$A jumps, emerging markets surge

Today's Agenda

• US Federal Reserve minutes, Earnings: Alcoa.
• Bank of England policy decision.

Market Highlights

• The Dow Jones industrial average rose 0.73 per cent to end at 16,912.29. The S&P 500 ended 0.8 per cent higher 1995.83 after trading down 0.18 per cent earlier in the day. The Nasdaq Composite added 0.9 per cent to 4,791.15.
• In Europe, the Stoxx 50 added 0.2%, the FTSE 100 rose 0.16%, the CAC 40 gained 0.14% and the DAX advanced 0.68%.
• SPI futures up 32 points.
• The Australian dollar is at US72.02¢. The Aussie reached US72.35¢ in early trading in New York overnight. The currency was at US71.85¢ at Wednesday's local close.

Today's News

• Bank of Queensland has reported a 19 per cent rise in cash profit to $357 million for 2015, just beating consensus analyst forecasts, but costs have ticked up due to recent acquisitions. Statutory profit rose 22 per cent to $318 million. It was lower due to one-off costs for the 2014-15 financial year.
• Macquarie Group is set to announce the acquisition of ANZ Banking Group's Esanda unit.
• Shares in Rio Tinto jumped 7.5pc in London after Morgan Stanley upgraded European miners to "overweight".
• Deutsche Bank expects to report a net loss of €6.2 billion for the third quarter and may eliminate its dividend for the year.
• X marks the spot as Germany's central bank publishes a full list of all its gold holdings and where the loot is located.
• Trans-Tasman dairy company, a2 Milk, plans to raise $NZ40 million ($36.7 million) to help fuel its expansion across China, the US and Britain after sales of its Platinum infant formula brand surged higher than it expected.

From Today's Financial Review

• IAG's CEO change means full steam ahead in Asia | Chanticleer: The change in chief executive at Insurance Australia Group from Mike Wilkins to Peter Harmer will trigger a renewed focus on Asia.

• Experts warn of a waning housing boom: Investors, developers, contractors and consultants expect growth in house prices and housing starts to wane, Property Council survey says.

United States

• Analysts project earnings for S&P 500 members dropped 6.9 per cent in the third quarter. Still, a Fed measure of corporate income has posted its biggest quarterly increase since 2012, suggesting the overall picture for profits may be skewed by downgrades at energy producers combating weak oil prices.

• Corporate results weighed on the market Wednesday, as Yum! Brands, owner of the KFC, Pizza Hut and Taco Bell chains, suffered its worst stock decline in almost 13 years after missing third-quarter profit estimates. Adobe Systems shares declined after forecasting fiscal 2016 sales and profit that fell short of estimates.

• Alcoa reports after markets close Thursday, while companies reporting next week include Johnson & Johnson, Intel and JPMorgan Chase & Co.

• The S&P 500 remains about 5 per cent below its level on August 11, the day China's surprise currency devaluation roiled global financial markets and sent the index careening into a correction.

• The Dow Jones industrial average rose 0.73 per cent to end at 16,912.29. The S&P 500 ended 0.8 per cent higher 1995.83 after trading down 0.18 per cent earlier in the day. The Nasdaq Composite added 0.9 per cent to 4,791.15.

Europe

• A rally in European stocks ran out of steam after data showing an increase in US crude stockpiles trimmed an intraday advance in oil producers. While a surge in energy shares propped up the Stoxx Europe 600 Index for most of the day, the broader benchmark gave up almost all of its gains in the final hour of trading as advances in Total SA and Royal Dutch Shell Plc diminished. The Stoxx 600 rose 0.1 per cent at the close of trading, after climbing as much as 1.2 per cent.

• "The potential for a steep rebound is pretty good," said Teis Knuthsen, chief investment officer at Saxo Bank A/S's private-banking unit in Hellerup, Denmark. "I think we may be quite surprised by the speed in which markets can recover."

• The Stoxx 600 jumped 4.1 per cent in the past three sessions as investors speculated the Federal Reserve won't rush to raise rates and Glencore led a rally in miners. The gauge had tumbled as much as 18 per cent from an April record through September 29 amid worries about global growth and the Fed's thinking.

• Health-care shares fell the most among Stoxx 600 groups today. Roche Holding AG and Novartis AG, among stocks with the biggest weightings on the benchmark gauge, lost 2.4 per cent or more.

• A gauge of miners posted the best performance among European industry groups, capping its best seven-day gain since 2009. Anglo American Plc and Rio Tinto Group rose at least 7.5 per cent after Morgan Stanley upgraded the shares.

