Category: Australia & NZ

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ASX banks profit squeeze but miners bullish

Iron ore continues its primary decline, having broken support at 90. Expect a test of the long-term target at 65.

Iron Ore

ASX 300 Metals & Mining index rallied during the week. I was expecting another test of support at 4100 ( the neckline of a large head-and-shoulders reversal pattern ) but a higher Money Flow trough near zero indicates buying pressure. A large divergence between iron ore and the Metals & Mining index warns that something is afoot.

ASX 300 Metals & Mining

The CEOs of ANZ, Westpac and NAB this week all mentioned pressure on net interest margins in their earnings announcements.

Net Interest Margins

But as this chart of fee and other income to March 2019 shows, it is not just interest margins that are under pressure. Transaction fees are steadily declining, while low book growth in recent years has resulted in declining lending fees. The recent sharp fall in other fee-based activity is also unlikely to recover as banks shed their troublesome wealth management business units.

Majors: Fees
Source APRA: Major Banks

ASX 300 Banks index retreated below its rising trendline, warning of a correction. Declining peaks on the Trend Index indicate secondary selling pressure. Follow-through below 7600 would strengthen the signal.

ASX 300 Banks

REITs have been experiencing selling pressure in the last few months despite the scramble for yield, with descending peaks on Twiggs Money Flow and a bearish descending triangle. Breach of support at 1600 would offer a short-term target of 1500.

ASX 200 REITs

ASX 200

Financials are mildly bearish but miners are surprisingly bullish. An ascending triangle on the ASX 200 signals buying pressure, while the declining peaks on Money Flow are modest in relation to the overall up-trend. Breakout above 6800 would signal another advance with a target of 7200. Breach of support at 6400 is now less likely but would warn of a decline with a target of 5400. As always, the two biggest sectors, Financials and Mining, are likely to point the way.

ASX 200

We maintain low exposure to Australian equities, with a focus on defensive and contra-cyclical stocks, because of our bearish outlook. But ASX 200 breakout above 6800 would force us to review our outlook.

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ASX: Iron ore breaks support

Iron ore broke support at 90, falling sharply to $83.55/ton. Expect a decline to test the long-term target at 65.

Iron Ore

ASX 300 Metals & Mining index rallied slightly but another test of support at 4100 is likely — the neckline of a large head-and-shoulders reversal pattern. Declining peaks on the Trend Index warn of selling pressure. Completion of the head-and-shoulders reversal would offer a target of 3400.

ASX 300 Metals & Mining

Residential mortgage activity is recovering in response to recent rate cuts but banks are under pressure, with lower interest margins, lower fee income and high remediation costs from malpractices exposed by the Royal Commission.

ANZ reported a flat full-year profit at $6.4 billion but revealed margin and retail fee pressure:

“The halving of the Reserve Bank’s cash rate during the year was the major factor in a 12 basis point compression of ANZ’s net interest margin to about 1.72 per cent. The net interest margin is the difference between the bank’s funding costs and what it charges for loans, and it’s as low as it has ever been – in the mid-1990s the margin was about 4 per cent – with no reason to believe the pressure on margins will abate.” [Stephen Bartholomeusz]

ASX 200 Financials index met resistance at 6500. Declining peaks on the Trend Index now indicate selling pressure. Expect a test of primary support at 6000; breach would offer a target of 5300.

ASX 200 Financials

REITs recovered slightly from their recent sell-off but the descending triangle is bearish. A lower Trend Index peak would strengthen the bear signal. Breach of support at 1600 would offer a short-term target of 1500.

ASX 200 REITs

ASX 200

The ASX 200 continues to give mixed signals. An ascending triangle on the index chart is bullish, but declining peaks on the Trend Index warn of selling pressure. Breakout above 6800 would signal another advance, while breach of support at 6400 would warn of a decline with a target of 5400. The two biggest sectors, Financials and Mining, are likely to lead the way.

ASX 200

We maintain low exposure to Australian equities, with a focus on defensive and contra-cyclical stocks, because of our bearish outlook.

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Australian Gold: Patience required

Gold, measured in Australian Dollars, is in a bearish descending triangle, testing support at $2150/ounce. A sharp fall on the Trend Index, with a peak below zero, warns of strong selling pressure.

