Australia: Headwinds persist

From Elliot Clarke & Simon Murray at Westpac:

…the take home from Budget 2019 is that, while supportive of activity over the long-term, the near-term impact on incomes and activity is limited. Labor’s alternative proposals, as per the budget reply, are also spread out over time. So no matter which party wins in May, the headwinds of persistent weak income growth and declining house prices are set to hold growth well below trend through 2019. This is clear justification for interest rate cuts from the RBA, which Westpac believes will come in August and November.

While the RBA is yet to adopt an easing bias, the April meeting decision statement did emphasise the fluidity of the situation…

The last sentence is important: the RBA has not yet adopted an easing bias. Perhaps because of the housing debt bubble.

Australia: Household Debt and Disposable Income

Business investment has already failed to respond to interest rate cuts.

Australia: Business Investment

10-Year AGB yields are already below US Treasuries but have failed to significantly weaken the Australian Dollar.

Australia: Difference to US 10-Year Bond Yield

House prices are falling.

Australia: Housing Prices

Plunging high-density housing approvals promise a sharp slow-down in housing construction.

Australia: Building Approvals

Dwelling Investment is likely to join Mining Investment in the red, detracting from GDP growth. Windfall iron ore prices (Exports) are keeping the economy afloat, while they last.

Australia: GDP Components

Bank’s impaired and total non-performing assets are low, but likely to rise if the housing fall (and construction down-turn) continues.

Australia: Bank Non-Performing Assets

Bank capital ratios are modest at just over 10% of common equity (CET1) against risk-weighted assets. But that falls to about 5.5% without risk-weighting (leverage ratio). Not a lot of room for comfort.

Australia: Bank Capital

ASX 200 continuation likely

Weak red candles on the ASX 200 Financials index indicate support at 5900/6000. Rising troughs on Twiggs Money Flow flag buying pressure. Falling housing prices have not yet made a dent in investor confidence. Penetration of medium-term support at 5800 would warn of another test of primary support at 5300 but a rally is more likely.

ASX 200 Financials

Materials respected their new support level at 12500, benefiting from high iron ore prices.

ASX 200 Materials

The ASX 200 is consolidating at 6200 but continuation to test resistance at 6300/6350 is likely.

ASX 200

Expect stubborn resistance at 6350, followed by a correction.

I remain cautious on Australian stocks and hold more than 40% in cash and fixed interest in the Australian Growth portfolio.

ASX 200: Financials & Materials test support

Financials are testing their new support level at 5900/6000. Falling housing prices are likely to drag the index lower. Penetration of the rising trendline at 5800 would warn of another test of primary support at 5300.

ASX 200 Financials

Materials are also testing their new support level at 12500/12600 but respect is far more likely, given the tailwind from iron ore prices.

ASX 200 Materials

The ASX 200 is consolidating at 6200 but continuation to test resistance at 6300/6350 is likely. Expect stubborn resistance, followed by a correction.

ASX 200

I remain cautious on Australian stocks and hold more than 40% in cash and fixed interest in the Australian Growth portfolio.

ASX 200 approaching resistance

A sign of increased risk aversion is the stellar performance of the A-REIT index. AREITs are trading at substantial premiums to net asset value as investors bid up stocks with stable cash flows.

ASX 200: Real Estate

Financials are retracing to test their new support level at 5900/6000. Calls from the RBNZ for the big four to increase their capital haven’t helped.

ASX 200 Financials

Materials are also retracing but continue their up-trend. Though the iron ore windfall is unlikely to last.

ASX 200 Materials

The ASX 200 is heading for a test of resistance at 6300/6350. Expect stubborn resistance, leading to a correction.

ASX 200

I remain cautious on Australian stocks and hold more than 40% in cash and fixed interest in the Australian Growth portfolio.

Aussie banks get a wake up call from across the Tasman

I have long called for Australian banks to increase their equity capital in order to withstand a potential banking crisis in Australia. The Murray Commission found that banks, in a crisis, would act as “an accelerant rather than a shockabsorber”.

Now the RBNZ has announced plans to force the big four banks to hold more capital in their New Zealand banking operations. From Clancy Yeates at the Sydney Morning Herald:

The Reserve Bank of New Zealand has mounted a firm defence of its plan to force Australia’s major banks to hold $NZ12.5 billion ($A12.12 billion) more in capital in their banking operations across the Tasman, saying the “highly profitable” businesses would have to accept lower returns.

In an interview on Wednesday, RBNZ deputy governor Geoff Bascand also justified the plan to bolster bank balance sheets by emphasising the social costs of banking crises and arguing New Zealand could not rely on Australian parent companies for a bail-out in severe shock.

……The big four Australian banks made $4.4 billion in cash profits from their New Zealand operations in 2018 representing about 15 per cent of their total combined profit with ANZ tipped to experience the most significant hit.

Mr Bascand said the central bank had estimated the big four’s NZ return on equity, until recently 14 to 15 per cent, would decline by between and 1 and 3 percentage points as a result of the change.