• Volkswagen AG, the automaker that lost as much as $US33 billion in market value after admitting to cheating on emission tests last month, jumped 7.1 percent for a third day of gains. The company may start recalling the rigged diesel cars in January and plans to complete repairs by the end of 2016, chief executive officer Matthias Mueller told Frankfurter Allegemeine Zeitung.

• German industrial output, adjusted for seasonal swings and inflation, fell 1.2 per cent in August after a revised increase of 1.2 per cent a month earlier. The reading compared with a median estimate for a 0.2 per cent gain in a Bloomberg survey of economists.

Asia

• Bank of Japan grips onto drifting inflation target: The dream of 2 per cent inflation is still alive at the Bank of Japan.

• Japanese stocks rose for a sixth day after the nation's central bank maintained record monetary stimulus. Energy shares led gains as crude oil extended its rally from the highest close in more than a month.

• The Topix climbed 1.2 per cent to 1493.17 in Tokyo to close at its highest level since September 9 and cap its longest winning streak since August. The Nikkei 225 Stock Average added 0.8 per cent to 18,322.98. The yen strengthened 0.2 per cent to 119.97 per dollar after Bank of Japan governor Haruhiko Kuroda and his board decided to keep increasing the monetary base at an annual pace of 80 trillion yen, as predicted by 34 of 36 analysts surveyed by Bloomberg last week.

• Oil explorer Inpex Corp surged 7.2 per cent, while airlines fell the most among the 33 industry groups on the Topix index on prospects for higher fuel costs. Ryohin Keikaku Co, which operates the Muji brand, lost 6.9 per cent after analysts said the company's earnings report was slightly negative. Seibu Holdings Inc, operator of Japan's biggest hotel chain, plunged 5.1 per cent as trading volume surged.

• "Expectations for further easing are deeply entrenched, leading us to a sixth consecutive day of gains," said Naoki Fujiwara, chief fund manager at Shinkin Asset Management Co in Tokyo. Immediately after the BOJ meeting "we saw a sharp rise in the yen, but after that ended we're seeing buying."

• Samsung Electronics had its biggest advance in more than six years, climbing 8.7 per cent after announcing results.

China

• Volatility in the world's wildest stock market is finally receding. If that's one argument for buying Chinese shares, Bocom International Holdings Co's Hao Hong has a long list of reasons why you shouldn't. For one, the Shanghai Composite Index's valuation is above its long-term average, even after a 41 per cent drop in the benchmark gauge since mid-June. Government efforts to bolster the yuan will drain market liquidity, Hong says, and plummeting equity volumes suggest investors lack faith in a rebound. He rejects the notion that targeted economic stimulus is enough to revive the bull market.

• Chinese stocks in Hong Kong jumped to an almost seven-week high as investors wait for mainland markets to open after a week-long holiday. Energy companies surged on higher oil prices while automakers continued their rally. The Hang Seng China Enterprises Index added 4.7 per cent to 10,394.79, its highest close since August 20.

• Cnooc and PetroChina posted some of the biggest gains on the benchmark Hang Seng Index after crude extended its advance from a one- month high. Great Wall Motor soared 15 per cent after trailing increases by other automakers on Tuesday.

• The Hang Seng Index rose 3.1 per cent to 22,515.76, with volume 31 per cent higher than its 30-day average. Mainland markets have been shut since October 1 for National Day holidays. The Hang Seng China Enterprises Index traded at 7.7 times estimated earnings, less than half the global average. The gauge tumbled as much as 39 percent from this year's peak as multiple cuts to interest rates and the reserve requirement ratio failed to revive the nation's economy.

• "H shares are being driven by oil stocks as oil prices surged last night," said Daniel So, a strategist at CMB International Securities Ltd. "Over the next week, H shares will stay strong ahead of the fifth plenary session of the Communist Party of China. People may be optimistic that supportive policies will come out."

• The Communist Party Plenum scheduled for this month is set to chart the path for China's development.

Currencies

• The euro fell against most major counterparts after data showed German industrial production unexpectedly declined in August, adding to signs that weaker emerging-market demand is weighing on Europe's largest economy. The shared currency slid versus all but two of its 16 major peers as investors weighed the potential for the European Central Bank to expand its quantitative-easing program, which tends to weaken the euro. It dropped against the yen after the Bank of Japan refrained from adding to its already unprecedented monetary stimulus.

