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The implied probability of a September rate hike in the Fed funds futures dropped to 38% overnight, from 48% a day ago. Some Fed members stated that the incoming information did not yet provide grounds for inflation to reach 2% in the medium term. This was made clear by the US inflation data. While core inflation was in-line with expectations for 1.8% year-on-year growth, if you strip out housing (ie inflation ex food, energy and housing), inflation is only running at 0.9% year-on-year. Nonetheless, John Williams’ speech tonight will be keenly dissected for any further information, but if there is going to be a Fed rate hike this year, December is now the most likely scenario.
Greater China disconnect
It’s been another interesting day in Hong Kong-Shanghai Stock Connect. The China Securities Finance Corporation (CSFC) appears to be back with a vengeance in the mainland stock markets, after the Shanghai Composite rallied over 6% from its low yesterday. A similar pattern is being eschewed by the CSI 300 today, initially falling 2% only to be driven up by strong buying in the IT and materials sectors.
However, this buying does not seem to have spread over to the Hang Seng today. The index is currently down 1.1%, but the H-shares of mainland companies are noticeably faring even worse, down 1.7%. This disconnect between the A-share and H-share market does give a lot of credence to the argument that the “National Team” is out in force buying in the Mainland markets.
There has been a lot of confusion over why the Chinese government has intervened so heavily to prop up the stock market, when its comparatively low market capitalisation would seemingly not have a huge effect on the real economy. What is becoming clearer now is the stepped-up capital outflow associated with the falls in the stock market. With equities taken out of the extremely limited array of mainland China investment opportunities, desire for capital growth naturally turns to overseas assets.
These increased capital outflows put further stress on interbank liquidity, as the recent People’s Bank of China (PBoC) injections through reverse repos and the MLF can attest to. The CNY 1-year interest swap has climbed 10 basis points today to 3.39, a strong indicator of lack of liquidity. Analysts are calling for further reserve requirement ratio (RRR) cuts before the end of the year, and as the Chinese stock markets continue to threaten further declines, this becomes increasingly likely.
The Nikkei has had a poor day as it reacted to the Fed minutes. The USD/JPY had weakened 0.5% on the news, and the associated headwinds from this and the oil price declines have led the index down – with consumer staples and energy sectors seeing the biggest falls. Export-oriented corporates are not faring well from the strengthened USD and concerns over the Chinese economy in the wake of the CNY devaluation and further equity market declines.
While the index has a lot of sectors down today, it has largely been stopped from a more dramatic decline by SoftBank Group, with its President Nikesh Arora saying he was about to buy ¥60 billion of the firm’s shares. The IT sector has been the best performer in the index off this news.
The overnight leads for the ASX were not positive, with the energy and resources sectors being some of the biggest losers on the European and US exchanges. With those sectors slated to underperform, the main question for the index was how the banks fared today. Ongoing concerns about capital requirements and perhaps lending exposure to the resources and agricultural sectors seem to have impacted the banks today again, with the sector declining 1.3%. True to form, the only two sectors to do worse than the banks were resources and energy, declining 1.8% and 4.8%, respectively.
Qantas (QAN) has had an impressive bounce back into profit after its $646 million loss last year driven by the $2.6 billion write down on its fleet. NPAT came in it at $675 million, slightly below expectations, but evidence of a very impressive turnaround nonetheless. There were solid earnings from Qantas Domestic (EBIT $480), with Qantas and Virgin settling into a comfortable duopoly and allowing them to steadily raise prices. Qantas International and Jetstar both produced healthy profits, EBIT $267 million and $230 million respectively, after losses last year. With low oil prices likely to continue for the near future, Qantas’ consolidation sets it up to have a consistent and positive performance over the next 12 months.
Wesfarmers (WES) produced underlying earnings of $2440 million, beating estimates of $2425 million. There was steady growth from Coles, which saw EBIT grow 6.6%, and seems to be doing well against an underperforming Woolworths. Bunnings, Officeworks and Kmart continued to be the biggest profit centres for the group, with all of them experiencing EBIT growth of over 10%. Target is still a problem for the group with flat same-store sales growth, and WES Industrials continue to be a drag on overall performance. This has been a great 2015 for WES, but better results from Coles are going to be key for the group to continue this pace into 2016.
Origin (ORG) has taken a beating today on the back of the almost 5% decline in the WTI overnight. The underlying profit declined 4% from the year before to $682 million, and the stock price has dropped 11.3%. This is not entirely surprising given Origin is heavily leveraged to oil prices from its oil-linked gas prices. With this collapse in prices, the onus is on the firm to continue to reduce net debt. The sale of Contact Energy in New Zealand is a start, but clearly there is much more that needs to be done in order to put the firm in a better position to survive the ongoing oil market downturn. The outlook for the stock is not strong as it tries to transition into a stronger financial position.