Markets Live: Banks in wild swings

Despite the October meeting of the RBA delivering no surprises, it was a dramatic day on the local share market, which posted its biggest intraday swing of the year as bank stocks oscillated wildly and and Rio Tinto rallied.

The benchmark S&P/ASX 200 Index and the broader All Ordinaries Index each dipped 0.2 per cent, on Tuesday to 5284.2 points and 5284.8 points respectively, after pushing as much as 1.6 per cent lower in the morning.

As was universally tipped by economists, the Reserve Bank elected to keep the official cash rate at its record low 2.5 per cent. Rates have now been steady since August 2013.

Shares and the dollar each got a bounce following the announcement.

“October’s RBA announcement highlights that the impact on the economy of recent declines in the dollar has been lessened by the fall in commodity prices,” Pitcher Partners director of wealth management David Lanesaid.

Mining was the strongest sector, up 1.4 per cent as the biggest miners led the bourse.

Australia’s biggest iron ore miner, Rio Tinto, jumped 4.3 per cent to $60.07 after the company confirmed that it had been approached, and rejected, a takeover offer from Swiss mining giant Glencore in August.

This led some to question whether Glencore might launch a hostile takeover bid, but most equity experts think this would prove too dilutive.

JP Morgan resource analyst Lyndon Fagantold clients the prospect of a Glencore - Rio Tinto merger in the coming year was unlikely.

BHP Billiton rallied 1.7 per cent off a 2014 low to $33.24 as investors digested a plan unveiled by the company on Monday to overtake main rival Rio Tinto as Australia’s lowest cost iron ore producer. Deutsche Bank analysts confirmed their “buy” recommendation on BHP Billiton, while JP Morgan analysts re-iterated their “neutral” stance.

Early in the session, each of the big four banks were down by more than 2 per cent. But despite rallying on the assurance of a continuation of record low interest rates, none of them managed to eke out a gain.

Commonwealth Bank of Australia fell 0.5 per cent to $75.77, ANZ Banking Group dipped 0.1 per cent to $31.51, and National Australia Bank fell 1 per cent to $32.38. Westpac Banking Corporation was unchanged at $32.42.

“After big sell-offs since the start of September the banks are almost approaching reasonable valuations again,” Perpetual portfolio manager Vince Pezzullo said.

 

Banks led investors on a not-so-merry dance before ultimately dragging shares slightly lower, offsetting a strong performance from the miners, particularly Rio Tinto which jumped 4.3 per cent on merger talk.

The benchmark ASX 200 index managed a 76 point turnaround in the afternoon to close a mere 9 points, or 0.2 per cent, lower at 5284.2 at the close, while the All Ords was 8 points lower at 5284.8.

Banks were the prime movers for the slump and the recovery, as each of the big four was 2 per cent lower at one stage, before recovering into the close. NAB closed 1 per cent lower, CBA 0.5 per cent, ANZ eased 0.1 per cent, and Westpac was flat.

BHP added 1.7 per cent, while Fortescue gained 4.3 per cent.

The Bank of Japan kept monetary policy steady today but revised down its assessment of factory output, acknowledging that a sales tax hike in April had dealt a heavier blow to the economy than expected.

As widely expected, the BOJ voted unanimously to maintain its pledge of increasing base money, or cash and deposits at the central bank, at an annual pace of 60-70 trillion yen ($US547 billion-$US638 billion) through purchases of government bonds and risky assets.

"Japan's economy continues to recover moderately as a trend, but there is some weakness in production ... after the sales tax hike," the BOJ said in a statement issued after the meeting.

BOJ governor Haruhiko Kuroda will hold a news conference to explain the policy decision.

BOJ board member Sayuri Shirai disagreed with the central bank's description of inflation expectations. He also suggested the bank say an increasing number of indicators of inflation expectations had been flat recently.

BOJ board member Takahide Kiuchi proposed watering down the central bank's price target, which was turned down in an eight-to-one vote.

The BOJ has stood pat since launching an intense burst of stimulus in April last year, when it pledged to double base money via aggressive asset purchases to achieve its 2 percent inflation target in roughly two years.

Banks are showing some remarkable volatility today, opening higher then slumping deep into the red before trimming back their losses to trade slightly lower at the end of a wild session.