Earlier, Bascand said:

“At one time, the owners of a bank had plenty of skin in the game; in fact, there was a time when banks got most, or all, of their money from their owners. However, over the last century, banks have started to use less of their own money and more of other people’s, and the balance has almost entirely reversed. While we are not attempting to turn back the clock …..We believe that more ‘skin in the game’ for banks will result in:

  • Banks being better able to absorb large, unexpected losses
  • Society being less at risk from banking crises
  • Reduced fiscal risk…..As the global financial crisis illustrated, when banks fail there can be a severe domino effect that puts pressure on governments to step in with financial support
  • Bank shareholders and management being less inclined to take excessive risks”

(Gareth Vaughan, Interest.co.nz)

The RBNZ proposal calls for systemically important banks to hold a minimum of 16% Tier 1 capital against risk-weighted assets, of which 6% would be a regulatory minimum and 10% would act as a counter-cyclical buffer to absorb losses without triggering “resolution or failure options”. Bear in mind that risk-weighting significantly understates total assets and that leverage ratios, reflecting un-weighted assets, are about 55% of the above (i.e. 8.8%).

The banks have protested, warning that increasing capital will raise interest rates to borrowers.

…..The RBNZ has acknowledged interest rates charged by banks will probably rise as a result of the change, but Mr Bascand said it estimated the impact would be about half a standard 0.25 percentage point move in official interest rates.

If banks’ borrowing rates did rise more sharply than expected, he said the RBNZ could offset this through monetary policy…..

What the banks failed to consider (or mention) is that investors are prepared to accept lower returns on equity if there is lower associated risk. Also banks with strong balance sheets have historically experienced stronger growth. Both lower risk and stronger growth would help mitigate the costs of additional capital.

Question is, why are RBNZ raising concerns about bank capital and not APRA? Another case of regulatory capture?

ASX 200 gravestone

Australian housing prices are falling.

Australia: Housing Prices

Fueled by declining credit growth.

Australia: Housing Credit growth

With falling contribution to GDP growth from dwelling investment, and mining investment shrinking….

Australia: GDP Contribution

GDP growth is expected to weaken further.

Australia: GDP growth

The gravestone candlestick on the ASX 200 weekly chart warns of selling pressure. The primary trend is down and the index unlikely to break through resistance at 6300. Expect a correction to test support at 5650; breach would warn of another decline.

ASX 200

I remain cautious on Australian stocks and hold more than 40% in cash and fixed interest in the Australian Growth portfolio.

ASX 200 hanging despite bank rise

ASX 200 Financials broke through resistance at 5900/6000 while bullish divergence on Twiggs Money Flow signals buying pressure. The primary trend remains down but it appears that a base is forming. I remain wary of banks because of declining house prices but you can’t argue with the tape. A higher trough on the next correction would confirm a reversal.

ASX 200 Financials

The ASX 200 shows another hanging man candlestick at 6200 on the weekly chart, signaling hesitancy. The primary trend is down and the index is due for a correction soon. A higher trough would reverse the down-trend but there is a lot of uncertainty in global markets.

ASX 200

The Materials sector is retracing to test its new support level at 12500 after meeting resistance at 13000. The primary trend is upward and breach of 12500 is unlikely.

ASX 200 Materials

I remain cautious on Australian stocks and hold more than 40% in cash and fixed interest in the Australian Growth portfolio.

Gold retreats

Spot Gold retreated from resistance at $1350/ounce. Penetration of the rising trendline warns of another correction. The immediate target is support at $1250.

Spot Gold in USD

Silver is also retreating. Breach of $15/ounce would strengthen the bear signal.

Spot Silver in USD

Crude oil has rallied since the start of the year but the primary trend is down and lower peaks on the trend index warn of further selling pressure. Breach of medium-term support at $52 would signal another test of primary support at $42 which would be bullish for the Dollar.

Crude Oil

The Dollar is gradually strengthening. Breakout of the Dollar Index above its current range of 95.50 to 97.50 would be bearish for gold.

Dollar Index

The Aussie Dollar held steady, while the All Ordinaries Gold Index retreated from its recent high above 6000. Expect a test of new support at 5400.

All Ordinaries Gold Index

Gold-Oil divergence

The crude oil bounce continues but the primary trend is down. WTI Light Crude (shown here on a monthly chart) is likely to test resistance at $60/barrel, followed by another test of primary support at $45.

Crude Oil

Weak crude tends to coincide with a weak gold price. At present the two commodities are diverging, with gold rallying as crude falls. Safe haven demand for gold, due to rising global uncertainty, is the most likely explanation.

Spot Gold and Crude Oil adjusted for inflation (CPI)

Spot Gold is testing resistance at $1350/ounce. Breakout would signal a primary advance but gold is expected to follow oil lower in the long-term.

Spot Gold in USD

The All Ordinaries Gold Index broke resistance at 5400/5500, signaling an advance to 7000. Strength of the advance depends on a weaker Aussie Dollar and/or a stronger gold price in US Dollars.

All Ordinaries Gold Index

ASX 200 buoyant but banks a worry

The Materials sector (18.5% of the ASX 200 index) continues its advance, buoyed by a temporary iron ore shortage and positive spin on US-China trade talks. The higher trough on Twiggs Money Flow below confirms buying pressure.

ASX 200 Materials

ASX 200 Financials (31.4% of the main index) are testing resistance at 5900/6000 but remain in a primary down-trend. Declining house prices are a significant headwind. Respect of resistance would strengthen the bear signal, while breakout would warn that a base is forming.

ASX 200 Financials

The ASX 200 is likely to test the 2018 high at 6350 but remains in a bear market. Another test of the former primary support level, at 5650, is likely. A higher trough, at that level, would reverse the down-trend.

ASX 200

I am cautious on Australian banks and hold more than 40% in cash and fixed interest investments in the Australian Growth portfolio.