And then the sun came up…

Tuesday, 5 February 2019
Melbourne, Australia
By Matt Hibbard

  • Business as usual?
  • So where to now for the market?

Wow. I didn’t know there were so many different industry groups, bodies and associations in Australia.

Since the release of Commissioner Hayne’s report yesterday, an endless number of spokespeople have popped their head up to have their say.

About the only people we haven’t heard from are the Lawn Bowls Association and the Bridge Society. But then, it is only Tuesday. They could be drafting their responses as we speak.

Depending on how their industry will fare from with the Commissioner’s 76 recommendations, the report was either too soft, too severe, or somewhere vaguely in the middle.

For those who dreamed of bank executives’ blood flowing in the streets, they could only pout and ponder as they read the report. No doubt they went to bed last night fulminating about how the banks had got away with it.

But it is still early days.

Details of the proposed criminal prosecutions are yet to be made public. And not all banks fared the same. The board of National Australia Bank, in particular, will be smarting over their special mention in the Commissioner’s report.

Suffice to say, there will be lots of pressure on the NAB Chairman and/or CEO to step aside. Will there be an announcement before week’s end?

Of course, the big winners today were the shareholders in the big banks. Their share prices went on a tear. We’ll come back to that in a moment, but first a look at the markets.

Markets

Over the weekend, the Dow Jones Industrial Average closed up 175.48 points, or 0.70%.

The S&P 500 gained 18.34 points, or 0.68%.

In Europe, the Euro Stoxx 50 index finished down 5.92 points, or 0.19%. Meanwhile, the FTSE 100 gained 0.20%, and Germany’s DAX closed down 4.08 points, or 0.04%.

In Asian markets, Japan’s Nikkei 225 is down 9.48 points, or 0.045%. China’s CSI 300 is up 1.43%.

In Australia, the S&P/ASX 200 is up 119.30 points, or 2.03%.

On the commodities markets, West Texas Intermediate crude oil is US$54.85 per barrel. Brent crude is US$62.80 per barrel.

Turning to gold, the yellow metal is trading for US$1,314.63 (AU$1,811.00) per troy ounce. Silver is US$15.91 (AU$21.92) per troy ounce.

One bitcoin is worth US$3,438.59.

The Aussie dollar is worth 72.59 US cents.

Business as usual?

Given their size and weighting, the bounce in the banks today translated into a huge 100-plus point rally in the index. At one point, the ASX 200 was up over 140 points.

And despite being singled out in the commissioner’s report, the aforementioned NAB didn’t miss out on the action. It was up around 5% on the day.

CBA was up a similar amount, with ANZ and Westpac leading the charge — they were both up around 7%. That sure was a welcome bounce from stocks that have caused investors so much heartache.

Sure enough, some of the bounce at the open came from short sellers abandoning their positions. But even as the share prices drifted lower after the initial flurry of action, a whole new round of buying came into the market.

Of course, the better gauge will be where these same stocks are trading at week’s end.

If you believe in the old maxim that the market is always right, then the market clearly told us something today.

As I covered in yesterday’s edition of Port Phillip Insider, the banks have been busy offloading their wealth management arms (and other businesses) in anticipation of the commission’s report.

They believed that the much-maligned vertical integration model, where institutions can both sell products and give advice — the very conflict of interest that the royal commission clearly brought to light — would become a thing of the past.

The banks must now be wondering if they acted in haste.

You only had to look at AMP’s price today to see that the model is still alive and well. Shares in AMP jumped over 11% in reaction to the commission’s report.

No doubt, AMP still has a lot of work to do to get its house in order. However, with all those customers, you have to wonder whether those who have been running the ruler over it in the past, might now step up to the plate.

When AMP was trading at a similar level (as today) late last year, there was speculation that Macquarie Bank, or another institution, might make a bid for it.

Of course, though, speculation is just that…we will have to wait and see.

It seems now that we return to business as usual for the banks. That will all kick off tomorrow when Matt Comyn from the CBA releases their half-year results.

As I mentioned yesterday, there will be plenty of questions about what CBA will do with the money generated from selling businesses. Whether shareholders will receive a special dividend, or if the bank will use those funds to buy back its own shares.

But just as much, the results will once again bring us back to the nitty gritty. Things like loans in arrears, earnings per share, net interest margins (NIM), including the cost of financing its loan book.

Over the last four results (two annual and two interim), bank bears have been waiting for a blow out in loans in default or arrears. Yet that number has barely moved — tomorrow we will find out how market leader, CBA, is travelling.

So where to now for the market?

While banks shares have given investors plenty of heartburn over the last few years, other sectors have fared much better.

In particular, commodity producers like BHP Group and Rio Tinto. Even bauxite miner and alumina producer, Alumina Ltd, has rallied strongly off its recent lows.

Given BHP and RIO’s weighting, they have helped keep the index afloat. And now, with the haze of the Banking Royal Commission behind us, the markets will get back to business, and assess banks as it has always done — on actual results and perceptions of how they will perform in the future.

That is why I’ll be looking closely for loans in arrears in CBA’s result tomorrow, and its net interest margin — much more so than worrying about special dividends. They will really tell us if the falling property market in Sydney and Melbourne is starting to flow into banks’ results. Plus, if funding costs continue to rise.

Because if CBA is having troubles in either of these areas, you can be sure that other banks will also be feeling the pinch.

All the best,

Matt Hibbard,
Editor, Options Trader