Category Archives: australia

Australian Market Erases Decline

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SYDNEY–Further cuts in Australian interest rates in 2012 look set to be decided mostly by the crisis in Europe, with the Reserve Bank of Australia saying Tuesday the relative health of the local economy argued against cutting rates at its policy meeting on Dec. 6.

The S&P/ASX 200 index erased early declines following the central bank’s statement, recently trading down 0.01% at 4,059.90.

“There had been further evidence that a major investment boom was in progress and the overall economy was expanding at a pace broadly in line with trend. Australia’s main trading partners were also still recording solid growth,” the minutes of the meeting said.

“This did not suggest any strong need to cut interest rates,” it added.

Still, it was Europe’s escalating debt woes and a diminished inflation threat that sealed the deal on cutting interest rates for a second time in as many months in December. ”These (European) risks had, if anything, increased though the timing and magnitude of any effects that might flow from them remained very difficult to predict,” the minutes added.

The comments suggest the RBA was reluctant to cut interest rates this month, mindful of a record boom in mining investment, which is only now just starting to drive the economy. The RBA cut its benchmark cash rate to 4.25% in December warning the crisis and economic slowdown in Europe was beginning to show up in Asia.

Australia’s mining boom is truly monumental with A$450 billion (more than 30% of gross domestic output) projects now either being developed or in the planning stages. The commodity-rich economy has hitched its fortunes to Asia with more than 70% of its exports going into the region. It grew at an annualized pace of nearly 4.0% in the third quarter, but the expansion was largely due to mining.

The lopsided nature of the economy has seen key employers in the manufacturing and tourism sectors suffer badly by comparison, nudging unemployment higher.

Still, the Paris-based Organization for Economic Cooperation and Development said recently it expects Australia to be among the fastest growing developed economies in 2012.

The level of concern over Europe expressed by the RBA and the government has risen sharply over recent months, with Treasurer Wayne Swan warning the economy isn’t immune to the crisis. Stress testing of the major banks is ongoing ahead of what many expect will be a hard year for the world economy in 2012 amid the threat of a widening credit freeze in Europe.

Anecdotes from the Christmas sales period has also point to hard times for retailers, faced with consumers still fearful of what may emerge in the world economy, and intent on reducing debt exposures.

The Treasury Department Friday reported nonmining businesses are battling in the face of an elevated Australian dollar, which is still at historically high levels.

Financial markets continue to forecast more interest rates cut by the RBA in 2012, with the first likely in February when the RBA’s policy-making board next meets.

-James Glynn

The Panda Is Getting Very Bearish

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AP

For the past year, the People’s Bank of China has been caught between two contradictory policy paths of equal priority. It has either had to raise rates to slow inflation, or lower them to spur the domestic economy. If either failed, it could spur social unrest. Complicating this balancing act was a third, and equally threatening risk: a real estate bubble, which has the potential to hurt both the economy and the financial system.

Until its surprise move to cut reserve requirements for banks by 50 basis points last week, the PBOC has been tackling both the inflation and property market risks with a bias toward gradual policy tightening, implicitly suggesting that it’s prepared to let growth slow a bit to contain those risks.

But now, with Europe almost certainly entering recession and the global growth outlook deteriorating, the downside economic risks are showing up. And that has serious implications for the world economy and for currency allocations.

On Dec. 1, HSBC’s China PMI fell to an unexpected 28-month low of 47.7 in November from 51 in October, perpetuating a downtrend in place since November last year and pushing the indicator into the sub-50 contraction territory. And on Thursday China announced that industrial output growth dropped in November to its slowest pace in two years: 12.4% from 13.2% the month prior.

To be sure, inflation also fell sharply, with consumer prices showing just a 4.2% on-year gain in November, compared with 5.5% in October. But although that gives the PBOC breathing room to take more easing measures–most likely through more reserve requirement reductions–it might also suggest that the slowdown is greater than the market expected.

And the most important factor in that risk is in the still-unresolved problem of the real estate bubble. Although foreigners have been accustomed to thinking of exports as the engine of Chinese growth, some 70% of it has come from internal real estate investment, according to Kynikos Associates’ Jim Chanos–admittedly, one of the most prominent China bears.

A popping of that bubble will have devastating consequences for the global economy.

Although various Chinese cities have reported a precipitous decline in home purchases in recent months, prices are virtually flat. That suggests a possible disconnect in monetary policy and the risk of big declines to come, posing a serious risk to the banks that financed the bubble and to the construction industry that has kept China booming.

