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Telcos… is it me you’re looking for?

Asian markets struggled today as Friday’s selloff in US biotechs continued to weigh down US futures, providing a negative lead in for Asian trade.

Asian trade
Source: Bloomberg

Chinese industrial profits data came in below consensus expectations at 11.30 AEST and immediately spurred selling in Chinese and Japanese markets. The US dollar weakened in Asian trade despite the final US Q2 GDP being revised upwards to 3.9% from 3.7% and Fed Chair Janet Yellen re-emphasising the intention to raise rates this year. The Aussie and Kiwi dollar have been showing surprising strength against the USD, despite both currencies having relatively weak outlooks.

The Kiwi dollar rallied up over the US$0.64 level, its highest point since 19 September. The Kiwi has been buoyed by news that Fonterra is increasing its milk price payout forecast. However, with New Zealand economy still struggling and a majority of economists calling for a rate cut at the RBNZ’s 29 October meeting, a sustained break above the $0.64 level seems unlikely to last. NZ Building Permits and the ANZ Business Confidence Survey are released on Wednesday. If the currency persists at this elevate level until then, they could be the precipitating factors for another downward move.

The Aussie broke out of the very consistent downtrend that it had been trading in from 19-24 September after the Fed meeting. After dipping below the US$0.70 level, it seems to just be trading sideways slightly above that level, with most of the recent trading taking place within the $0.7000 and $0.7040 band. The Aussie seems to be awaiting further leads, but the odds are still skewed to it moving to the downside as strong US data or hawkish statements from Fed members are likely to help push it back below $0.70.

Chinese industrial profits prompted further concerns about the economy as they declined 8.8% from a year earlier. Mining, coal, oil & natural gas all continued to see profit declines between 40-68%.

This led to the Shanghai Composite falling 1.4% at the open, with the telecommunications energy and financial sectors doing particularly poorly. However, the index improved in later trade to pare back the decline to only 0.2%. Volumes were down massively at 50% below their 30-day moving average ahead of China’s 5-day holiday beginning on 1 October.

Japanese markets suffered a severe drag as 1000 companies went ex-dividend on the Topix, as shares often decline by the expected value of the dividend.

The ASX 200 has sought to undo its late-session losses on Friday – the index bucked the prevailing negative trend in Asian markets to gain 1.3%. There were solid gains across the board in the index, except for the healthcare sector, which seemed to be suffering in the wake of Hilary Clinton’s comments that she planned restrict prices in the industry. Estia (EHE) and Resmed (RMD) were two of the worst performers on the index, falling over 2%, while the sector as a whole declined 0.3%.

The banks were one of the best performers on the index with the sector up 1.8% despite the slowing auction clearance numbers on the weekend. These point to further signs the property market is cooling.

But the biggest action on the market was the announcement of a merger between Vocus (VOC) and M2 Group (MTU) to create a new powerful player in the telco space. The deal was prompted by the need for scale as the National Broadband Network allows for heated competition in the broadband market.

With TPG (TPM) recently buying out iiNet as well, the stage has been set for a serious showdown in the broadband sector. This could seriously eat into margins, and does add to concerns about Telstra’s ability to defend its market share against significantly beefed up competitors. The M&A arbitrage play was in fine form today as Vocus declined by 6.3% and M2 saw their shares gain 14%.

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