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Markets Live: Cautious start ahead

Canberra Times logo Canberra Times 25/05/2014 Patrick Commins, Jens Meyer
Volatility in markets is low, both on Wall Street (white line: VIX) and locally (green line). © Provided by Canberra Times Volatility in markets is low, both on Wall Street (white line: VIX) and locally (green line).

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Good morning and welcome to the Markets Live blog for Monday.

Your editors today are Jens Meyer and Patrick Commins.

This blog is not intended as investment advice.

BusinessDay with wires.

 

Local stocks are poised to open flat even though the S&P 500 closed at a record high ahead of the weekend.

Here's what you need2know:

  • SPI futures up 3 points to 5514
  • AUD at 92.39 US cents, 94.20 Japanese yen, 67.78 Euro cents and 54.88 British pence
  • On Wall St, S&P500 +0.4%, Dow Jones +0.4%, Nasdaq +0.8%
  • The Dow closed at a record high on Friday at 16,583.34
  • In Europe, Euro Stoxx 50 +0.5%, FTSE100 -0.1%, CAC +0.3%, DAX +0.5%
  • Spot gold down 0.1% to $US1292.61 an ounce in New York on Friday
  • LME copper adds 0.6% to $US6918.75 a tonne in London on Friday
  • Brent oil flat at $US110.54 per barrel in New York on Friday
  • Iron ore fell 1.3 per cent to $US97.50 on Friday.

What’s on today:

  • There are no local economic reports scheduled
  • Japan: Bank of Japan meeting minutes will be released

Stocks to watch:

  • Telstra is set to hold a mobiles briefing
  • Deutsche Bank has maintained its ‘buy’ recommendation on James Hardie Industries; price target $16.16
  • JPMorgan has retained its ‘neutral’ rating and maintained its share target price of $44.05 on REA Group
  • SP Ausnet and Whitefield Ltd will trade ex dividend today

Read more.

Predictions that the Australian dollar could revisit parity within 12 months have some investment experts worried about the damage it could cause to corporate balance sheets and the domestic economy.

Expectations that the dollar could return to parity against the greenback come as it trades around US92¢, about 8¢ higher than where it started the year despite last week's fall in response to a lower iron ore price and a drop in consumer confidence.

The domestic economy remains fragile with growth below trend, the Reserve Bank's official cash rate at a record low of 2.5 per cent and lingering concerns that as the mining boom fades, growth in non-mining sectors may not be sufficient to fill the gap.

Westpac's chief economist Robert Rennie told Channel Nine's Financial Review Sunday that $195 billion in liquefied natural gas projects set to come online, starting from the second half of this year, could push the Australian dollar back to parity, when global growth remains weak and appetite for high-yielding currencies is high.

Read more.

The S&P 500 Index rose last week to a record and small-cap shares rebounded amid better-than-estimated data that boosted confidence in the strength of the world’s largest economy.

Tiffany & Co and Best Buy advanced at least 6 per cent to pace gains among retailers as profits topped forecasts. An index of homebuilders climbed 3.9 per cent as reports showed US home sales rose in April. The Dow Jones Internet Composite Index rallied for a second week, with TripAdvisor and Netflix posting the biggest increases in the S&P 500.

The S&P 500 climbed 1.2 per cent in the period to close at a record 1,900.5. The Dow Jones added 114.96 points, or 0.7 per cent, to 16,606.3, about 0.7 per cent below its closing high. The Russell 2000 Index of small companies ended a two-week slide, increasing 2.1 per cent.

“You have a constructive environment here,” John Fox, director of research at Fenimore Asset Management said. “Corporate profits are growing, interest rates are low,valuations are fair and you can earn a fair return in stocks compared to your other options.”

A gauge of US stock volatility known as the VIX dropped 8.7 per cent during the five days to 11.36, the lowest level since March 2013. The Chicago Board Options Exchange Volatility Index has retreated 47 per cent from a 14-month high in February.

Small-caps and Internet shares have started to recover after being among the hardest hit by a market retreat that began in early March. The Dow Jones Internet gauge surged 4.1 per cent for the week. It has rallied 5.4 per cent over the past 10 days, for the best two-week performance since September.

A group of technology shares in the S&P 500 finished the week at its highest level since 2000.

 

Is it scary that Wall Street is hitting new record highs but no-one’s particularly scared?

The CBOE Volatility Index, or VIX, closed on Friday at 11.36, its lowest level since March 2013. That means investors see less risk ahead, particularly with the S&P500 ending at a record high of 1900.53 on Friday.

"One of the reasons the VIX is so low, we haven't really done anything this year. We haven't moved an awful lot," said J.J. Kinahan, chief derivatives officer of TD Ameritrade in Chicago. For the year, the S&P 500 has gained just 2.8 per cent.

With the typically slow northern summer months just ahead and little on the horizon to shake the market from its current course, investors could be looking at even lower VIX levels, some analysts said.

"It's not that there's no likelihood of a correction. It's that people don't perceive anything to derail the train at this point," said Andrew Wilkinson, chief market analyst at Interactive Brokers. "So I think people are beginning to wonder: Are we heading back to single-digit volatility?"

The S&P 500's record high and the drop in the VIX are not the only signs that fear is not a factor on Wall Street.

Volume is down as well. S&P 500 E-mini futures volume was below the 1.52 million daily average of the past year on every day last week except Tuesday.

The market's gain has come despite concerns about a slowdown in China and weakness in small-cap names. Typically small-cap stocks lead the market's advance when the US economy is improving.

To be sure, some analysts say the lack of volatility suggests a complacency that could encourage excessive risk-taking. New York Federal Reserve Bank President William Dudley and Dallas Fed President Richard Fisher have both expressed such concerns in recent days.