After all, raising rates to slow a housing boom is one thing; lowering them without a coincident fall in prices while an economy slows is not likely to have the same effect.

If China were to stumble, so should its currency, the yuan. But if it depreciates, it could inflame political tensions in the US. so throw geopolitical risks into the problems Beijing has to deal with.

With all the plates in the air that China is spinning, most analysts still see its leaders managing a “soft landing.” They may be heartened by the latest inflation numbers, but I am not so sure.

These are not long-term capitalists with great experience managing a free market economy of 1.3 billion people.

The circus in Europe has been a diversion from the real problem. The inexperience of China’s leaders to manage an economy being pulled in two different directions is the real threat to global growth.

So what does this mean for FX? For one, it means the Aussie dollar is possibly the most overvalued currency. Its proximity to China have made it China’s favorite source for raw materials. The biggest reason for gains to Australia and her currency.

HTM Investment Group Cuts Staff

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ASX-listed Wilson HTM Investment Group last week laid off less than 5% of its staff, Managing Director Andrew Coppin said Monday.

The company is the latest in a string of financial-services firms to cut back on staff due to challenging markets. JBWere cut 5% of its staff in August, while Royal Bank of Scotland and Macquarie Group have both decreased local headcount in the past six months.

“We are undergoing a rationalization of the business and like so many firms in our sector at the moment, we are doing what we have to maintain and secure the future of the business to be in a strong position for future growth,” Mr. Coppin said.

Though cuts have occurred across the board — in corporate finance, research, institutional sales, private wealth and the back office — Mr. Coppin said the company is still in the process of recruiting for its core revenue-generating businesses of private wealth and capital markets.

Despite the latest layoffs, Mr. Coppin estimates the firm’s headcount to be 8% lighter than it was 12 months ago.

The recent cuts were flagged at the company’s annual general meeting Oct. 27, where Mr. Coppin said: “The future leaders in the sector will be those who remain lean, agile and most responsive to market change.” Mr. Coppin became managing director on the same date, stepping up from his role as head of private wealth management.

Deutsche Bank owns a 19.55% stake in Wilson HTM Investment Group, which had A$10.5 billion (US$10.9 billion) of funds under management on Sept. 30. The stock was floated at A$2 in 2007 and was last flat at A$0.48.

Alcoa Results Trim Resources

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By David Rogers

Australia’s S&P/ASX 200 index is down 0.7% at 4200 after hitting a two-day low of 4185 on relatively light trading volumes. Resources are leading a modest pullback after disappointing results from Alcoa. Sharp falls in base metal prices generated further profit taking after resources led a 10% rise in the Australian share market in the past week.

BHP, Rio Tinto and Fortescue (FMG.AU) are down 1.9%-3.3%, while Alumina is down 4.4%. Energy stocks are being weighed down by a A$500 million capital raising by ERA, with Woodside down 1.1%, Santos down 3.2% and Paladin  down 2.7%. Financials are mixed, with CBA up 0.5% after CLSA upgraded the firm to outperform, while Westpac  is down 0.9% and Macquarie  down 1.2%.

“The market is directionless after strong gains in the past week,” says MF Global senior trader Nick Burmester. “Slovakia’s ‘no vote’ on the expanded European stability fund was no great surprise, while sloppy results from Alcoa have weighed on resources. I think we will trade sideways until European is sorted out, unless we see any big surprises from U.S. reporting season,” he says.

Will U.S. Investors Buy Australia’s Mortgage Story?

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SYDNEY–National Australia Bank Ltd., one of the country’s biggest lenders, is planning to test the appetite of U.S.-based investors through an offer of residential mortgage-backed securities that includes a U.S. dollar tranche, the first such issue by the bank since 2006.

Bloomberg News
Homes for sale in Scarborough, a suburb of Perth, in January.

The offer–which the bank hopes will raise at least 750 million Australian dollars, or US$767 million, but could be upsized–breaks a two-month drought in local RMBS supply. It also comes during a volatile period for bank funding costs as investors remain nervous on the worsening outlook for Europe’s debt crisis.

Australia’s banks typically lean heavily on global wholesale funding markets but have been able to steer clear of public borrowing during the recent burst of turbulence as lending growth slows and cash deposits continue to increase. Issuance of RMBS in Australia has recovered since the depths of the 2008 crisis at a pace well ahead of the country’s developed-economy peers but remains below volumes seen in the lead-up to the 2007 credit crunch.