• Several bank analysts have called on the Aussie to rally in a counter trend move, arguing that the pair is so grossly oversold that a move towards US75¢ is likely as short covering takes hold, says Boris Schlossberg, managing director of FX strategy at BK Asset Management. "We think such targets are optimistic given the depressed state of prices on the commodity front. However if commodity price staged a mild rally into the year end the Aussie could certainly follow, especially given the fact that the Fed is unlikely to move until December the earliest, providing ample time for carry trade speculators to lock in the spread which is unlikely to compress between now and year end."

• The New Zealand dollar advanced 1.5 per cent against the US dollar, leading currencies from commodity-exporting countries, amid rising whole-milk powder prices.

• Here's what to look for when the Federal Reserve releases minutes from the Federal Open Market Committee's September 16-17 policy-setting meeting at 2pm Thursday in Washington: a signal about just how near Fed officials were to raising interest rates in September and the arguments that ultimately persuaded them to leave rates unchanged near zero. Fed officials who have spoken since the meeting, including San Francisco Fed president John Williams and the Atlanta Fed's Dennis Lockhart, have called it a "close call". "Relative to market expectations, which interpreted the statement as very dovish and are not pricing a rate hike until well into 2016, the minutes could appear somewhat hawkish," Michelle Meyer, deputy head of US economics at Bank of America in New York, wrote in a research report, noting officials' "close call" comments. "Market participants will be looking for signs of how strongly held this view actually is, and what conditions - particularly on the global front - might derail that expectation."

Commodities

• The IMF's guide to surviving the next commodity boom and bust: Australia should increase efforts at making its budgets more resilient, save more, and shift towards a greater reliance on the GST, the International Monetary Fund says.

• In a note, Morgan Stanley called for investors to increase their exposure to emerging markets and commodities on more stable data from China, attractive relative valuations and a likely inflection in macro-economic sentiment. The firm upgraded Anglo American - the second worst performing stock in sector so far this year, second to Glencore - to "equal weight" from "underweight". It lifted both Rio Tinto and BHP Billiton to "overweight" from "equal-weight".

• Oil retreated after a government report showed that US crude inventories and production climbed. Nationwide, stockpiles rose for a second week, according to the Energy information Administration. Supplies at Cushing, Oklahoma, the delivery point for WTI contracts, increased for the first time in six weeks and production rebounded from a 10- month low. Refinery operations slowed to the lowest level in seven months. Oil traded at the highest level since July in New York before the release of the EIA data at 10.30am in Washington. Prices slumped to a six-year low in August amid speculation a global glut will be prolonged. US crude stockpiles remain about 100 million barrels above the five-year average and OPEC continues to pump above its target.

• West Texas Intermediate for November delivery fell 72 cents, or 1.5 per cent, to close at $US47.81 a barrel on the New York Mercantile Exchange. Futures climbed 4.9 per cent to $US48.53 Tuesday, the highest settlement since August 31. The volume of all futures traded was 51 per cent higher than the 100-day average at 2.40pm.

• Brent for November settlement slipped 59 cents, or 1.1 per cent, to end the session at $US51.33 a barrel on the London-based ICE Futures Europe exchange. The European benchmark crude closed at a $US3.52 premium to WTI.

• Spot gold fell 0.1 per cent to $US1145.86 an ounce by 2.53pm New York time, after touching $US1153.30, its highest level since September 24. The market was relatively subdued as traders awaited the minutes from the Fed's September meeting on Thursday at 1800 GMT. "What the market will be looking for is, how close was the Fed to making a move in the September meeting, and how deep and detailed was the global turmoil discussion in that meeting," said Rob Haworth, senior investment strategist for US Bank Wealth management in Seattle. "The hedge funds have been either unwinding short positions or taking new long positions as a hedge to Fed inaction. Part of what you're getting today is truing up those positions; people who aren't getting the price action they expected, maybe taking that off."

• Copper advanced as much as 1.5 per cent before paring the climb to 0.3 per cent, as investors weighed the impact of supply cuts on the global market. Three-month London Metal Exchange copper ended flat at $US5186 a tonne versus a previous close of $US5185.

• BNP Paribas advised against taking an aggressively negative price view on metals. It expects growth in world base metals demand to slow to 2 per cent in 2015, but sees it picking up to 3 per cent next year.

• Nickel ended up 2.1 per cent at $US10,170. Prices have stabilised since falling below $US10,000 to their lowest in 6-1/2 years in August. Global nickel demand is expected to increase to 1.965 million tonnes in 2016 versus 1.905 million in 2015, an industry group said.

