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19th of January 2018

Economy



Markets Live: ASX Santa rally to hit pause

That's it for Markets Live for today.

Thanks for reading and for your comments.

See you all again tomorrow morning from 9.

The ASX edged higher to hit another post-GFC high on Wednesday, with miners leading the advance as investors head into the end of the year in an upbeat mood.

The S&P/ASX 200 index rose 3 points, or 0.1 per cent, to 6075, while the broader All Ordinaries advanced 4 points, or 0.1 per cent, to 6167. The Australian dollar traded at US76.76c.

The Australian market hasn't traded at current levels for nine years. It's strengthening along with US markets which are repeatedly hitting fresh record highs.

"The market's had a strong ride," said Matthew Sherwood, head of investment strategy at Perpetual Investments.

Going forward there will be two key drivers for markets - earnings and valuations, he said. Valuations have risen and the earnings outlook appears less positive than at the start of 2017.

"So we will probably see lower returns in regional markets and higher volatility," he said.

Against this backdrop Mr Sherwood said the Australian market will likely lag other markets given its weighting to "old economy" components. Miners and banks make up a large chunk of the Australian market but it is light on technology stocks.

Turning to Wednesday's market action and Mr Sherwood noted a back-up in ten year bond yields overnight that resulted in some yield-related sectoral disparity in the Australian market. 

The overnight move in bond yields followed the passage of the US tax cut bill though the House of Representatives. It will now head to the Senate and looks set to get approval there as well, Mr Sherwood noted.

Telecom Telstra fell 1.1 per cent to $3.66, while Sydney Airport lost 1.3 per cent to $7.38 and property play Stockland slipped 1.1 per cent to $1.1 per cent.

Miners were the strongest performers by sector, with Rio Tinto gaining 0.9 per cent to $72.97 and South32 up 1.2 per cent to $3.41.

Ardent Leisure jumped 11.9 per cent to $1.34 after it said it has sold its bowling and entertainment division to privately-owned The Entertainment and Education Group for $160 million. The deal will allow it to focus on its core theme parks and US-based Main Event Entertainment businesses.

Domino's Pizza recovered some ground on Wednesday, rising 3.9 per cent to $44.67 and paring year to date losses to 31 per cent.

Domino's shares fell 7 per cent during trade on Tuesday, which Morgan Stanley's retail analyst Tom Kierath said was related to the wave of selling surrounding another prominent Queensland franchisor, Retail Food Group.

RFG's horror run continued on Wednesday, with another 17.9 per cent wiped off the value of the company. The stock has now fallen from a high of $7.18 in April to just $1.62 by close of trading on Wednesday.

The nation's biggest cattle company Australian Agricultural Co climbed 5.1 per cent to $1.93 after it turned to a Westpac fixed income specialist to bolster its performance after a five month international search for a new chief executive officer. Hugh Killen will start as CEO on February 1.

The World Coal Association has hit back at mining giant BHP, saying the miner inaccurately depicted the views of the association on climate and energy policy in a BHP report released this week.

In a written statement the world coal lobby group said it was "disappointed" by the BHP report, and that the association supported a "balanced approach" to climate and energy policy.

In a much-anticipated review of its membership of industry groups, BHP said it had reached a "preliminary" decision to dump its membership of the world coal lobby group. It said it would communicate this decision to the WCA before making a final decision by the end of March next year.

BHP attributed the move to what it said was a "material difference" between itself and the World Coal Association on climate and energy policy.

BHP said the WCA had "supported abandoning the proposed Australian Clean Energy Target because in their view abandoning the Clean Energy Target would improve the investment climate for HELE generation". HELE stands for High Efficiency Low Emissions coal-fired electricity generation.

BHP said that it believed that governments "should focus on setting policies to facilitate efficient markets".

BHP shares are up 0.2 per cent today.

Is it time to wade into another one of Australia's most shorted stocks? That's the suggestion from Morgan Stanley, which says yet another sell-off in Domino's Pizza shares could mean it is time to buy.

Domino's shares fell 7 per cent during trade on Tuesday, which Morgan Stanley's retail analyst Tom Kierath said was related to the wave of selling surrounding another prominent Queensland franchisor, Retail Food Group.

RFG, which operates more than 300 pizza stores under the Crust and Pizza Capers brands, issued a issued a horror profit downgrade on Tuesday.

"Recent press reports regarding DMP's competitor RFG has seen some negative impact on Domino's share price. But at just a 22 per cent premium to ASX 200 industrials index (excluding financials) we think Domino's value looks compelling," Mr Kierath told clients.

Domino's is the third most shorted company on the ASX, with 16.5 per cent of the company in the hands of short sellers.