NAB’s offer is backed by about 2,500 home loans all originated and serviced by the bank itself. The National RMBS Trust 2011-2 is the second RMBS issue by NAB in 2011. The offer is made up of Class A notes split between U.S. dollar floating-rate 2-year soft bullet Class A1 notes aimed at U.S.-based institutional investors and Australian dollar 3-year amortizing Class A2 notes.

Eva Zileli, a senior manager in group funding at the Melbourne-based lender, said the country’s still-low unemployment rate and a robust housing market where default rates remain low have given NAB an opportunity to diversify its funding base through foreign investors.

“The Australian market has held up well. It’s a positive story we have got to sell to offshore investors and they feel quite comfortable with the mortgage story in Australia,” she said.

–Enda Curran

Tiger Rises After Australian Ban Is Lifted

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By Chunhan Wong

Tiger Airways is up 5.3% at 1.09 Singapore dollars (90 U.S. cents) after Australia’s aviation safety regulators lifted a ban on its flights there.

Tiger says its Australian operations will gradually resume from Friday, but will undergo consolidation. The low-cost carrier will cut its Australian fleet to eight jets from 10—with two planes redeployed to Singapore—as well as shut its Adelaide crew base and temporarily suspend its Avalon crew base.

In a note written before the ban was lifted, Morgan Stanley said “the decision to downsize or exit the Australian operation might not be a negative outcome for Tiger if the aircraft resources can be deployed on the more-profitable Asean markets than at the less profitable Australian operation.” The house has an “equalweight” call on Tiger, with a S$1.15 target.

UBS, which has a “sell” call and S$0.70 target on the carrier, wrote in a note before the ban was lifted that “the problem in Australia will inevitably affect bookings at Tiger Singapore, while any plan to move the Australian capacity into Singapore may result in overcapacity.”

Australia Shares Hit Two-Year Low

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By David Rogers

The Australian share market was on track Friday for its biggest fall since January 2009 after diving to a two-year low on the back of Thursday’s steep declines on Wall Street.

At 0300 GMT, the benchmark S&P/ASX 200 was down 3.9% at 4108.3 after plunging to 4087.7 on extremely heavy share trading volume—about twice normal levels.

“The trigger for the rout seems to have been the BOJ’s intervention in the yen, which triggered a full blown liquidation of the carry trade,” said Bell Potter Managing Director Charlie Aitken. He added that events this week will ensure the Reserve Bank of Australia cuts rates before the end of the year.

Traders said offshore hedge funds were still selling domestic banks, although not as aggressively as Thursday. They also said liquidation tied to margin calls was particularly strong during Friday morning. Analysts feared U.S. non-farm payrolls data, due later Friday, would continue the run of poor U.S. economic data.

Investors should consider switching to Australian financials from resources, in light of strong bank yields and cheap valuations, and the potential for a further slide in commodity prices that would likely weigh on resources,” CityIndex chief market strategist Peter Esho said.

“There have been a lot of brokers putting out ‘what-if’ scenarios on domestic banks in regard to residential mortgages, but I think resources will bear the brunt of repatriation selling,” Esho said. “We are having a discussion about growth, and not necessarily a liquidity crisis. Commodities are in the firing line of concern about global growth and there is room for them to fall further.”

Esho said banks have already fallen heavily and their dividends are starting to look very attractive.

The energy sector was weakest, with Woodside down 5.6% after Nymex crude oil fell US$5.86 to US$86.63 overnight.

Materials, financials, industrials and consumer discretionary stocks were also underperforming in reaction to Wall Street and commodity prices. BHP Billiton is down 4.4%, Macquarie down 8.4%, Leighton down 4.1% and David Jones down 6.8%. Major banks were mostly outperforming, with CBA down 2.1% before its first-half results and upcoming dividend payment.

Aussie Dollar Falls on Westpac Forecast

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The Aussie dollar erased its early, schadenfreude rally against the greenback, spurred by the Standard & Poor’s warning of a possible downgrade of U.S. debt, after Westpac issued a negative outlook for the Australian economy and forecast the Reserve Bank of Australia would cut rates sharply.

It was the first major domestic bank to forecast interest rate cuts from Australia’s central bank in the coming months.

Citing rising offshore risks, including the debt concerns growing in both Europe and the U.S., Westpac said it now expects a 0.25 percentage-point rate cut from the Reserve Bank of Australia in December. By the end of 2012, Westpac expects 1 percentage point of monetary easing in rates, which currently stand at 4.75%.

