26 May 2017
Aussie bank levy likely to disappoint
Markets
- Fresh record highs this week for both the broader US equity market and the technology heavy NASDAQ index. Technology stocks are now up more than 20% for the year, which means the broader US market is only up around 1.5%.
- Broader global equity markets pushed higher whilst the Aussie market finished flat.
- In local stock news, the big 4 banks have begun to estimate what impact the Federal Government’s proposed bank levy will have on their profitability. So far, the annual cost to each bank is likely to be around $200-$250m after tax, significantly less than the government’s estimates. Expect the banks to pass the cost on to customers in full.
- Origin Energy has announced the sale of its Darling Downs pipeline network for close to $400m, representing a strong sale price. The sale brings cumulative sale proceeds to just over $1bn, with further sales/divestment to come this year, in order to improve their balance sheet and future free cash flow generation.
- The oil price fell, as OPEC and non-OPEC producers agreed to a 9 month extension on the existing arrangement to cut production (a positive), with some market participants hoping for a greater cut and longer extension.
Economics
- Credit rating agency Standard & Poor’s has downgraded the credit ratings of the Australian non-major banks. The big 4 banks retained their credit rating, mainly due to the favourable federal budget, but reiterated their negative outlook on the big 4.
- The US central bank’s latest policy meeting minutes showed broad agreement on plans to begin shrinking their balance sheet (QE). Members also view the recent slowdown in US economic growth as transitory. Rate rises highly likely for June and September meetings.
- Credit rating agency Moody’s has lowered China’s credit rating for the first time since 1989.
- Japan’s economy advanced for the 5th straight quarter, the longest expansion in a decade, with support from stimulative policy and continued strength in exports (given the very low exchange rate).
Politics
- US President Trump is now most of the way through his first foreign trip since taking office. Some “memorable” moments thus far – participating in a native Saudi Arabian dance, receiving a climate change book from the Pope (Trump is a known climate change sceptic), and pushing past fellow world leaders to get in the most prominent position for a group photo shot - but was mostly well received and behaved.
- The White House unveiled its 2018 budget proposal that included US$3.6 trillion in spending reductions by slashing funds for entitlements and discretionary programs while increasing spending on border security, law enforcement and defence. Not good for the broader economy.
- Indian Prime Minister Modi has unbelievably secured agreement from India’s 29 states for the implementation of a GST. More than 1,200 items will come under the tax, which will range from 0% to 28%. The government plans to implement a tax code that unifies more than 12 separate levies. Long time coming, but well done.
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