Gold (AUD/ounce)

The All Ordinaries Gold Index recently broke support at 7200, warning of a decline to 6000. Again, a declining Trend Index warns of selling pressure.

All Ordinaries Gold Index

Patience is required. Gold is in a long-term up-trend, with a target of the 2012 high at $1800/ounce. A correction may offer an attractive entry point but further falls are expected before the advance resumes.

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ASX mixed signals

Residential mortgage activity is recovering in response to recent rate cuts. Buyers are unable to resist the ultra-low finance costs, while APRA is sitting on its hands regarding macro-prudential measures (e.g. reducing maximum LVRs) to prevent another credit/housing bubble. Again, we see a two-speed economy, with mortgage stress in newer suburbs and inner-city units, where homeowners are unable to take advantage of lower rates, and rising prices in older, more established suburbs with lower mortgage exposure.

ASX 200 Financials index is testing resistance at 6500. Higher troughs on the Trend Index indicate buying pressure. There is no sign of a reversal at present but keep a weather eye on primary support at 6000; breach would warn of a primary decline with a target of 5200.

ASX 200 Financials

Banks face headwinds from pressure on interest margins, increased competition from disruptors in the form of neobanks (digital banking service providers), and demands to increase capital buffers which could lead to dividend cuts.

Iron ore is testing support at 90. Breach of support would warn of a decline with a long-term target of 65.

Iron Ore

ASX 300 Metals & Mining index is testing support at 4100, the neckline of a large head-and-shoulders reversal pattern. Declining peaks on the Trend Index signal selling pressure. Breach of support would warn of a decline with a target of 3400.

ASX 300 Metals & Mining

REITs recovered slightly from their recent sell-off but downside risk remains. Breach of support at 1600 would warn of a decline to 1500.

ASX 200 REITs

ASX 200

The ASX 200 continues to give mixed signals. An ascending triangle on the index chart is bullish, but the Trend Index also shows declining peaks, warning of selling pressure. Breakout above 6800 would signal another advance, while breach of support at 6400 would warn of a decline with a target of 5400.

ASX 200

We maintain low exposure to Australian equities, with a focus on defensive and contra-cyclical stocks, because of our bearish outlook.

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ASX and 3 headwinds

Despite recent strong performance, investor enthusiasm may be cooling, with the Australian economy facing three headwinds.

Declining Household Spending

Household income growth is faltering and weighing down consumption. Household spending would have fallen even further, dragging the economy into recession, if households were not digging into savings to maintain their living standards.

Australia: Disposable Income, Consumption and Savings

But households are only likely to draw down on savings when housing prices are high. Commonly known as the “wealth effect” there is a clear relationship between household wealth and consumption. If housing prices were to continue falling then households are likely to cut back on spending and boost savings (including higher mortgage repayments).

Consumption is one of the few remaining contributors to GDP growth. If that falls, the economy is likely to go into recession.

Australia: GDP growth contribution by sector

Housing Construction

The RBA is desperately trying to prevent a further fall in house prices because of the negative effect this will have on household spending (consumption). But rate cuts are not being passed on to borrowers, and households are maintaining their existing mortgage repayments (increasing savings) if they do benefit, rather than increasing spending.

House prices ticked up after the recent fall, in response to RBA interest rate cuts. But Martin North reports that the recovery is only evident in more affluent suburbs with lower mortgage exposure (e.g. Eastern suburbs in Sydney) and that newer suburbs and inner city high-density units are experiencing record levels of mortgage stress.

Housing

Building approvals reflect this, with a down-turn in detached housing and a sharp plunge in high density unit construction.
Building Approvals

Dwelling investment is likely to remain a drag on GDP growth over the next year.

Falling Commodity Prices

Iron ore and coal, Australia’s two largest commodity exports, are falling in price as the global economic growth slows. Dalian Commodity Exchange’s most-traded iron ore contract , with January 2020 expiry, closed at 616 yuan ($86.99) per tonne, close to a seven-month low. Falling prices are likely to inhibit further mining investment.

Iron Ore and Coal Prices

Metals & Mining

The ASX 300 Metals & Mining index is testing long-term support at 4100. Breach would complete a head and shoulders reversal, with a target of 3400.