• While equity markets stole the headlines, it was commodity markets that bore the brunt of the 3Q risk unwind, notes Citi. "Commodities underperformed every other asset class last quarter with the BCOM TR index declining 14 per cent (its worst quarter since 2008) versus a 7 per cent drop in the S&P 500 and 2 per cent return for USTs. Fresh EM and China woes prompted concerns over faltering global commodity demand, further weighing on sentiment in already oversupplied commodity markets. Indeed, commodity investors that had been optimistic in 1H15, as around $US22 billion flowed into sector ETFs and passive index investments, reversed course in 3Q. Cumulative outflows totalled around $US5.4 billion in July-September as passive indices retrenched about $US7 billion, more than offsetting modest energy and precious metals driven ETF inflows of around $US1.6 billion. Citi expects commodity prices to remain under pressure this winter and we expect ongoing retrenchment in investment flows to continue into year end."

Australian Sharemarket

• Bottom of the market 'reasonably close': Australia's biggest listed investment company believes the bottom of the market is near and is tapping investors for funds to exploit recent volatility.

• Local shares climbed to a four-week high on Wednesday in a topsy-turvy trading day boosted by a surge in energy stocks. The market posted its third straight day of gains but struggled for conviction in early trade with selling in the banks and Telstra dragging the index lower. At close of trade the benchmark S&P/ASX 200 closed 30 points, or 0.6 per cent, higher to 5197.9. The broader All Ordinaries added 29 points, or 0.6 per cent, to 5228.4.

Stocks in Focus

• Banks shares set to rise as investors dive in: Have the banks bottomed? Macquarie says bank shares typically rise before their ex-dividend dates and could return to normal valuations relative to the market.

• Deutsche Bank's supermarket pricing study shows pricing in the September quarter was flat year-on-year, which is unchanged from the June quarter. "Both major chains have continued to reduce private label prices, but Woolworths' investment in branded products moderated slightly in this qtr compared to the prior quarter. Conversely, Coles has continued to control its own pricing dynamic with branded goods showing strong inflation in line with the prior quarter. The price gap between Coles and Woolworths is now similar to 2012 levels, which we view as a rational level. Hence, we believe the likelihood of a price war is lower now given Woolworths has moderated investment and Coles has not responded aggressively."

Street Talk

• Clock ticks on Woolies, Lowes hardware partnership: October 20 is looming as a potentially big day for Woolworths watchers as the retailer wrestles with how to exit from its disastrous Masters joint venture.

• Westpac investors eye Hartzer's rem package: Westpac chairman Lindsay Maxsted is faced with a very important decision; shareholders or management.

Broker Watch

• Deutsche Bank retains a $39.90 target price and "hold" rating on ASX Ltd. "As flagged at its recent AGM, recent market volatility has translated to high activity growth for ASX, with cash equity turnover up 21 per cent, SFE growth of 7 per cent and capital raisings doubling off a low pcp in 1Q16. While cash equities turnover is now ahead of our 1H16 forecasts, we retain our forecasts at this stage given a likely normalisation in recent market volatility, seasonally lower year-end activity levels ahead and equity rebate structures returning 50 per cent of any upside to participants. At a 12 month forward PE of 18.1x, ASX is trading in line with its historical average and appears fully valued."
• Citi initiated coverage on Vitaco with a "neutral" rating and a price target of $2.85 a share. "Vitaco has a portfolio of New Zealand and Australian vitamins, sports nutrition and health food brands that are well placed to exploit the growing Chinese demand for provenance. Vitaco's own manufacturing will boost its operating leverage. We forecast FY16e EBIT of $22.5 million, 12 per cent ahead of prospectus forecasts. Vitaco trades at a PE ratio of 27x FY16e. Given its 29 per cent EPS CAGR to FY18e, we see this as a fair multiple. Any upside from here will be driven by better sales growth in China, which has boosted multiples for relevant comparable companies. The company is working on increasing its Asian brand profile by leveraging its NZ provenance."
• Macquarie Wealth Management has an "underperform" on Beadell Resources and a price target of 11¢ as it heads toward detailing production and costs in its quarterly report on October 22. "An improved quarter from Tucano, but we believe the outlook still remains challenging. In its recent FY15 production downgrade BDR suggested that the company expects annualised life of mine production of 160,000oz, a 13 per cent reduction on the average of 186,000oz outlined in the most recent long-term mine plan update. A change in ore type is likely to require more crushing and milling capacity, which we expect to increase capital requirements."
• Bell Potter backs Elders with a "buy" and a price target of $4.75 a share. "The combination of a significant uplift in cattle prices, stronger saleyard throughput, higher wool sales volumes and an improved (albeit small) outlook for the summer crop acreage all suggest a solid finish is likely for FY15e. With this stronger than expected 2H15 market backdrop, we believe the earnings bias for ELD remains to the upside. ELD operates with favourable tailwinds in the traditional livestock and wool agency businesses (around 34 per cent of GP), a strategy in place to more than double underlying EBIT by FY17e and is now addressing its capital structure on more favourable terms than we had previously assumed. In the near term, stronger than expected market tailwinds imply a continued upside bias to earnings forecasts."

