Category: Australia & NZ

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ASX 200: Testing support at 5000

The ASX 200 weakened towards the close and is testing medium-term support at 5000. Breakout below 4980 would warn of a correction. Declining 21-day Twiggs Money Flow, indicating medium-term selling pressure, makes this likely. The index is in a strong primary up-trend and a 5 or 10 percent correction would not alter this. It is merely a case of one step back then two steps forward.
ASX 200 Index

* Target calculation: 5000 + ( 5000 – 4500 ) = 5500

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ASIC: High-frequency trading taskforce—Key findings

Findings of the recent ASIC investigation into dark liquidity and high-frequency trading.

The high-frequency trading taskforce found that:

(a) some of the commonly held negative perceptions about high-frequency trading are not supported by our analysis of Australian markets—for example:

(i) that high-frequency traders exhibit unacceptably high order-to-trade ratios. Increases in order-to-trade ratios in Australia have been moderate compared with overseas markets, and other algorithmic traders operate at similar levels; and
(ii) that high-frequency traders’ holding times are often a matter of seconds and therefore that they make no contribution to deep, liquid markets. Our analysis shows that only 1.2% of high-frequency traders held positions for an average of two minutes or less, 18% for less than 10 minutes and 51% for less than 30 minutes; and

(b) there is some basis in fact for other perceptions (e.g. about high-frequency trading creating excessive noise and exhibiting predatory or ‘gaming’ behaviours), but other traders are also contributing to the problem.

Both [the HFT and Dark Pools] taskforces have found evidence of potential breaches of ASIC Market Integrity Rules and the Corporations Act 2001 (Corporations Act), and some matters have been referred to our Enforcement teams for investigation. We have also seen a change in behaviour as a result of our inquiries. For example:

(a) fundamental investors are asking more questions about where and how their orders are executed;
(b) there have been improvements to automated trading risk management controls; and
(c) at least one high-frequency trader has ceased trading in Australia.

The main problem with HFT is investor perceptions that they are paying more for stocks than they should be. HFT trading profits can only come out of investors pockets. While the ASX receives massive fees from HFT traders, the erosion of investor trust in fair pricing is too serious to ignore. Failure to address this could see investors migrate to other exchanges or platforms, especially if there is a transparent auction process where HFT traders are unable to intercede.

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Local government: the Lakewood model

In his report for the Urban Taskforce Australia, Professor Percy Allan recommends that local government adopt the Lakewood model of contracting in services. Lakewood was a sleepy California town threatened with being engulfed by urban sprawl — until they found a novel way of managing costs and improving services.

Lakewood of the early 1950s was David fighting the Goliath of Long Beach, a city intent on gobbling up its unincorporated neighbour parcel by parcel. The legal turf battles were exhausting Lakewood’s defenders, most of whom were transplants drawn to the promise of this sleepy village-turned-post-war boomtown. Then along came John Sanford Todd, a struggling attorney and proud Lakewood resident, who dreamed up a way to preserve his community’s independence without it going broke: It would become a new kind of city, one that contracted out for police protection, trash collection, fire fighting – just about every service a city provides.

That practice is commonplace in the USA today, but it was a revelation a half century ago. Todd’s vision, dubbed “the Lakewood Plan,” became a model of local government that informed incorporation drives throughout Southern California and beyond. Suburbia took shape in a rash of “contract cities,” including the neighbouring Dairy Valley (now Cerritos), La Puente, Bellflower, Duarte, Irwindale, Norwalk and Santa Fe Springs, which sprang up in such rapid succession that some observers began proclaiming the end of big cities.

There may even be opportunities to extend this model to metropolitan or state level, where states contract in and share the costs of centralized services provided by specialist corporations. This could apply to areas as diverse as road transport, police services and payroll functions.

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Australia: Sydney is reaching a liveability crisis

Professor Percy Allan kindly sent me a copy a report, to which he contributed, on living conditions in Sydney — prepared by the Urban Taskforce. Here are some interesting excerpts:

Over the next 20 years Sydney will need at least 600,000 new homes located in infill sites and in greenfield sites on the fringes of the metropolitan area. But Sydney has not built sufficient homes over recent years with its current production only half that of Victoria on a per capita basis. Already the average house cost in Sydney is one of the highest in the world and this is impacting on affordability for many families. The Sydney median house is $100,000 more expensive than the equivalent in Melbourne. The average weekly earnings of a first homebuyer can afford a mortgage of $331,000 while the average house price in Sydney is $563,300. The lack of housing supply has led to an increase in rents by 40% over the last 5 years…….

