housing surges and banks eye their cut, lenders' activities in relation to overseas buyers are being examined as part of a broader parliamentary inquiry into residential housing.
At hearings of the House of Representatives economics committee late last month, ANZ Bank and Macquarie Group were asked to provide details of how they were ensuring various foreign investment rules were followed.
However, responses from banks, published this month, highlight the limitations of what lenders currently know about foreign real estate investors.
Macquarie Group was asked what it did to make sure loan clients were not misusing the significant investor visa and diverting the funds into property assets. Known as the "888" visa in reference to the lucky Chinese number, the visa fast tracks residency status for wealthy foreigners who invest at lease $5 million in bonds, certain managed funds, or private companies.
A response from Macquarie this month said it did not directly monitor how loaned funds were being used but it had the power to call in the loan or seize collateral early if clients were dishonest.
TPG and The Carlyle Group, the private equity owners of Healthscope, have decided to bring forward the institutional bookbuild to midday today.
Healthscope is seeking to raise $2.25 billion to $2.57 billion at 20 times to 23 times forecast 2015 net profit.
The deal is covered at the mid-point of the $1.76-to-$2.29 a share range. What remains unclear is the volume of the stock the private equity owners will retain in a publicly owned Healthscope.
Healthscope, the largest initial public offer since QR National in December 2010, had initially scheduled the institutional bookbuild for Wednesday at 9am. The earlier timeframe now means it will close Thursday lunchtime with final allocations later that evening.
This from Intelligent Investor:
Compared with Ramsay Health Care, Healthscope is a bargain. But is it cheap? Ramsay, Australia’s largest private hospital operator, currently sports a price-earnings ratio (PER) of 34 and dividend yield of 1.7%.
Despite being a very similar business, when Healthscope floats later this month it will have a PER of 25 and a yield twice that of Ramsay’s. There’s a lot to like about this business but, growing at only 5-8% a year, it’s too expensive.
Despite the defensive earnings, favourable industry fundamentals and high quality New Zealand pathology business, Healthscope looks fully priced. With a dividend yield of just 3% and private equity selling, there’s not much in the way of a margin of safety.
There’s a good business here but we’d need a far lower share price to recommend it.