ASX likely steady as traders hunt for catalyst

Oil prices surged 3 per cent as traders girded for a bullish US crude storage report and the government lowered its forecast for American production in the second half of 2015.

Today's Agenda

• Australia consumer sentiment, RBA's Glenn Steven's speech to the Economic Society of Australia 12.50pm AEST; UK monthly industrial production; US monthly Federal Budget data is released with the weekly mortgage finance data.

Today's News

• Oil Search may sell down part of its stake in the P'nyang gas field in Papua New Guinea to Santos in a move that will give the Adelaide-based company a more lucrative role in a planned expansion of the $24.7 billion PNG LNG venture.

Market Highlights

• HSBC will eliminate 22,000 to 25,000 full-time jobs, or about 10 percent of its workforce, through restructuring by the end of 2017 and sell its underperforming businesses in Turkey and Brazil. The move will reduce the size of its global investment banking business in an effort to cut billions of dollars in costs.
• Greece pulled back on budget concessions to its creditors in new proposals, as German Finance Minister Wolfgang Schaeuble said it would be "daft" to accept blame for Prime Minister Alexis Tsipras's predicament. The latest proposals fall short of the budget targets that Tsipras agreed on in a June 3 meeting with European Commission President Jean-Claude Juncker, an EU official said.
• Iron ore at the Port of Qingdao slipped 7 US cents, or 0.11 per cent, to $US64.27 a tonne on Tuesday, according to Metal Bulletin.
• The Australian dollar is around US76.85¢ on Tuesday, compared with US76.87¢ in late trade on Wednesday.
• The SPI is largely flat at 5461.

From Today's Financial Review

• Dumping imputation would hit local investors: Dumping dividend imputation would fund a cut in the company tax rate of as much as 10 percentage points, but Australian shareholders would pay a hefty price.
• Woolworths to spend $500m in Victoria: Woolworths has unveiled plans to invest in new supermarkets and distribution infrastructure as it diverts capital from its struggling general merchandise and hardware businesses to food and liquor.
• Sugar industry attacks foreign investment: The three foreign companies that control Australia's sugar milling industry are gradually losing the political battle to continue marketing the country's sugar crop in a free and open market.
• China A shares in spotlight ahead of review: Selected Shanghai- and Shenzhen-listed shares could be admitted to one of the most important regional equity indices this week in a move which shores up the long-term appeal of one of the top performing sharemarkets in Asia.

United States

• US index provider MSCI Inc said on Tuesday it will hold off including China-listed shares in one of its key benchmark indexes, but expects them to be incorporated once outstanding market accessibility issues are resolved. The failure to include the shares in the index now is seen as a setback for China's attempts to promote its yuan currency globally and attract foreign capital through a raft of financial reforms.

• Data on Tuesday showed that US job openings surged to a record high in April and small business confidence increased in May - signs that the economy was regaining momentum after stumbling at the start of the year. "What we've seen is a confirmation that the stock and bond market is dependent on easy monetary policy," said James Abate, chief investment officer of Centre Funds in New York. "The market continues to muddle and is very susceptible to a correction in the case of a shock incident."

• The Dow Jones industrial average fell 2.51 points, or 0.01 percent, to 17,764.04, the S&P 500 gained 0.87 points, or 0.04 percent, to 2,080.15 and the Nasdaq Composite dropped 7.76 points, or 0.15 percent, to 5,013.87.

Europe

• Europe's main stock markets have retreated as investors tracked the latest news flow on stalled Greek debt talks, while HSBC bank slid on revelations of a radical overhaul.
• Frankfurt's DAX 30 index dropped 0.58 per cent to close at 11,001.29 points, and the CAC 40 in Paris reversed 0.15 per cent to 4850.22 points. London's benchmark FTSE 100 slid 0.53 per cent to end the day at 6753.8 points.