Conclusion

Local government has aggravated Sydney’s housing crisis by:
• Not rezoning sufficient land for affordable multiple dwellings,
• Not adopting clear consistent plans and regulations to guide permissible development,
• Not ensuring individual development assessments are independent of political and vested interests,
• Not spending enough on capital works thereby creating a large backlog of unsatisfactory community infrastructure,
• Using depreciation provisions and reserves for non-capital purposes,
• Under-borrowing for infrastructure enhancements thereby forcing new homebuyers to contribute disproportionately towards this end,
• Not sharing the cost of greenfield infrastructure with existing communities that inherited free public assets from previous generations, and
• Not sharing or outsourcing activities that would benefit from economies of scale and scope nor focusing on specific place management to better respond to community needs at a street level.

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ASX and Asia fall

The ASX 200 retreated more than 2.0% Monday after the Cyprus deposit grab unsettled financial markets. Expect another test of support at 4980. Breakout would warn of a correction, while recovery above 5150 would signal an advance to 5500*. Declining 21-day Twiggs Money Flow indicates medium-term selling pressure.
ASX 200 Index

* Target calculation: 5000 + ( 5000 – 4500 ) = 5500

Dow Jones Japan Index dropped about 1.5%. Follow through below short-term support would indicate no more than retracement to the rising trendline.
Dow Jones Japan Index
Dow Jones Hong Kong Index has fallen about 2.0% so far. Breach of support at 472 signals a correction.
Dow Jones Hong Kong Index
Dow Jones Singapore Index has fallen 1.0% in the morning and we can expect further weakness in the p.m.
Dow Jones Singapore Index

European markets are likely to open lower. If the US follows and finishes the day with a weak close, negative sentiment could start to feed on itself, tipping global markets into a correction. Overall, the primary trend in the US and Australia remains positive.

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Australia: RBA should emulate the Swiss

Australia is suffering a similar fate to Switzerland, where the Swiss Franc soared against the Euro during the Eurozone sovereign debt crisis. Flight to safety caused the Franc to rocket, threatening local manufacturing industry. Exporters were priced out of international markets while imports were undercutting local suppliers. The Swiss National Bank (SNB) did not sit on its hands but pledged to maintain an effective currency peg against the Euro. Catherine Bosley at Bloomberg writes:

The Swiss central bank pledged to keep up its defense of the franc cap after almost doubling its currency holdings to shield the country from the fallout caused by the euro zone’s crisis.

The Swiss National Bank cut its forecasts for inflation and said it will take all necessary measures to keep the “high” franc within the limit of 1.20 per euro……

The SNB, led by President Thomas Jordan, put the ceiling in place in September 2011 after investors pushed the franc close to parity with the euro and threatened to choke off growth. The central bank’s campaign to defend the cap has led to foreign currency holdings ballooning to more than 400 billion francs, almost three quarters of annual output. It spent 188 billion francs on interventions last year, 10 times the 2011 amount.

Australia’s position is in some ways even worse than Switzerland. Not only do international investors increasingly view the Australian Dollar as a safe haven, with higher bond yields and a stable economy, but booming mining exports have caused a bad case of Dutch Disease — rising exports killing local manufacturing and service industries such as tourism and education.

Bulk Commodity Exports

While not suggesting that the RBA accumulate huge holdings of greenbacks and euros — these are depreciating currencies, with central banks engaged in widespread QE — but the idea of a sovereign wealth fund is appealing. Investing in international equities is a risky business that would cause most central bankers to tremble, but sovereign wealth funds have been successfully run by Norway, China, Abu Dhabi, Saudi Arabia, Singapore and others. Far safer than international equities would be to buy Australian international debt, targeting the roughly $400 billion owed to foreign investors by major Australian banks.

Net Foreign Liabilities

The appeal would be two-fold: eliminate currency risk while generating a stable return on investment.

Printing more dollars, whether you spend them locally or offshore, will normally increase inflation risk. But with high local savings rates and slowing rates of debt growth, deflationary pressures are rising. The only real inflationary pressure is from higher oil prices. So the RBA has room to maneuver.

A weaker Australian dollar would make exporters more competitive and rescue local manufacturers from international competition. Tourism and education, formerly major export earners, would hopefully recover from the belting they have taken in recent years. Miners would also not complain as a weaker dollar would boost profit margins.
Read more at SNB Keeps Up Franc Defense as Euro Crisis Risks Persist – Bloomberg.

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What Australia needs is lower land prices

Australia enjoyed a mining boom over the last ten years but now faces a fall-off in capital expenditure on new projects as commodity prices fall. The RBA, eyeing the coming slow-down with some trepidation, is hoping that housing construction recovers to fill the void. So far the housing market has failed to respond to lower interest rates.

Housing Building Approvals

The reason that the housing market has not reacted to lower rates is partly attributable to housing affordability, with household debt in the last 20 years having trebled as a ratio to disposable income.

Housing Debt as % of Disposable Income

The uncertain financial climate has also contributed, with households repaying debt rather than looking for new homes.