BNP Paribas FX Strategist Robert Ryan called the views from Westpac “extremely negative.”

That Westpac, one of Australia’s large lenders, now expects the RBA to begin easing policy by the end of 2011 and into 2012 is a very bearish signal, says TD Securities Strategist Roland Randall.

“It’s a worry that one of Australia’s major banks is calling for a rate cut,” he said.

That Westpac, one of Australia’s large lenders, nowexpects the RBA to begin easing policy by the end of 2011 and into 2012 is avery bearish signal, says TD Securities Strategist Roland Randall. “It’s a worrythat one of Australia’s major banks is calling for a rate cut.”

The AUD/USD fell after the move, to US$1.0711 from US$1.0741.

S&P’s warning on U.S. ratings is a “a little more intense than Moody’s,” but really is just another reminder to Congress to get their fiscal house in order and will also push back further any prospect of tightening by the Fed, said ANZ FX strategist Grant Turley.

“It’s just more pressure on the U.S. dollar,” he said, adding that the Aussie dollar may lag gains on risk-aversion trade.

The Aussie dollar was most recently trading at US$1.0662.

Buyers Turn Scarce in Australia

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Carla Gottgens/Bloomberg News
People passing by, but not enough going in

By David Rogers and Ross Kelly

Australian shares bounced off a two-week low, but still finished the day down 0.5% as retailers took a hammering—Harvey Norman down 4.6%, JB Hi-Fi down 5.3% and Myer Holdings down 6.4%.

And then there’s David Jones, which may get the blame for the others’ troubles; it fell 18% to a two-year low of 3.20 Australian dollars (US$3.44) after the upscale department store delivered a profit warning Wednesday, saying it’s witnessing a dramatic and rapid deterioration in trading conditions. It said profit for the second half of the current fiscal year could be down 12%—it had  previously pointed to a 5% rise—and first-half profit for fiscal 2012 could be down 20%.

“David Jones has certainly created some problems for the market,” Justin Gallagher, head of domestic sales and execution at RBS. “Obviously the implications for domestic consumer health aren’t good.”

Deutsche Bank, which cut David Jones to hold from buy after the warning, said, “While we continue to expect an eventual recovery in sales growth, given the speed and depth of the deterioration in June, we have pushed the expected recovery out and downgraded our longer-term sales growth expectations.”

Macquarie kept its outperform rating on David Jones, but lowered its price target to A$3.89 from A$4.80 and said the profit warning “signals a breakdown in David Jones management to accurately and reliably predict sales and earnings.”

But Citi, while saying the Australian retail sector is likely to remain out of favor until better sales momentum emerges, does argue that the David Jones’s weak fourth-quarter sales are likely to be the worst of the major listed retailers and that the price/earnings ratios of many of them already reflect the risk of a cut in their profit outlooks.

A Wine-Free Foster’s Makes Its Debut

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By Ross Kelly

SYDNEY–Foster’s Group Ltd. was officially unshackled from its underperforming wine assets Tuesday, but the market remained unconvinced that a takeover of the iconic Australian company is imminent.

Foster’s is now a pure-play beer outfit, valued by investors Tuesday at A$8.9 billion on its first day of trade on the Australian Securities Exchange. The wine assets, housed in new entity Treasury Wine Estates Ltd., were valued by the market around 2.1 billion Australian dollars (US$2.26 billion).

Since Foster’s bought it 15 years ago, the wine business has been plagued by grape gluts, bad weather, the financial crisis and a strong Australian dollar making it difficult to grow sales in key markets such as the U.S.

The asset was considered a poison pill for any potential suitors, and the beer group’s share performance Tuesday shows that the demerger has already had its desired effect of increasing shareholder value.

Before the demerger, the old Foster’s had a market capitalization of A$10.6 billion. The market is now valuing the two new companies combined at A$11 billion.

Australians are among the biggest beer drinkers in the world, in terms of volume per capita, and the nation’s population growth is forecast to outstrip the U.S. and Western Europe, making it an attractive place to invest.

Goldman Sachs analysts have also noted that Australia has a stable duopoly beer market, with the top two players having a combined market share of close to 90%.

But the sheer size of the deal that would be required to buy Foster’s limits the number of potential acquirers, and the current strength of the Australian dollar could be putting them off.

“We remain unconvinced that bidders are lining up,” Citigroup analysts said Tuesday.

While the broker has applied a 25% bid probability in its A$4.50 a share valuation of the new Foster’s, it said the strong Australian currency makes the company more expensive to foreign suitors, while its financial metrics are currently unattractive. “The Foster’s share price needs to go down before it can go up,” Citigroup said.