The stock recovered some ground on Wednesday, rising 2.4 per cent to $44.02. But the stock is still down 30 per cent in the last 12 months.

Mr Kierath said there were a number of differences between Domino's and RFG, including the fact that Domino's franchisees continues to sign up for additional stores.

"Domino's stores have superior economics, including lower rent and higher sales per store," he said.

Morgan Stanley also said the closure of any Pizza Capers and Crust stores would be a small positive for Domino's

"Any greater scrutiny by regulators of the franchise model could also see benefits for DMP's business model," Mr Kierath said.

James Thomson reports

Having subdued Australia's housing market frenzy, governor Philip Lowe now has to steer his way through the hangover.

Despite being saddled with record household debt and wretched wages growth, Australia's economy is showing signs of picking up steam, with hiring on a tear and firms investing.

The dual narratives have prompted the central bank to sit still on record-low interest rates for 16 months, and now present Lowe with a dilemma for 2018: gauging just when the economy can handle a hike.

"The challenge is not to jump immediately from mission accomplished in housing into the next tightening cycle," said Daniel Blake, an interest-rate strategist at Morgan Stanley in Sydney.

"You want to see how this cooling housing market affects consumption spending, because some have ridden the asset-price growth and taken advantage of that, and others have followed in with a lot of leverage."

The timing of the first rate rise since 2010 is in dispute: Goldman Sachs Group's prediction for May tops the hawks, while Westpac Banking's 2020 call leads the doves. Markets, meanwhile, are honing in on the fourth quarter of next year.

Lowe said late last month that spare capacity in the economy and a subdued inflation outlook meant there wasn't a strong case "for a near-term adjustment" in monetary policy.

Part of the reason for slack - despite record full-time hiring - is Australia's booming population growth.

The mix of migration-driven demand, a lack of homes and former RBA governor Glenn Stevens's easing cycle that slashed rates from 4.75 per cent in 2011 to 1.5 per cent last year, has also fuelled a housing bonanza. Property prices in Sydney almost doubled in that period.

Read more here

Mining services giant Orica has taken another step into the world of big data, buying Australian technology group GroundProbe from private equity firm Crescent Capital for $205 million.

GroundProbe provides monitoring and measurement systems to mining companies, and specialises in tools and analytics - including laser and radar technology - to monitor the stability of mine walls to improve safety and productivity.

The deal continues Orica's push into data and technology services; it currently operates two businesses in this area, BlastIQ and Nitro Consult, both of which use data to improve the performance of customers' explosions.

"The integration of GroundProbe's market leading technologies will further consolidate our position as the industry leader in digitally enabled blasting solutions to the mining industry, and strengthen our existing presence in the large and high growth mining and civil monitoring markets," Orica chief executive Alberto Calderon said in a statement.

"We believe the potential for data-driven improvement in the drill and blast component of the mining value chain is significant. By integrating GroundProbe's capabilities alongside BlastIQ and Nitro Consult, we are able to expand the digital solutions we can offer to help customers improve safety, productivity and environmental outcomes."

Shares lost 0.2 per cent in a slightly higher ASX. 

Bitcoin.com is one of the world's largest bitcoin sites, having grown its profile thanks to the insane price surge of the cryptocurrency this year. But its cofounder and CTO, Emil Oldenburg, a Swedish native, is extremely sceptical of bitcoin's future.

"I would say an investment in bitcoin is right now the riskiest investment you can make. There's an extremely high risk," he says in an interview with Swedish tech site Breakit.

"I have in fact sold all my bitcoins recently and switched to bitcoin cash," says Oldenburg, referring to the problems with bitcoin's high transaction costs and lead times.

Indeed, by some counts, bitcoin transaction fees are doubling every three months, and it now takes on average 4.5 hours to confirm a bitcoin transaction. Ars Technica reported that fees reached $US26 per trade recently. Bitcoin.com operates in everything that has to do with bitcoins.

Today, the site –based out of Tokyo but registered on St Kitts – has tens of millions of unique monthly visitors, according to Similarweb, a web analytics site. The company's biggest single revenue stream is its so called bitcoin "mining pool", where it forges new units of the cryptocurrency that are released on the market.

Oldenburg doesn't want to disclose any revenue numbers, more than revealing "it's an awfully lot of money," he says to Breakit. 

The ASX has managed to shake off early losses and notch fresh nine year highs today.

The S&P/ASX 200 index climbed 2 points to 6074, while the All Ordinaries rose by the same amount to reach 6165. The Australian dollar is at US76.60¢. 