Household Saving as % of Disposable Income

Further cuts in interest rates will not help. Encouraging home buyers to enter the market at unsustainably low interest rates would exacerbate the housing bubble and cause further hardship when rates rise. Rather than monetary policy, we need changes at federal, state and local government level to increase the availability of land for housing.

  1. Abolish transfer duties
    Abolishing transfer duties on property would encourage home-owners to re-size as their needs change, releasing more housing stock into the market. Abolishing transfer duties would also remove state support for higher property prices. Under a transfer duty, higher prices boost state revenues, encouraging support for property developers who land-bank large tracts of land and restrict their release to maintain high prices.
  2. Replace with a land tax
    Replacing transfer duties with a land tax, based on the value of the land, would also discourage land-banking by property developers. Restricted release of land is the primary cause of unaffordable housing in both Australia and the UK.
  3. Overcome zoning issues
    Zoning issues at state and regional level may also contribute to the slow release of new land for development.
  4. Reduce infrastructure costs
    Costs of new infrastructure development are another reason local government tends to restrict release of new land for housing development.  Establishment of municipal utility districts (“MUDs”) within a local government area would help to overcome this. Leith van Onselen describes how MUDs  in Texas, ranging in size from 200 to 5000 hectares, charge home-buyers a monthly infrastructure levy rather than requiring up-front payment for establishment of new services — which is then folded into the purchase price. The MUD levy expires when bonds used to finance the services have been amortized, or residents can decide to continue the levy to upgrade public amenities such as parks, swimming pools and other facilities.

Increased availability of land would drive down new house prices and encourage the establishment of new households. This would boost not only housing construction, building materials and general construction — through establishment of roads and services — but the retail sector as well, because every new home needs to be furnished. New jobs in these sectors would lift general consumption and the broader economy, helping Australia to avoid the approaching mining cliff.

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ASX 200: Retracing in a strong up-trend

The ASX 200 is retracing for another test of support at 4980/5000. Breakout would warn of a correction, while recovery above 5100 would signal an advance to 5500*. Declining 21-day Twiggs Money Flow indicates medium-term selling pressure.
ASX 200 Index

* Target calculation: 5000 + ( 5000 – 4500 ) = 5500

A monthly chart of the ASX 50 [$XFL] puts the retracement into perspective. Rising 13-week Twiggs Money Flow indicates buying pressure. Respect of support at 5000 is likely, but even a stronger correction would not disrupt the primary up-trend: respect of 4500 would present a buying opportunity.

ASX 200 Index

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Forex: Euro declines while Aussie follows through

The euro retreated below support at $1.30, indicating a correction to primary support at $1.2650. A 63-day Twiggs Momentum trough close to zero would suggest a primary advance, with a long-term target of $1.50*.
Aussie Dollar/USD

* Target calculation: 1.35 + ( 1.35 – 1.20 ) = 1.50

Pound sterling found short-term support against the dollar but the long-term target for the decline is $1.43*. Declining 63-day Twiggs Momentum, below its 2011 lows, strengthens the signal.
Aussie Dollar/USD

* Target calculation: 1.53 – ( 1.63 – 1.53 ) = 1.43

The Aussie Dollar followed through after breaking out above $1.03, signaling a rally to $1.06. Reversal below $1.02 is now unlikely, but would warn that primary support at $1.015 is again under threat. Narrow fluctuation of 63-day Twiggs Momentum around zero suggests a ranging market.

Aussie Dollar/USD

The Canadian Loonie found medium-term support at $0.97 against the greenback, but we should still expect a test of primary support at $0.96. Failure would warn of a decline to $0.90*, but respect is just as likely and would signal a rally to $1.02.
Aussie Dollar/USD

* Target calculation: 0.96 – ( 1.02 – 0.96 ) = 0.90

The US dollar continues to advance against the Japanese Yen, suggesting that the 30-year down-trend is over. Expect resistance at ¥100, with a possible correction back to ¥90, but breakout would test the 2007 high above ¥120*.
Aussie Dollar/USD

* Target calculation: 100 – ( 100 – 80 ) = 120

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Why British prosperity is hobbled by a rigged land market | Centre for European Reform

Simon Tilford, chief economist at the Centre for European Reform, writes:

The British have the least living space per head, the most expensive office rents and the most congested infrastructure of any EU-15 country. Thanks to a rapidly growing population – the result of a healthy birth-rate and immigration – these trends are worsening steadily. At the same time, the British economy is languishing in a prolonged slump brought on by a collapse of demand. The answer is obvious: Britain needs to build more. Unfortunately, the obstacles to development are formidable….

A similar problem to Australia: restricted land release drives up prices, making home ownership inaccessible to the younger generation while damaging the construction industry.

Read more at Centre for European Reform: Why British prosperity is hobbled by a rigged land market.

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