ASX 300 Metals & Mining

Financials

The Financial sector recovered this year, trending upwards since January, but faces a number of issues in the year ahead:

  • customer remediation flowing from issues exposed by the Royal Commission;
  • net interest margins squeezed as the RBA lowers interest rates;
  • continued pressure to increase capital ratios are also likely to impact on dividend payout ratios;
  • low housing (construction and sales) activity rates impact on fee income; and
  • high levels of mortgage stress impact on borrower default rates.

ASX 200 Financials index faces strong resistance at 6500. There is no sign of a reversal at present but keep a weather eye on primary support at 6000. We remain bearish in our outlook for the sector and breach of 6000 would warn of a primary decline with a target of 5200.

ASX 200 Financials

REITs are experiencing selling pressure despite an investment market desperate for yield. Dexus (DXS) may be partly responsible after the office and industrial fund reported a 26% profit fall in the first half of 2019.

ASX 200 REITs

ASX 200

The ASX 200 is showing signs of (secondary) selling pressure, with a tall shadow on this week’s candle and a lower peak on the Trend index. Expect a test of support at 6400; breach would offer a target of 5400.

ASX 200

We maintain exposure to Australian equities at 22% of portfolio value, with a focus on defensive and contra-cyclical stocks, because of our bearish outlook.

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Martin North: Mortgage stress highest ever in Australia

Martin North at DFA does monthly household surveys to assess the granularity of property data in Australia. What he finds is that one-third of households (about 1 million) are in mortgage stress. In Sydney, the problem is concentrated in the Western suburbs and inner city units.

Many Western and outer fringe households bought in at high prices and have experienced price falls of 30% or more. They are locked in because of little or no remaining equity and cannot refinance to get the benefit of lower rates. They have run down savings and run up credit cards in the hope that the situation would improve but there has been little movement in these areas and banks are starting to foreclose.

Inner city units have suffered similar price falls but also face the problem of poor construction standards which makes resale difficult.

Martin is skeptical of high auction clearance rates and recovery in prices, pointing out that this is largely restricted to the Eastern suburbs where households enjoy much lower mortgage exposure relative to property values.

Hat tip to Macrobusiness where I found the video.

 

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ASX hesitates in its downward slide

There is a hint of optimism in the air, with the year-on-year decline in housing prices slowing, to around -5% nationally, on the back of lower interest rates.

Housing

The ASX 200 hesitated in its downward slide but is still likely to test support at 6400. Breach would offer a target of 5400.

ASX 200

Iron ore continues to trade in a narrow range above short-term support at $90, suggesting continuation of the down-trend. Breach would offer a medium-term target of $80 per ton.

Iron Ore

The ASX 300 Metals & Mining index is testing long-term support at 4100. Breach would complete a head and shoulders reversal, with a target of 3400.

ASX 300 Metals & Mining

The Financial sector hesitated slightly, after a sharp fall last week. The rebound was undermined by an ANZ profit downgrade:

ANZ today announced its second half 2019 Cash Profit will be impacted by a charge of $559m (after-tax) as a result of increased provisions for customer related remediation.

Major banks’ net interest margins are also under increasing pressure as the RBA lowers interest rates.

Net Interest Margins

Expect ASX 200 Financials to test primary support at 6000. Breach would signal a primary decline, with a target of 5200.

ASX 200 Financials

REITs are surprisingly soft in a financial market desperate for yield. But there is wide disparity in the sector, with BWP for example surging, while office and industrial fund Dexus (DXS) is undergoing a sell-off.

ASX 200 REITs

We maintain exposure to Australian equities at 25% of portfolio value, with a focus on defensive and contra-cyclical stocks, because of our bearish long-term outlook.

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Ultra-low interest rates may lead to a ‘debt trap’

The highly-regarded Stephen Bartholomeusz warns that central bank policies may lead to a ‘debt trap’:

“….With the world apparently re-starting the use of unconventional monetary policies even before central banks have extricated themselves from the legacies of a decade of those policies, there is a real risk that the impacts and the threats posed by their side effects will swell and that the world will be caught within what the BIS has previously described as a “debt trap’’ with no exit.