Miners are leading the market higher, with South32 up 1 per cent, Rio TInto higher by 0.6 per cent and BHP up 0.2 per cent. 

The other heavyweight sector, the banks, was putting in a mixed performance, with CBA up 0.2 per cent but NAB down 0.5 per cent. 

BlueScope Steel rose 2 per cent, Boral advanced 1.3 per cent and Qantas shares climbed 1.3 per cent. 

Ardent Leisure jumped 7.8 per cent after the firm said it's going to sell its bowling division, while Webjet climbed 4 per cent after a broker upgrade. 

Retail Food Group shares slid again, trading down another 9.6 per cent, with the shares now down 59 per cent since the 8th of December.

There are hedge funds with blockbuster returns. Then there is the Pantera Bitcoin Fund.

The fund, one of the first in the world to dedicate itself to virtual currencies, released its returns in a letter sent to investors on Tuesday. The figure for the life of the fund, which was set up in 2013, is eye popping: 25,004 per cent.

A significant portion of the gains have come this year, thanks to the sky rocketing price of an individual bitcoin, which hit $19,000 on Monday. (The fund's 25,004 per cent figure was actually counted back when bitcoin was at $15,500, a week ago.)

For comparison, the top performing hedge fund in the world last year returned 148 per cent, according to Preqin, a hedge fund tracker. Since 2013, the Pantera Bitcoin Fund's compound annual returns have been around 250 per cent.

The Pantera Bitcoin Fund did not have to do much to get those returns. It just bought bitcoins and held them as the price went up.

Its performance is a reminder of the unprecedented gains that bitcoin has experienced, with some analysts arguing that bitcoin's moves have been even greater than the movements of Dutch tulip bulb prices back in the 1600s.

But Dan Morehead, who founded Pantera Capital and the fund after a career at Goldman Sachs, said it was not an easy decision to create a bitcoin-focused hedge fund in 2013, when bitcoin was primarily known as a currency for online drug markets.

"The first hard part was actually deciding to launch a cryptocurrency fund when everyone else thought that was crazy," he said on Monday.

Shares in the nation's biggest cattle company are up 2.9 per cent today after it said it has turned to a Westpac fixed income specialist to bolster its performance after a five month international search for a new chief executive officer.

Hugh Killen will start as CEO on February 1, the company said.

Mr Killen was most recently leading Westpac's fixed income, currency and commodities business but was lured to AAco to consult in the role of chief commercial officer.

He hails from a family with strong connections to the beef and cattle industry. The Killen family had grazing assets spanning NSW and the Northern Territory.

AACo chairman Donald McGauchie, who has been without a CEO since the abrupt departure of Jason Strong in August, said Mr Killen was a clear stand out during the recruitment process.

"Having run an international and domestic executive search process and having had the benefit of interacting directly with Hugh in recent months, we have no doubt that we have the right person to be our chief executive officer," Mr McGauchie said.

"Clearly an experienced managing director, we have been particularly impressed by Hugh's commercial skills and the speed with which he has got across our business, its strategy and future path."

One of the year's big movers:

Big Un, which uses its software to make promotional videos for restaurants, salons and other small businesses at lower costs, is the top performer this year among the almost 700 companies in Australia whose shares fetch at least $1 apiece.

A penny stock until June, Sydney-based Big Un is trading at more than $3 per share and is worth about $450 million.

It's hard to pinpoint what changed Big Un's fortunes, but it's been raising sales projections regularly.

This month brought another revision, with the company forecasting revenue of at least $22 million for the December quarter, a 10 per cent increase from expectations in November.

"We have perfected our business model and hit traction," said Big Un Chairman Hugh Massie, who signalled his bullishness when he bought $488,750 of shares at market price late last month. "Small businesses want video at a low cost and we are able to provide that through our combination of technology platform and operation structure."

Read more here

Webjet is up 3 per cent at $10.44 today after an upgrade to buy from neutral at UBS.

The broker said that the stock looks cheap given the company's potential earnings trajectory.

"We believe the core B2c business should continue to benefit from the structural shift of bookings transitioning online and that Webjet's recent shift to number 2 B2B player globally positions it well to take share of the $70 billion B2B market," the UBS analysts said.

"While the recent downgrade was disappointing and uncertainty remains, we believe full year 2018 EBITDA consensus/guidance is more skewed to the upside and the share price reaction is therefore overdone."

The shares fell 22 per cent at the end of November from $11.86 to $9.25 but have since recovered around half of that decline. 

Ardent Leisure shares are up 5.1 per cent today after it said it has sold its bowling and entertainment division to privately-owned The Entertainment and Education Group for $160 million. 