Foster’s shares opened trading at A$4.57 Tuesday, down from their last trade of A$5.48 when wine was still part of the business. Analysts expected Foster’s to be valued somewhere around A$4.50, so Tuesday’s performance was broadly in line with expectations.

Goldman Sachs valued the demerged Foster’s at A$4.70 a share, partly because of a favorable ruling in a tax dispute this week, and factored in an extra 30 cents to reflect the possibility of takeover activity. “Accordingly, we expect Foster’s to trade between A$4.70 and A$5.00 in the near term,” the analysts said in a note Monday.

Representatives for Fosters weren’t available to comment Tuesday.

The number of potential suitors, however, could be limited to just a few such as SAB Miller PLC or Anheuser-Busch InBev NV, Citi said.

The strong currency, lack of global brand and Australia’s isolated geography could also act as a deterrent, it said.

Still, Goldman Sachs says “there is a good chance of a takeover of Foster’s on a three-year view.”

The company’s shares drifted lower to close trade at A$4.53 each, while Treasury Wine Estates finished a little higher at A$3.36.

Fairfax Media Shares Slide 8% After Company Forecasts Earnings Drop

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By Ross Kelly

Fairfax Media Ltd. shares are down 8.8% to 1.20 Australian dollars (US$1.31) in Sydney after the publisher of the Sydney Morning Herald, the Age and the Australian Financial Review newspapers said it expected its operating earnings for the fiscal year ending next month to be down 6.1%, to 600 million Australian dollars (US$656 million) from last year’s A$639.1 million.

Bloomberg News
Extra! Fairfax shares tumble on weak forecast.

Revenue in the second half of the financial year is running 4.5% behind last year’s, Fairfax said, at the lower end of its forecast range. In its interim results release in February the company had said “second-half revenues could be in the range of plus or minus 5% on last year.” Operational costs, meanwhile, are tracking 1% higher than following the development of new iPad applications and recent small acquisitions.
“While the rate of decline in advertising levels has abated slightly over the past month, the company does not anticipate market conditions over the remainder of the current financial year improving sufficiently to offset the declines experienced to date,” Fairfax said in a statement.

Australian Dollar Soars on Inflation

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By James Glynn

Australia’s inflation rate rose more than expected in the first quarter of 2011 due in part to soaring world oil prices and a flood-induced food price spike, sending the Australian dollar sharply higher and narrowing the odds of an interest rate increase in coming months.

The consumer price index rose 1.6% in the first quarter from the fourth quarter of 2010 and rose 3.3% from a year earlier, the Australian Bureau of Statistics said Wednesday. Economists had expected the CPI to rise 1.2% on quarter and rise 3.0% on year.

Core inflation, which is crucial to policy making at the Reserve Bank of Australia, rose by an average of 0.9% in the first quarter, easily beating an expected rise of 0.6%.

The big increases to the CPI in the quarter came from food prices, health and education costs, the ABS said. Much of this was expected, but economists said the spike in core inflation will be “hard to dismiss’ at the RBA.

Adam Carr, senior economist at ICAP, said the RBA must hike interest rates now as inflation is clearly a problem. “This is no longer funny,” he said, predicting the next hike could come in June.

The Australian dollar rallied to a fresh 29-year high of US$1.0851 after the CPI report. The currency was trading at US$1.0826.

The RBA uses a 2%-3% inflation target over the course of the economic cycle as the basis of its policy making. It has raised interest rates seven times since late 2009, pausing since November with the cash rate target at a slightly restrictive 4.75%. Three-year government bond futures prices weakened sharply, falling 7 ticks to 94.84 on the CPI data.

Stephen Walters, chief economist at JPMorgan, described the inflation data as “punchy.” He said while there is no immediate “bell ringing” for the RBA, it is increasingly clear interest rates are set too low.

“On the cusp of the biggest mining boom in history, and with no spare capacity” the next move in interest rates is clearly higher, he added.

With utility costs like electricity prices climbing, the danger now is that this inflation problem becomes entrenched in consumer expectations, posing a genuine risk that wages pressures will rise further, he said.

This is the trough for inflation, Mr. Walters said.

Already the RBA has highlighted rising wages, noting the pace of increase has returned to that seen before the global financial crisis.

“The risk of the RBA moving again in the next few months has certainly increased after those numbers,” said Brian Redican, senior economist at Macquarie Bank.