The other disturbing aspect of the [BIS] report is that it repeatedly says it is too early to assess the longer-term implications of the policies the central banks have employed.

Central bankers respond to the latest data – they respond to short-term signals – but the side-effects of their post-crisis policies have already been building for a decade and will continue to build while they maintain ultra-low or negative policy rates and keep buying bonds and other fixed interest securities to depress longer-term interest rates and suppress risk premia.

How those side-effects are unwound and how the banks extricate themselves from their policies and the legacies of those policies won’t be known until they try, but the potential for another crisis has been increased by the big surge in global leverage and the elevated asset prices the policies have encouraged.

Negative rates and quantitative easing and variations on those themes might, as the BIS report says, be useful additions to central bankers’ toolboxes but the past decade has shown they aren’t by themselves a panacea for economic ills and they bring with them potentially unpleasant side effects the longer they are in place.”

Debt traps occur when the interest rate needed to service the government debt is greater than the growth rate of GDP, according to former Fed governor Robert Heller:

“…In such a situation, debt service obligations grow more rapidly than the economy; eventually, the accumulated debt can no longer be serviced properly. In other words, the dynamics of the situation become unsustainable and a death spiral ensues.”

So far, central banks have responded by driving interest rates to record lows but unintended consequences are emerging, with low interest rates leading to low GDP growth. A feedback loop is emerging:

    • Low interest rates

Australia: 10-Year Bond Yield

    • Low bank interest margins

Australia: Bank Net Interest Margins

    • Low credit growth

Australia: Credit & Broad Money Growth

    • Low inflation

Australia: Underlying Inflation

    • And low economic growth

Australia: GDP Growth

We are venturing where angels fear to tread: central banks trialing new policies without empirical evidence as to their long-term consequences.

Monetary policy should be administered judiciously, intervening only when the financial system is in dire straits, outside the realm of the regular business cycle. Instead monetary policy is treated as a panacea, the constant drip-feed building a long-term dependence on further stimulus.

The problem with ‘traps’ is that they are difficult to escape.

“If you find yourself in a hole, the first thing to do is stop digging.”

~ Will Rogers

[NOTE: I should clarify that Australia has relatively low fiscal debt and is not in any immediate danger of a debt trap. But the ‘lucky country’ would suffer severely from fallout if the US or China were caught in a debt trap.]

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ASX 200 hits a brick wall

The ASX 200 retreated sharply from stubborn resistance at the 2007 high of 6800, like hitting a brick wall. Breach of support at 6400, after a lower high, is now more likely and would offer a target of 5400.

ASX 200

Iron ore continues to test short-term support at $90. Breach is likely and would signal another decline, with a medium-term target of $80 per ton.

Iron Ore

The ASX 300 Metals & Mining index is headed for a test of long-term support at 4100. Breach would complete a head and shoulders reversal, with a target of 3400.

ASX 300 Metals & Mining

The Financial sector retreated sharply from resistance at 6500. Expect a test of primary support at 6000. Breach would signal a primary decline, with a target of 5200.

ASX 200 Financials

We maintain exposure to Australian equities at 25% of portfolio value, with a focus on defensive and contra-cyclical stocks, because of our bearish long-term outlook.

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ASX 200: Stubborn resistance

Iron ore is headed for another test of short-term support at $90. Breach would signal another decline, with a medium-term target of $80 per ton.

Iron Ore

The ASX 300 Metals & Mining index retreated this week and is expected to test long-term support at 4100. Breach would complete a head and shoulders reversal, with a target of 3400.

ASX 300 Metals & Mining

The Financial sector is testing resistance at 6500, with short candles indicating hesitancy.

ASX 200 Financials

With building approvals falling, expect housing to remain a drag on growth in the medium-term — unless the RBA & APRA go all-in on interest rates and macro-prudential to rescue the housing bubble.

Australia Private Residential Building Approvals

The ASX 200 is testing resistance at the 2007 high of 6800. Short candles warn of stubborn resistance. Reversal below 6400 remains unlikely but would signal a decline to test primary support at 5400.

ASX 200

We maintain exposure to Australian equities at 25% of portfolio value, with a focus on defensive and contra-cyclical stocks, because of our bearish long-term outlook.

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