Asia

• Japanese stocks fell for a third day after the yen strengthened by the most in more than two months and as an impasse between Greece and its creditors dragged on. The Topix index slumped 1.7 per cent to 1634.37 at the close in Tokyo, its biggest decline since April 30 as all but three of 33 industry groups dropped. The Nikkei 225 Stock Average fell 1.8 per cent to 20,096.30. "The market is trying to figure out its next move right now," Toshihiko Matsuno, chief strategist at SMBC Friend Securities Co. in Tokyo, said by phone. "We still have concerns over US monetary policy and Greece hanging over our heads. If the US moves towards raising rates, bonds will be sold, and if that turns into a big move, there'll also be consequences for stocks."
• The MSCI Asia Pacific Index declined 1 per cent to 145.97 in Hong Kong, the biggest drop since May 7. South Korea's Kospi index lost 0.1 per cent, while Taiwan's Taiex index sank 1.9 per cent to close at the lowest since January and New Zealand's NZX 50 Index fell 0.4 per cent.

China

• China's CPI inflation eased to 1.2 per cent y/y in May, compared with 1.5 per cent in the prior month, as food prices declined in the month. On a monthly basis, the CPI dropped by 0.2 per cent, suggesting that domestic demand remains lukewarm. As such, ANZ revised down its CPI inflation forecast to 1.5 per cent for the whole year of 2015, from 1.8 per cent previously. ANZ Research says: "We believe that further monetary policy easing is highly needed. While market interest rates declined to the lowest level since 2009 after RRR cuts, the costs of funds faced by Chinese corporates remained elevated, especially as corporate profits continued to deteriorate. In addition, the return of 3-month wealth management products, which is a more credible indicator to reflect the cost of funds for the small and medium-sized commercial banks, remains elevated at above 5.0 per cent in the past month. China's bank-dominated financial system has made monetary policy transmission mechanism less effective, rendering limited impact of monetary policy easing on the economy. M2 growth dropped significantly to a record low of 10.1 per cent y/y by the end of April, despite the aggressive 150bps RRR cuts in the past quarters. We believe that the PBoC still has room to cut the RRR and interest rates further in the near future. If capital outflow continues at the pace of Q1, we expect the PBoC to cut RRR by another 100bps in addition to further interest rate cut of at least 25bps."

• Hong Kong stocks sunk 1.2 per cent, tracking a Shanghai sell-off after more data highlighted weakness in the Chinese economy. The benchmark Hang Seng Index slipped 326.76 points on Tuesday to close at 26,989.52 on turnover of HK$166.90 billion. Shanghai slipped 0.36 per cent.

Currencies

• RBC Capital Markets writes in a note that central to an exploration of the impact of currencies on mining company fortunes is the ever-present relationship between the USD and local currencies. "There is no doubt that an inverse correlation between the USD and gold price, and as such the relationship between the USD and other currencies, tends to hedge some of the changes. What presents a significant opportunity for currency to provide meaningful benefits is when localised currencies break out of this trend for domestic economic reasons. The same may be said for iron ore and the AUD, and arguably oil and the rouble, whereby moves in price manifest in a change in the value of the currency due to the local economy's reliance on/contribution to exports."
• Overnight, Westpac reported that the US dollar index ranged sideways. EUR similarly ranged between 1.1214 and 1.1311. USD/JPY dipped from 124.60 to 123.86 and then rebounded to 124.44. AUD ranged between 0.7646 and 0.7716. NZD initially bounced from 0.7087 to 0.7180 and then ranged around 0.7140. AUD/NZD slipped from 1.0820 to 1.0740. Poor data could prompt a break through support at 0.76 for AUDUSD and put pressure on year to date lows of 0.7530 with topside resistance kicking in on approaches to 0.7750 and 0.78, said Matt Richardson, corporate foreign exchange dealer at OzForex.

