Category: Australia & NZ

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ASX 200 bearish consolidation

The big banks fell sharply on news of a new levy on bank liabilities in the latest budget. At this stage the ASX 300 Banks Index merely shows a secondary reaction. Breach of 8500, however, would signal a primary trend reversal, offering a medium-term target of 8000*.

ASX 300 Banks

* Target: 8500 – ( 9000 – 8500 ) = 8000

Resources stocks compensated, with the ASX 300 Metals & Mining Index rallying to test resistance at 2850/2900. Breakout is unlikely given the weak lead from iron ore. Reversal below 2700 remains likely and would strengthen the bear signal for resources.

ASX 300 Metals & Mining

Iron ore formed a bearish consolidation above support at $60. Breach would offer a short-term target of $50*.

Iron ore

* Target: 60 – ( 70 – 60 ) = 50

Selling of the Aussie Dollar continues, with a medium-term test of primary support at 71.50/72.00 now likely.

Aussie Dollar

Consolidation of the ASX 200 above support at 5800 is a bearish pattern. Breach would signal a correction to test primary support at 5600*. Twiggs Money Flow still indicates long-term buying pressure and only a fall below zero would warn of a reversal.

ASX 200

* Target medium-term: 5800 – ( 6000 – 5800 ) = 5600

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2 More Warning Signs for the ASX

The recent Iron ore rally has faded and the commodity is again testing support at $60. Twiggs Momentum (13-week) below zero indicates a primary down-trend.

Iron ore

The ASX 300 Metals & Mining Index broke support at 2850, warning of a down-trend. A Twiggs Money Flow peak below zero flags strong selling pressure.

ASX 300 Metals & Mining

Falling ore prices will place strong downward pressure on the ASX and the Aussie Dollar.

Aussie Dollar

ASX 300 Banks Index retreated below 9000. Declining Twiggs Money Flow indicates medium-term selling pressure. Follow-through below 8900, or Twiggs Money Flow below zero, would warn of a correction.

ASX 300 Banks

The large red engulfing candle on the weekly ASX 200 chart also warns of a (secondary) reversal. Breach of support at 5800 would signal a correction. Twiggs Money Flow still shows long-term buying pressure and only a fall below zero would warn of a market top (primary trend reversal).

ASX 200

* Target medium-term: 5800 + ( 5800 – 5600 ) = 6000

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‘Be careful what you wish for’: RBA could cause Aussie rout

From Myriam Robin at the Sydney Morning Herald:

The yield differential between 10-year US and Australian government bonds has shrunk to less than 30 basis points, the tightest in about 15 years, as the US engages in monetary tightening while the RBA appears set to keep rates steady at 1.5 per cent.

….This should be a serious concern for Australian policymakers, TD Securities’ chief Asia-Pacific macro strategist Annette Beacher told The Australian Financial Review, as many foreign investors are primarily attracted to the high-yield status of the local currency.

The Aussie Dollar has attracted investors over the last decade primarily because good fortune in avoiding a post-GFC recession enhanced Australia’s reputation as a stable economy. But the Aussie is still a commodity currency prone to boom-bust cycles. Dodging the 2008/2009 bullet was more a matter of luck than of skillful management of the economy. Without China’s massive post-GFC stimulus the Australian economy would have been smashed — along with the housing bubble — and the big four banks would have gone to the wall (or more likely been rescued by a government bailout). And the Aussie would be trading close to 50 cents, which ironically, despite the massive shock, may have put the economy in a stronger (and more realistic) position than it is today.

Source: ‘Be careful what you wish for’: RBA could cause Aussie rout

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ASX 200 advance slows as iron ore falls

Iron ore found support at $60.

Iron ore

The ASX 300 Metals & Mining Index has taken some encouragement from the rally, with support at 2850. But bear rallies are normally short in duration and reverse sharply.

ASX 300 Metals & Mining

The ASX 200 advance has slowed after the recent sell-off in the resources sector. But rising Twiggs Money Flow still signals buying pressure and another attempt at 6000 seems likely.