Ex Dividends

• Aberdeen Leaders, Eumundi Group, TFS Corp

Yesterday's Market Movers

• Top gainers: LNG +21.6%, AWE +15.1%, Santos +11.9%
• Top losers: Pact Group -5.7%, Austal -4.9%, Platinum Asset -4.8%

Australian Economy

• Deutsche Bank says the August trade deficit was wider than it expected in August, printing at $3.095 billion against our pick of a $2.75 billion deficit. "Exports fell 0.5 per cent mom, following gains in June and July, while imports rose 0.6 per cent mom. Consumption imports rose 1.7 per cent mom to be up almost 20 per cent in year-ended terms (broadly matching the decline in the exchange rate over the same period). Part of the weakness in exports reflects an as-expected pull-back in the volatile non-monetary gold category after a strong rise in July, though iron ore exports were also weak, with values falling 0.7 per cent mom despite a 7.2 per cent mom rise in prices in the month. Partly offsetting this was a 7.4 per cent mom gain in coal exports."

Debt Markets

• Treasuries pared losses after the US attracted the strongest demand in more than four years from a class of buyers that includes mutual funds at a $US21 billion auction of 10-year notes Wednesday. Indirect bidders, a group that includes foreign central banks as well as mutual funds, bought the largest share of a 10- year note offering since February 2011 after yields rose to the highest in almost two weeks relative to two-year notes. Short- term debt prices had risen as traders cut the probability of a Federal Reserve rate increase this year to 39 per cent from 77 per cent in August. "A lot of bond funds have been receiving cash, so that suggests some local demand," said Aaron Kohli, a fixed-income strategist in New York at Bank of Montreal, one of the 22 primary dealers that are obligated to bid at Treasury auctions. "The market has sold off against recent lows, but there's no convincing evidence rates will continue much higher."

• Benchmark US Treasury 10-year note yields climbed three basis points, or 0.03 percentage point, to 2.06 per cent as of 2.54pm New York time, according to Bloomberg Bond Trader data. The 2 per cent security due in August 2025 fell 1/4, or $2.50 per $1000 face amount, to 99 15/32. The yield rose as high as 2.08 per cent Wednesday. It had been as low as 1.90 per cent on October 2.

• Turnover of Commonwealth securities fell 1.4 per cent in the year to June 30 to $1.09 trillion, the first decline since 2008, when the government reported its last budget surplus, according to data from the Australian Financial Markets Association. The liquidity ratio measuring turnover as a proportion of outstanding debt fell to 3.2, the lowest in at least five years and down from 4.7 in 2012. The 90-day volatility of the nation's 10-year bond yield surged to a record in May. More stringent rules imposed after the global financial crisis have forced lenders to hold larger volumes of government securities that can be converted readily into cash and to reduce risks when making markets. Reserve Bank of Australia assistant governor Guy Debelle said Wednesday market participants need to adjust to the new regulations and to new technology.

• Activity in debt issued by the sovereign, Australian states and foreign governments combined declined 3.6 per cent, according to the 2015 Australian Financial Markets Report. Overall turnover in over-the-counter markets rose 6.3 per cent to $83.7 trillion. "The liquidity environment has changed and, no, you may not like it, but it ain't going to change back anytime soon, so you might as well get used to it," the RBA's Debelle said at a launch of AFMA's annual markets report.

• The Reserve Bank of Australia (RBA) kept rates on hold as expected, notes Liz Moran at FIIG Securities. "The consensus among analysts is that rates will be on hold for an extended period rather than cuts in the near future. Not good news for term deposit investors with the implication that there is little prospect of higher term deposit rates on the horizon."

with Reuters, Bloomberg, AAP

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Elise Shaw, elise.shaw@afr.com.au 02 9282 3501