Commodities

• RBC Capital Markets reports that "through April and May we saw several positives for iron ore including Chinese monetary policy stimulus, announcements of possible closures or deferrals from BHP and Vale, (little fundamental impact but positive for sentiment), Chinese steel production ticked up, port inventories fell, and lump premiums lifted suggesting domestic Chinese production is under pressure. However, without support from rising Chinese steel prices (which are currently at 10-year lows), we feel the strength in iron ore is fragile. Further into Q3, we expect demand to ease as we move past China's summer construction peak; concurrently, supply is set to step up as majors continue expansions. This is likely to see prices testing first half lows. We have lowered our H2 2015 forecast $US5 a tonne to average $US52.5 a tonne. We leave our medium and long term forecasts unchanged."
• Spot gold was up 0.3 percent at $US1,176.88 an ounce, while US gold futures for August delivery settled up $US4 at $US1177.60 an ounce. Gold fell to $US1162.35 on Friday, its lowest level since March 19, after upbeat data on US job openings bolstered expectations the Federal Reserve would lift interest rates for the first time in nearly a decade in September.
• Iron ore at the Port of Qingdao slipped 7 US cents, or 0.11 per cent, to $US64.27 a tonne on Tuesday, according to Metal Bulletin.
• Oil prices have surged as traders girded for a bullish US crude storage report and the government lowered its forecast for American production in the second half of 2015. Brent crude settled up $US2.19 a barrel, or 3.5 per cent, at $64.88, and US crude settled up $US2 a barrel, or 3.44 per cent, at $US60.14. Analysts expect the weekly US report on domestic commercial energy stockpiles will show lower supplies on Wednesday in a sign of a tighter market.
• Copper prices rose on Tuesday due to a flurry of buying triggered by a weak dollar early in the day and a rally in commodities across the board. However, gains in the metal used in power and construction were limited by expectations of weak economic data from top consumer China this week. Benchmark copper ended at $US5970 a tonne, up from $US5948 at Monday's close.
• Aluminium closed unchanged from Monday's last bid at $US1750. Lead gained about one percent to $US1930 from Monday's close at $US1910, and tin slipped to $US15,250 from $US15,440. Zinc rose one per cent to $US2160 from $US2139 on Monday. It earlier touched a one-week peak of $US2182. Nickel was up at $US13,495, from $US13,420 on Monday. It earlier hit a three-week high of $US13,620.

Australian Sharemarket

• A post-long weekend bounce and improved business confidence was not enough to shake the Australian sharemarket out of its selling phase, which closed down for a sixth straight day of trade on Tuesday. The benchmark S&P/ASX 200 fell 27 points or 0.5 per cent to 5471 on Tuesday, while the broader All Ordinaries also finished the day 27 points or 0.5 per cent lower to 5479. The ASX 200 ended just 82 points shy of a technical correction, or 10 per cent slide from April's recent high of 5997 points.
• Evan Lucas, market strategist at IG notes that "for the last five days, the peak of the ASX has come at around 12pm to 1pm before promptly being sold off all the way to the close. Three of the past five days have closed at the low of the day."

Stocks in Focus

• AGL Energy (AGL) confirmed that the Nyngan Solar Plant in western NSW has achieved full generation, sending 102 MW of renewable energy into the National Electricity Market. UBS has a "neutral" recommendation on the stock and a price target of $16.67 a share from $16 previously.

Street Talk

• Greenstone IPO pulled: Greenstone's owners Hollard Insurance and Gavin Donnelly have pulled the company's $900 million initial public offering after a worse than expected hearing from domestic fund managers.
• Bankers make Contact over Origin Energy stake: There are easier ways to make a living than pitching Origin Energy's $2.2 billion stake in New Zealand's Contact Energy.
• Leighton puts Asia-focused Offshore unit on the block: CIMIC, the company formerly known as Leighton Holdings, is embarking on yet more asset sales and putting its troubled Offshore engineering services business on the block.