ASX 200

* Target medium-term: 5800 + ( 5800 – 5600 ) = 6000

ASX 300 Banks, the largest sector in the broad index, is consolidating above its new support level at 9000. Declining Twiggs Money Flow warns of medium-term selling pressure. Reversal below 8900 is unlikely but would warn of a correction.

ASX 300 Banks

Bank exposure to residential mortgages is the Achilles heel of the Australian economy and APRA is likely to keep the pressure on banks to raise lending standards and increase capital reserves, which would lower return on equity.

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Federal budget 2017: The next boom is under way – before another bust

From Michael Pascoe:

A Caterpillar and Komatsu cavalry is arriving just in time to save the next two federal budgets from the effects of slowing residential building approvals, solving one of Treasurer Scott Morrison’s fiscal dilemmas. National spending on transport infrastructure is in the process of soaring 73 per cent from last financial year to 2018-19, according to industry research company Macromonitor.

Spending on road and rail hit a cyclical low of about $19 billion in 2015-16. In constant dollars, the cycle is expected to peak at $33 billion in 2018-19. That spending would more than cover a 10 per cent decline from last year’s $63 billion worth of new residential building….

Increased infrastructure spending is welcome but former RBA governor’s comments on setting up a proper process of infrastructure planning and selection [see link below] highlight the negative boom-bust mentality of government focused on the election cycle.

Source: Federal budget 2017: The next boom is under way – before another bust

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IMF predicts Australian GDP rise but iron ore drops

From Latika Bourke at Sydney Morning Herald:

Australian economy to boom as unemployment drops, IMF

…The IMF predicts Australia’s economy will grow by 3.1 per cent in 2017 and 3 per cent in 2018. This is better than the most recent forecast by the Australian Treasury and released by the Australian government in December last year, which predicted GDP would “pick up to 2¾ per cent in 2017-18 as the detraction from mining investment eases.”

Broad projections like those of the IMF offer little comfort. The very next headline warns of falling iron ore prices:

From Timothy Moore at The Age:

Spot iron ore extends retreat, sliding another 4.6pc

The spot price of iron ore now has fallen one-third from its February peak, as the slide into a bear market turns into an accelerating rout.

At its Tuesday fix, ore with 62 per cent iron content slid $US3.05, or 4.6 per cent, to $US63.20 a tonne, according to Metal Bulletin. The price has tumbled more than 20 per cent so far this month….

Breach of the rising trendline warns that spot iron ore is likely to test primary support at 50. Reversal of 13-week Twiggs Momentum below zero warns of a primary down-trend.

Iron Ore Spot Price

Falling resources stocks are dragging the ASX 200 lower. The up-trend is still intact but expect strong resistance at 6000. Reversal below 5680 would signal reversal to a down-trend.

ASX 200

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Falling iron ore weighs on Resources stocks

Iron ore broke support at 70. Follow-through below the rising trendline would warn that the up-trend is weakening.

Iron Ore

Australian resources stocks, represented here by the ASX 300 Metals & Mining Index [$XMM], reflect strong selling pressure with a bearish divergence on Twiggs Money Flow. Follow-through below 2850 would warn of a (primary) reversal.

ASX 300 Metals & Mining Index

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Australia: Financial Stability | RBA

Extract from the latest Financial Stability Review by the RBA:

….In Australia, vulnerabilities related to household debt and the housing market more generally have increased, though the nature of the risks differs across the country. Household indebtedness has continued to rise and some riskier types of borrowing, such as interest-only lending, remain prevalent. Investor activity and housing price growth have picked up strongly in Sydney and Melbourne. A large pipeline of new supply is weighing on apartment prices and rents in Brisbane, while housing market conditions remain weak in Perth. Nonetheless, indicators of household financial stress currently remain contained and low interest rates are supporting households’ ability to service their debt and build repayment buffers.

The Council of Financial Regulators (CFR) has been monitoring and evaluating the risks to household balance sheets, focusing in particular on interest-only and high loan-to-valuation lending, investor credit growth and lending standards. In an environment of heightened risks, the Australian Prudential Regulation Authority (APRA) has recently taken additional supervisory measures to reinforce sound residential mortgage lending practices. The Australian Securities and Investments Commission has also announced further steps to ensure that interest-only loans are appropriate for borrowers’ circumstances and that remediation can be provided to borrowers who suffer financial distress as a consequence of past poor lending practices. The CFR will continue to monitor developments carefully and consider further measures if necessary.