ANZ is currently down 0.1 per cent, CBA down 0.5 per cent, NAB has lost 1.3 per cent and Westpac is down 0.35 per cent.

That's led to a remarkable spread of more than 110 points between the ASX200's session high and low.

The ASX200 has experienced some wild swings today, with the banks and other yield plays driving significant downside despite a recovery in the wake of the RBA meeting, IG's Stan Shamu notes:

• Having said this, the headlines have been around rumours of a Glencore-Rio Tinto merger. Rio predictably flew out of the blocks and has been bid for most of the day as speculators debate the possibility of a tie-up.
• However, many analysts have flagged a Rio/Glencore merger as unlikely, given the significant regulatory challenges it would face and the lack of value for Rio shareholders unless there were a significant premium.
• While there are some advantages, it certainly seems the cons outweigh the pros. It’ll be interesting to see how its UK-listed stock responds after having enjoyed mild gains yesterday.
• Later today, we have Fed members speaking, including Kocherlakota and Dudley. Any further hints of a hawkish shift following the recent jobs reading would be supportive of the USD.

Local banks are increasingly interested in lending money to airlines to purchase aircraft as they look to diversify their exposure away from property in the wake of the global financial crisis, says Boeing Capital Corporation managing director Kostya Zolotusky.

“Australian banks and other Asian banks are starting to play globally where in the past they were predominantly focused on domestic and Asian markets,” he said during a visit to Sydney to meet with local banks and aircraft leasing companies and discuss the latest market outlook.

“You have Commonwealth Bank that is becoming a true global aircraft finance bank. That resurgence is a reflection that in the past banks could almost single-mindedly plough as much money as they wanted into real estate. Now they have realised that is not as bullet-proof as everyone had assumed historically.”

Boeing expects $US112 billion of aircraft will be delivered this year, rising to $US139 billion by 2018 due to market growth. Few, if any, airlines buy aircraft in all cash-transactions, meaning they will fund the deliveries through loans, aircraft leases, bonds or export credit agencies.

ANZ, National Australia Bank and Westpac are also involved in aircraft financing, but to a lesser extent than Commonwealth Bank, which has its own leasing unit and also holds a stake in US-listed Air Lease Corp.

The AFR's Street Talk column today reported Macquarie Group was among the parties that had lodged a second-round bid for a $5 billion portfolio of aircraft leases being sold by London-based private equity firm Terra Firma. In addition, Investec manages global aircraft leasing funds from Sydney.

And here some reactions on Twitter:

Some early reactions from economists to the RBA decision:

RBC Capital Markets senior economist Su-Lin Ong:

The language around the currency has changed very little. All they've done is acknowledge that it's declined a bit more, largely because of the US dollar, and that some of the commodity prices that are key for Australia have fallen further too. It's very much a statement of fact offering little opinion on risk or outlook.

One thing that started last month was maybe a bit of softening in the tone on China. But all the discussion over most parts of the (Australian) economy is unchanged.

JPMorgan economist Tom Kennedy:

Obviously no change to the policy rate at 2.5 per cent, when you look at the commentary, it is pretty similar to what we're seeing from the bank over the past few months. The two things that I would point out here is they still seem a little bit more concerned on China - given what's happening in the property market over there - and really the influence the slowdown in the economy will have on Australia. That's probably a major risk going forward.

Secondly, they've also highlighted the pick-up in investor lending in the housing sector which is really just consistent with the themes over the past two weeks or so where officials have come out and said the competition or activity in the housing market is not balanced and currently investor loan growth is running well ahead of your more traditional and your larger owner-occupiers.

NAB senior economist David de Garis:

There was a bit of market chatter that they may remove the key outlook statement at the end but that hasn't been the case. They're still saying that the most prudent course is to have a period of stability in rates.

Their comment on the exchange rate is very little different in substance (from previous statements). They've changed the wording a little bit to recognise the decline in the exchange rate but also pointing out the rise in the US dollar and the fact that commodity prices have come off. They clearly want the exchange rate to move lower over time.

We still think the outlook is very much as before until we can see more material change in the economy ... We expect rates to rise in the last quarter late next year.