The deal will allow it to focus on its core Theme Parks and US-based Main Event Entertainment businesses.

The sale of the division that includes the AMF and Kingpin bowling centres as well as Playtime arcades across Australasia, values it at a multiple of 27.1 times FY17 Core EBITDA less routine capex, and 32 times FY17 Core EBIT was on a debt and cash free basis and would put Ardent into a net cash position upon completion, which was expected in the first half of 2018, the company said. 

"Following an unsolicited offer from TEEG, the decision to divest B&E reflects the attractive price offered and our focus on investing our capital in areas where we can earn the most attractive returns," Ardent chairman Gary Weiss said.

"While we are confident that the strategy for B&E will deliver improved earnings, this sale relieves Ardent of the requirement to make the significant further investment needed to support this strategy and provides Ardent with increased flexibility to continue the expansion of Main Event and the reinvigoration of Theme Parks."

Nearly one in four residential properties in the Melbourne council area have re-sold at a loss, Corelogic's latest Pain & Gain Report shows.

The number of loss-making properties in Melbourne has risen from just over 21 per cent a year ago.

The second biggest loss making council area in Melbourne is Stonnington which has seen the number of loss making resales rise to 16.9 per cent from 12.7 per cent a year ago.

Brisbane council area's loss making resales also ticked up higher. Almost 10 per cent of properties resold at a loss in Brisbane, up from 6.9 per cent a year ago.

But Gold Coast resales improved with 8.8 per cent resold with losses, compared to 15.7 per cent at the same time a year ago.

While specific areas within Melbourne and Brisbane have had increases in loss-making resales, Melbourne's overall loss-making transactions fell to 3.9 per cent from 4.9 per cent a year ago. Brisbane however had an overall uptick to 9.3 per cent from 8.5 per cent.

Sydney has the lowest loss making properties at 1.6 per cent, followed by Hobart at 2.9 per cent.

Perth is recovering, posting lower sales at a loss to its historic high, and the same can be said for the resurgent housing market in Hobart. It has the lowest loss-making property sales since November 2010.

"Even though a number of capital cities recorded an increase in the proportion of resales at a loss the rise was generally quite moderate," Corelogic said.

The ASX got off to a softer start on Wednesday, with losses from banks offsetting gains in the mining sector, as investors took a breather after pushing shares to fresh highs in the previous session.

The S&P/ASX 200 index declined 12 points, or 0.2 per cent, to 6059 while the broader All Ordinaries index slipped 11 points, or 0.2 per cent, to 6151. The Australian dollar traded at US76.61¢.

Australian shares jumped to levels not seen for nine years on Tuesday, following Wall Street stocks higher amid increasing optimism that a US tax cut plan would pass.

The tax plan was approved by US Republicans overnight and now heads to the US Senate for approval..

ANZ and NAB declined 0.4 per cent each while Westpac edged down 0.3 per cent. CBA managed to gain, advancing 0.1 per cent. 

In the mining sector, South32 climbed 1.2 per cent, while Evolution Mining advanced 2 per cent and St Barbara rose 2.9 per cent as gold edged up to $1261 an ounce. 

Webjet shares jumped 3.1 per cent after UBS upgraded firm to buy from neutral, saying that the company's value "looks appealing."

The US tax cut plan may have made significant progress this week but a partial US government shutdown on Friday still looms. 

US Congress is in for a contentious week as infighting over defense spending, healthcare and other matters complicates the drive to pass a temporary spending bill by midnight on Friday to avert a partial government shutdown.

In a week when President Donald Trump and his fellow Republicans in Congress were celebrating their tax cut legislation, many showed little appetite for a government shutdown at week's end.

But they sounded resigned to having to navigate through at least some drama over a package that includes so many disparate components, which could make for a messy process until the end.

"I'm going to vote for whatever I need to, to keep the government open," Republican Representative Chris Collins told reporters.

Leading Republicans in the Senate and House of Representatives expressed optimism that a funding bill, coupled with a large new disaster aid package, ultimately would pass by Friday's deadline.

But some were predicting that lawmakers will bump right up against the cutoff.

The House could vote as soon as Wednesday on legislation that extends most funding for domestic programs through Jan. 19. Democrats are likely to mainly oppose the bill, arguing that their priorities were being ignored.

Conservative Republicans are insisting on higher military funding through the rest of the fiscal year ending on Sept. 30 as part of the House bill.

Democrats in the Senate are expected to block that formula if, as expected, it does not also have more money for nondefense programs.

The Republican-controlled US House of Representatives approved sweeping tax legislation, sending the final bill to the Senate where lawmakers were due to take up the package of tax cuts later in the evening.