Conditions in non-residential commercial property markets have continued to strengthen in Melbourne and Sydney, while in Brisbane and Perth high vacancy rates and declining rents remain a challenge. Vulnerabilities in other non-financial businesses generally appear low. Listed corporations’ profits are in line with their average of recent years and indicators of stress among businesses are well contained, with the exception of regions with large exposures to the mining sector. For many mining businesses conditions have improved as higher commodity prices have contributed to increased earnings, though the outlook for commodity prices remains uncertain.

Australian banks remain well placed to manage these various challenges. Profitability has moderated in recent years but remains high by international standards and asset performance is strong. Australian banks have continued to reduce exposures to low-return assets and are building more resilient liquidity structures, partly in response to regulatory requirements. Capital
ratios have risen substantially in recent years and are expected to increase further once APRA finalises its framework to ensure that banks are ‘unquestionably strong.’

Risks within the non-bank financial sector are manageable. At this stage, the shadow banking sector poses only limited risk to financial stability due to its small share of the financial system and minimal linkages with the regulated sector, though the regulators are monitoring this sector carefully. Similarly, financial stability risks stemming from the superannuation sector remain low.

While the insurance sector continues to face a range of challenges, profitability has increased of late and the sector remains well capitalised.

International regulatory efforts have continued to focus on core post-crisis reforms, such as addressing ‘too big to fail’, as well as new areas, such as the asset management industry and financial technology. While the goal of completing the Basel III reforms by end 2016 was not met, discussions are ongoing to try to finalise an agreement soon. Domestically, APRA is continuing its focus on the risk culture in prudentially regulated institutions and will review compensation policies and practices to ensure these are prudent.

Reading between the lines:

  • household debt is too high
  • apartments are in over-supply and prices are falling
  • we have to maintain record-low interest rates to support the housing bubble
  • APRA is “taking steps” to slow debt growth but also has to be careful not to upset the housing bubble
  • the Basel committee has been dragging its feet on new regulatory guidelines and we cannot afford to wait any longer

Source: RBA Financial Stability Review PDF (2.4Mb)

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Consider Republicans’ tax plan | Ross Garnaut

From Patrick Hatch:

“Our existing tax base for the corporate income tax is in deep trouble,” Professor Garnaut told the Melbourne Economic Forum on Tuesday. “It’s subject to egregious avoidance or evasions, with two of the main instruments of avoidance being arbitrary use of interest on debt to reduce taxable income and, more importantly, arbitrary use of payment for import of services as deductions.

“You have a lot of what must be fundamentally some of the most profitable enterprises in Australia paying no corporate income tax.

“Google and Microsoft and Uber, they manage to generate very large sales in Australia … but somehow make no profit from it because of payment for intellectual property, payments for services.”

Cutting rates while broadening the base is a step in the right direction. But the broader base has to offset the rate cut, so that tax revenues are not depleted.

One of the oldest tricks in the tax avoidance industry is to set up a structure where A receives a deduction for an expense while the receiving party (B) is either tax exempt or is resident in a tax haven, and does not pay tax on the income. The effect is to substantially reduce tax payable by A.

Disallowing all deductions would unfairly penalize legitimate transactions. A simpler method would be to require A to collect a withholding tax on the payment to B (or B provides a tax file number showing that the income will be taxed in Australia) else the deduction by A will be disallowed.

Source: Consider Republicans’ tax plan, says economist Ross Garnaut

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Australia: Warning signs of a contraction

Australia faces shrinking inflationary pressures.

Inflation

Wage growth is falling.

Wage Price Index

Credit growth is shrinking.

Inflation

Growth of currency in circulation is also slowing. The fall below 5% warns of a contraction.

Currency in Circulation: Growth

One piece of good news is that Chinese monetary policy seems to be easing. After a sharp contraction of M1 money stock growth in January, February shows a partial recovery. Collapse of the Chinese property bubble may be deferred a while longer.

China M1 Money Stock

Which is good news for iron ore exporters. At least in the short-term.

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