ASX poised to rise for fourth session, $A drops on RBA capitulation – The Australian Financial Review

The main overnight mover was the Australian dollar which has shed 1.7 per cent and was leaning towards a US70ยข handle.

The RBA’s perceived policy shift, thanks to Dr Lowe’s midday speech yesterday, knocked the wind out of the local currency as well as Australian government debt.

The yield on the Australian 2-year security fell 12 basis points to 1.68 per cent, the 5-year yield fell 13 basis points to 1.75 per cent and the yield on the 10-year note slid 10 basis points to 2.15 per cent, according to Bloomberg pricing. The 10-year yield is now at its lowest since October 2016.

The gap between Australian and US 10-year notes now stands at 54 basis points.

Wall Street ended lower on the day with little news to bolster sentiment.

“The market is feeling a little exhausted after we’ve had a nice run in January and early February,” Nathan Thooft, global head of asset allocation at Manulife Asset Management in Boston, told Reuters.

Investors cited a void of catalysts for market gains.

“Trade talks are probably the thing that’s really intriguing to the market, but that’s in March,” said Kim Forrest, senior portfolio manager at Fort Pitt Capital Group in Pittsburgh, referring to the deadline for the United States and China to reach a trade agreement before additional tariffs go into effect.

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Today’s Agenda

Local data: AiG performance of construction January, NAB business confidence fourth quarter; NZ fourth quarter unemployment rate

Westpac on the NZ jobs data: “New Zealand releases Q4 labour force data at 8:45am Syd. The Q3 report was extremely strong, perhaps helped by some statistical noise: the unemployment rate sank from 4.4% to 3.9% and total jobs surged 1.1%. We view the overall labour market as still on an improving trend but look for some payback in Q4, with employment to have risen just 0.2%qtr and the unemployment rate up to 4.2%.”

Overseas data: Bank of England policy meeting; German industrial production December

Capital Economics on the BoE: “With the outcome of Brexit as unclear as ever, it is likely that the Bank of England’s Monetary Policy Committee (MPC) will keep rates unchanged at 0.75% on Thursday. However, the meeting’s accompanying Inflation Report may provide some clues to how keen the MPC is to change rates once Brexit has been resolved. So long as a deal is eventually struck, we think interest rates will rise more quickly than is widely anticipated.”

Market Highlights

SPI futures up 18 points or 0.3% to 5988 at about 9am AEDT

AUD -1.7% to 71.08 US cents

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On Wall St: Dow -0.1% S&P 500 -0.2% Nasdaq -0.4%

In New York, BHP -0.3% Rio +0.7% Atlassian +0.8%

In Europe: Stoxx 50 -0.1% FTSE -0.1% CAC -0.1% DAX -0.4%

Spot gold -0.4% to $US1310.37 an ounce at 1.30pm New York time

Brent crude +1% to $US62.61 a barrel

US oil +0.7% to $US54.04 a barrel

Iron ore n/a

Dalian iron ore n/a

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LME aluminium -0.8% to $US1907 a tonne

LME copper +0.8% to $US6279 a tonne

2-year yield: US 2.52% Australia 1.68%

5-year yield: US 2.50% Australia 1.75%

10-year yield: US 2.69% Australia 2.15% Germany

US-Australia 10-year yield gap as of 8.59am AEDT: 54 basis points

From Today’s Financial Review

RBA’s ‘neutral’ wipes out big four calls: The RBA’s move to a neutral stance in a slowing economy and softening housing market has wiped out interest rate hike expectations from the big four banks for 2019.

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Who is Australia’s next Mike Cannon-Brookes?: Sceptics say Australia will never produce a technology giant like Facebook or Google, but there are some real contenders and many true believers.

Chase income stocks amid slowing growth: Investors’ total returns from equities will likely come from dividends or income rather than capital gains, says JP Morgan global market strategist Kerry Craig.

United States

US stocks edged lower on Wednesday as videogame makers gave disappointing revenue forecasts and investors awaited developments on US-China trade relations.

The benchmark S&P 500 and the Nasdaq were weighed by declines in shares of Electronic Arts, which tumbled 13.3 per cent after the videogame publisher forecast full-year revenue below Wall Street estimates. The sharp drop pulled down shares of rival videogame publisher Activision Blizzard, which fell 10.1 per cent.

Shares of industry peer Take-Two Interactive Software also dropped sharply, 13.8 per cent, after the company’s similarly underwhelming forecast.

The slump in videogame stocks contributed to a 1.5 per cent decline in the S&P 500 communication services sector, the largest drop among the S&P’s major sectors.

Despite the fall, Wall Street’s indexes remained near two-month highs. A 7.3 per cent gain in the S&P 500 would put the index above its record closing September high.

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Morningstar on Warren Buffett’s beta advantage: “Berkshire has had an average leverage ratio of 1.7, with an average borrowing cost of 1.7%.”

Europe

European shares inched up to touch 12-week highs on Wednesday, fuelled by strong gains in Italian banks and tech stocks, while Ubisoft sank following a revenue warning from US videogame maker Electronic Arts.