The first overhaul of the US tax system in over 30 years could be signed into law by President Donald Trump as soon as Wednesday US time if both chambers of Congress approve the legislation.

Republicans insist the sweeping package of tax cuts for corporations, small businesses and individuals will boost economic and job growth. They also see the measure as key to retaining their majorities in the House and Senate in elections next November.

"This is about expanding opportunities for people who are striving to make the most of their lives," House Speaker Paul Ryan said at a news conference.

Democrats say the legislation will deepen the income gap between rich and poor Americans.

The end-of-year sprint represents a remarkable recovery of Republican fortunes since the middle of this year, when the party's drive to dismantle former Democratic President Barack Obama's Obamacare healthcare law crumbled in the Senate and prospects for a tax overhaul seemed doomed by party infighting.

Lingering doubts about fate of the tax bill all but vanished on Monday after two of the last Senate Republican holdouts, Susan Collins and Mike Lee, agreed to support the legislation.

SPONSORED POST

While Aussie SPI futures indicate that the ASX 200 will open just a touch weaker (our call sits at 6069), the trend in the index is higher and any pullbacks into 6055/50 should be supported today, IG's Chris Weston says.

Keep an eye on the Nikkei 225 and China too. The Nikkei 225 is called to open a touch weaker at 22,856, but there is a ceiling open the market at 23,000 and a close through here would be significant, so hold tight and wait for any closing move through here as it could indicate higher levels are on the cards.

China requires attention as the government release its economic blueprint for 2018 today and the talk is looking quite positive for risk. The view is they place less emphasis on debt reduction and that debt levels will be tolerated in a bid for higher growth, notably, given creeping concerns about a softer property market and trade threats.

Tax reform has been the central focus of late, but is discounted into equity markets here. We are hearing the vote is unsurprisingly passing through the House, followed by a vote in the Senate tomorrow.

The market has heard the change of heart from the likes of Senators Collins and Corker and Marco Rubio has seen conditions change to vote for the plan, so we have come to a conclusion here.

So with tax priced in and in the absence of any new triggers, US equities have been modestly offered, with the S&P 500 currently -0.2%, driven by weakness in tech, REITs and utilities.

Read more here

All the overnight market action in numbers:

SPI futures down 12 points or 0.2% to 6065 AUD flat at 76.63 US cents On Wall St: Dow -0.3%, S&P 500 -0.3%, Nasdaq -0.4% In New York, BHP -1.1% Rio -0.8% In Europe: Stoxx 50 -0.8%, FTSE +0.1%, CAC -0.7%, DAX -0.7% Spot gold -0.1% to $US1260.92 an ounce Brent crude +0.5% to $US63.70 a barrel US oil +0.5% to $US57.47 a barrel  Iron ore -22c to $US73.93 a tonne Dalian iron ore -0.4% to 531 yuan LME aluminium +1.2% to $US2099 a tonne LME copper +0.5% to $US6942 a tonne 10-year bond yield: US 2.45%, Germany 0.37%, Australia 2.57%

On the economic agenda today: 

WBC leading index November Skilled vacancies November US existing home sales November

Stocks to watch: 

Computershare downgraded to sell at Morningstar Sundance Energy ADRs upgraded to buy at Seaport Webjet upgraded to buy at UBS

The S&P 500 Index dropped after prospects for passing the tax plan had sparked a two-day rally that took the benchmark within a whisker of 2700 for the first time.

The US House of Representatives is scheduled to vote Tuesday on the bill following a floor debate. The action then turns to the Senate, where Republican leaders intend to bring the measure up as soon as they get it.

"The market really has been trading in lock-step with the progress that's being made," Art Hogan, chief market strategist at B. Riley FBR, said. "Any pause we're taking today is sort of taking a deep breath to see if we get across the goal line."

Apple fell 1.2 per cent after broker Instinet downgraded the stock to "neutral," saying the supply-demand balance for the iPhone X suggested little space to raise sales estimates for the next quarter.

European shares pulled back on Tuesday in a broadly weaker market as a rally inspired by investor optimism about a tax reform in the United States lost its strength.

Expectations that the long-anticipated US tax bill will pass this week lifted the pan-European STOXX 600 benchmark by as much as 0.2 per cent in morning trade.

But the index turned lower and accelerated losses in afternoon, ending down 0.4 per cent.

Traders said there was no clear catalyst but that jitters on the bond market, where Germany's 10-year government bond yield hit a three-week high with its biggest one-day jump in more than three months, had weighed.

"Bond yields have flared up and that might have hurt stocks too," said Giuseppe Sersale, fund manager at Anthilia in Milan.

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