"The lower the VIX, the more overbought the market gets, leaving it vulnerable to some kind of setback," said Donald Selkin, chief market strategist at National Securities in New York.

But the lack of volatility is also showing up in the foreign-exchange and commodities markets, according to Bespoke Investment Group analysts. They noted lower implied volatility in options in the foreign-exchange market as well as recent stability in the PowerShares Deutsche Bank Agriculture Index exchange-traded fund.

"If the VIX index is pricing in too little volatility, then why is it wrong to do so?" Bespoke analysts wrote.

Fixed mortgage rates look set to stay at historic lows for at least the next few months, as banks try to pinch each other's customers and investors bet the Reserve Bank will leave official rates on hold for longer.

While advertised variable mortgage rates have not moved since last August, home owners have been able to cut their monthly repayments by using fixed rates, which have been drifting down thanks to competition between lenders and changes in global markets.

Now experts are tipping fixed rates could stay low for several more months, amid predictions that the central bank will leave official rates at a record low of 2.5 per cent for another year.

In mid-April investors were tipping an 80 per cent chance of an official rate rise in a year's time, but on Friday this was about 25 per cent.

The change in expectations has caused fixed rates - which reflect the outlook for official rates - to continue falling.

Figures from RateCity show three and four-year fixed rates in particular have edged lower in the past month, while HSBC last week cut two-year fixed rates to 4.58 per cent.

ING Direct treasurer Michael Witts said he thought fixed mortgage rates were unlikely to rise in the short term, because markets had recently scaled back the chances of an interest rate hike from the RBA.

Read more.

As Challenger’s shares continue to climb to new heights, it is believed the annuities giant could be looking overseas for new avenues of growth, reports the AFR’s Street Talk column.

The group’s boutique incubator business, Fidante Partners, has been busy snapping up stakes in funds management businesses, and market talk is heating up as to whether the division could be looking to establish an overseas office. Challenger declined to comment.

One idea is that a Fidante-style business could be established in a European hub such as London. While Challenger’s UK staff are moving to Access Capital Adviser’s London office under the new Whitehelm banner, the fund annuities provider and fund manager may choose to retain a London presence while it evaluates further expansion opportunities into the European funds management market.

In 2013, Challenger’s Fidante Partners incubator signalled its increasingly offshore intentions with a stake in two London-based boutique fund managers, Wyetree Asset Management in fixed income and River & Mercantile in global equities.

Challenger’s funds management business recently added a new global equities and Australian shares boutique to its stable of managers.

Challenger’s shares closed at $7.35 on Friday – the highest in the company’s history.

Shares have opened the week on a positive note, with the benchmark index pushing above 5500 - a level it has struggle to maintain in recent weeks.

The ASX 200 is 15 points, or 0.3 per cent higher, to 5507.3 in early trading, while the All Ords is 13 points higher at 5483.7.

Banks are the biggest contributors to the gains, with Westpac and ANZ up 0.5 per cent, and CBA and NAB 0.2 per cent higher. Macquarie is 0.9 per cent up.

BHP has gained 0.4 per cent, Rio is flat and Fortescue is 1 per cent higher.

Telstra, down 0.3 per cent, is the biggest drag on the market, while Regis Resources is down a further 14 per cent this morning after dropping 25 per cent on Friday.

SAI Global has revealed that private equity giant Pacific Equity Partners has approached it with a $1.1 billion takeover offer, and dumped its chief executive on a dramatic morning for the standards and risk management group.

SAI told the market this morning that it has received the “unsolicited, indicative, conditional and non-binding” proposal from PEP, valuing the company at $5.10 to $5.25.

SAI shares last traded at $4.28.

The company said that the board is yet to form a view about the takeover but says it is “open to engagement with PEP to determine whether a binding proposal” can be developed.

But the company, which was formerly known as Standards Australia, has also sacked its chief executive Stephen Porges, citing “fundamental differences of opinion between him and the board”.

SAI chairman Andrew Dutton will serve as executive chairman until a successor is appointed.

“Last week, it became clear to the board that we were unlikely to resolve the differences between the non-executive directors and the CEO regarding changes required and the pace of these changes to deliver the business improvements that we are seeking over the short to medium term,” Mr Dutton said in a statement.

Read more.

Horizon Oilhas secured a production development licence for its $US300 million Stanley gas condensates project in Papua New Guinea’s Western Province. A formal announcement is due as early as today in a move likely to bolster its planned $800 million merger with fellow energy player Roc Oil.

The licence has already been factored into the merger ratios and was largely expected. That said, it is another vote of confidence in the overall transaction and PNG’s burgeoning energy sector, which has expanded at a cracking pace over the past few years, fostering the growth of a number of smaller companies like Horizon and Kina Petroleum.

As the food chain extends these companies have become coveted by their larger rivals Inter Oil and Oil Search. For example Inter Oil, newly flush with cash from its Total joint venture, is thought to have set Horizon within its sights and was surprised at the sudden arrival of Roc Oil on the scene. More recently, Eaglewood Energy, which has exploration licences in PNG, was taken out by Transform Exploration for $US30.5 million ($33 million).

UBS values the Stanley project at 3¢ per share for Horizon, while Ord Minnett puts it at about 2¢ per share.

The licence also further undermines Allan Gray’s attempts to derail a merger between Roc Oil and Horizon Oil . The activist shareholder, headed in Australia by Simon Marais, claims to control 20 per cent of Roc Oil.

'Differences of opinion': Stepohen Porges has been sacked as SAI Global. © Peter Stoop 'Differences of opinion': Stepohen Porges has been sacked as SAI Global.

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