Europe’s STOXX 600 managed a 0.2 per cent gain by the close, having oscillated in and out of negative territory during the day.

The regional benchmark hid wide variations at country level: Germany’s trade-sensitive DAX was down 0.4 per cent and France’s CAC 40 fell 0.1 per cent while Italy’s FTSE MIB jumped 0.8 per cent.

Bank stocks, which began the day as a drag on the market, reversed course to rise thanks to a rally in Italian lenders after a new 30-year Italian bond drew record demand, a positive sign for government bonds.

Intesa Sanpaolo and Unicredit climbed 2.4 and 4.4 per cent, helping drive the banks index up 1 per cent, the top boost to the STOXX.

Strong results from Dutch lender ING also helped lift the mood in bank stocks, which were the worst-performing in Europe last year.

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ING shares climbed 6.1 per cent after it reported stronger-than-expected earnings driven by rising interest income and fees.

“ING has reported a strong set of Q4 numbers but we would caution against extrapolating Q4 trends,” wrote UBS analysts.

BNP Paribas shares recovered after weak results, ending the day up 1.8 per cent. The French lender reduced its profit target for 2020 and said weak financial markets hit revenues in the final quarter of 2018.

Asia

The Philippine stock market flirted with a bull market run Wednesday, before ending the day lower. Still, the benchmark has recovered a remarkable 18 percent in just three months — and investors say positive earnings results will further spur gains.

The Philippine Stock Exchange Index climbed as much as 1.8 per cent in Manila, before it fizzled, dipping below the 8212.59 level and closing the day 0.1 per cent lower at 8058.45. The surge since a two-year low in November has been on optimism that slowing inflation will boost earnings and support valuations. That’s encouraged foreign investors to return, as they poured more than $US413 million into the nation’s equity funds this year.

“While sentiments are very bullish because of better-than-expected economic data, investors should partially sell on rallies and buy on dips,’ said Wendy Estacio, an analyst at Unicapital Securities. “As the US and China near the deadline to reach a trade agreement, expect some dips but the market will be resilient if corporate earnings point to double-digit expansion.’

Japan’s Nikkei edged up on Wednesday with markets barely reacting to President Donald Trump’s State of the Union address, while attention remained on corporate earnings.

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Toyota Motor slipped into negative territory after the auto maker cut its annual net profit outlook during afternoon trade. The stock ended 0.7 per cent lower.

The Nikkei share average rose 0.1 per cent to 20,874.06.

Currencies

RBA’s ‘neutral’ wipes out big four calls: The RBA’s move to a neutral stance in a slowing economy and softening housing market has wiped out interest rate hike expectations from the big four banks for 2019.

$A resets as RBA enters ‘neutral zone’: The Australian dollar extended losses in the wake of the Reserve Bank signalling a shift to a more dovish rate stance.

Outlook for the Kiwi based on latest Reuters poll: “… analysts nudged up their near-term forecasts and see it rising to $0.7000 by year-end, compared with about $0.6866 on Wednesday. They see the currency stuck around $0.6700-$0.6800 in one, three and six months’ time, according to the median of up to 37 forecasts.

To be sure, some analysts see substantial downside risks. For 12 months ahead, forecasts stretch as low as $0.6100. The kiwi stumbled in 2018, shedding more than 5 percent against the U.S. dollar, although better-than-expected domestic data has helped cap losses.”

Commodities

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Nickel hit its highest in more than four months on concerns that a force majeure by Brazil’s Vale on some iron ore contracts could lead to restrictions in its nickel supply.

Benchmark nickel on the London Metal Exchange (LME) ended 0.9 per cent lower at $US12,925 per tonne, after it touched $US13,350, its highest since August 31, as the dollar firmed.

A Brazilian court forced production to stop at Vale’s iron ore mine after a tailings dam burst last month, killing more than 300 people and compelling Vale to tell clients it could not deliver on some iron ore contracts.

“The strength in nickel has been largely on worries that Vale’s nickel supply might be impacted after the iron ore force majeure,” said ING commodities strategist Warren Patterson.

“Whether that is justified though is the question, maybe the market is getting ahead of itself on the nickel side.”

Vale is the world’s top producer of nickel, which is mainly used in stainless steel.

Australian Sharemarket

Australian shares advanced for a third straight session on Wednesday as better-than-expected results offset losses made by the major banks.

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The S&P/ASX 200 Index climbed 20.2 points, or 0.3 per cent, to 6026.1 while the broader All Ordinaries rose 23.7 points, or 0.4 per cent, to 6091.8.

The major banks led the market losses on Wednesday after Commonwealth Bank reported a lower profit number than some analysts had been expecting. The bank said its net interest margin had been hit by higher funding and the performance of its core retail division had fallen. Its shares fell 1.4 per cent to $72.60.

Westpac shares closed 1.2 per cent lower at $26.37, ANZ slid 1.7 per cent to $26.41 and NAB declined 1.4 per cent to $24.62.

Street Talk

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with Reuters, Bloomberg, AAP

Comments? Questions? Let us know what you think of Before the Bell: timothy.moore@fairfaxmedia.com.au

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