Broker Watch

• Deutsche Bank has a "hold" on AWE Ltd and a price target of $1.20. "AWE's site visit to the onshore Perth Basin highlighted the development opportunity for new domestic gas production, following strong drilling results at the company's onshore Perth Basin acreage." Citi downgraded core EPS and marginally downgraded risked DCF valuation on AWE Ltd after making minor adjustments to its model post the Perth Basin site trip. "Our downgrade to Core EPS and valuation have resulted from a lower gas sales rate during EWT and a lower realised gas price, partially offset by lower drilling costs and lower opex estimates. The changes on Core EPS are large on a percentage basis due to the highly levered P&L, but relatively low on an absolute dollar basis. We maintain our 'buy' recommendation with a target price of $1.79 a share." UBS is "neutral" on the stock with a price target at $1.35 a share.
• Credit Suisse is keeping a target price of $2.50 a share on Qube Holdings and has an "underperform" on the stock. "Qube's earnings are likely to be weak over the next two years with a risk of downside from volatile resource contracts. By FY18 there could be evidence of the growth and profitability potential of the Moorebank intermodal terminal. We maintain our 'underperform' recommendation based on a 12-month view. On a longer term view, there could be attractive upside, but more attractive entry points could be available in the near term."
• Nine Entertainment issued a trading update pointing to a weak FTA TV ad market in 2H15 (particularly in May and June) and reduced its FY15 EBITDA guidance to be in the range of $285-290 million (previous guidance was for at least $311 million). "While the downgrade is disappointing, it illustrates the volatile nature of the ad market, with the company now expecting 2H declines in the markets in the low single digits compared to previous expectations of around 2 per cent growth," says Deutsche Bank. "We have reduced our EBITDA (incl associates) forecast to $286 million (previously $314 million) to be towards the lower end of the guidance range." At Deutsche Bank, the price target is reduced to $2.20 a share, down 30¢ a share; the "buy" rating retained given upside from current trading levels. At UBS, the recommendation is "buy" and the price target is $2.20 a share compared with $2.50 previously.

Ex Dividends

• Gentrack, Newhaven Hotels, OzForex, Tower, Transmetro.

Yesterday's Market Movers

Up: Harvey Norman up 4.68 per cent; MMA Offshore up 3.45 per cent; Recall Holdings up 3.13 per cent.

Down: Nine Entertainment Company down 16.12 per cent; Seven West Media down 11.39 per cent Technology One down 4.37 per cent.

Australian Economy

• Business confidence has rebounded to its highest levels for almost a year, according to the latest monthly National Australia Bank survey, which found that the latest interest rate cut and May's Federal budget had buoyed sentiment, writes Mark Mulligan. NAB said on Tuesday its business confidence index for May climbed four points to seven points, its highest level since August last year. Business conditions also rose, from four index points to seven, as the outlook on trading, profitability and employment improved. NAB warned, however, that the recuperation in conditions was not uniform across all business sectors and a "meaningful recovery in employment remains distant". Most economists expect the official unemployment rate to be unchanged from April's 6.2 per cent when the May data is released on Thursday.

Debt Markets

• RBC Capital Markets writes that if a company's debt is denominated in USD, currency fluctuations will have a quantum of the debt in the reporting currency. "There are nuances to such a relationship, which makes it difficult to ascertain negative or positive implications. Newcrest Mining NCM (as an example) has all of its $US3.9 billion debt drawn in USD, as the company has been able to access cheaper funding from US debt markets. We expect that interest rates on these facilities are materially lower than the cost of equity and, coupled with the long life of some of the company's assets, this suggests debt should (in our view) provide a key plank of the company's capital structure. When there are volatile moves in currency, the USD debt will be revalued with each reporting period, which could lead to changes in interest payments (real cash outflows). Of course, if financial results are instead reported in USD, this movement is mitigated. Using the same company as an example, we also highlight corresponding features that offset this periodic (and arguably artificial) translation. NCM's asset valuations will also be reassessed to take into account movements in currency, which are (in this instance) likely to lead to increased margins, particularly at the company's Australia-based assets. The result is that any increase in debt levels (represented on the $A-based balance sheet) will be offset by an increase in assets. In addition, lower local currency value is likely to lead to improved margins."
• Westpac reported that US 10-year treasury yields rose from 2.35 per cent to 2.45per cent - the highest level since October. The cheapening was helpful to the 3-year auction which was awarded at market at 1.125 per cent - the highest since 2011.
• The German 10-year yield also rose, from 0.86 per cent to 0.97 per cent.
• Australian 3-year government bond (futures) yields followed the global moves, rising from 2.04 per cent to 2.13 per cent. The 10-year yield rose from 2.96 per cent to 3.09 per cent.
• Analysts at Societe Generale are telling clients to reduce their holdings of equities and bonds and increase their exposure to cash.

with Reuters, Bloomberg, AAP, AFP

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Elise Shaw eshaw@afr.com.au 02 9282 3501