ASX gives up gains, $9 billion Sigma-Chemist Warehouse merger deal revealed — as it happened
Shares lose ground during afternoon trade, while a proposed $9 billion mega merger between Chemist Warehouse and Sigma could create a huge ASX-listed pharmacy business.
Follow the day's financial news and insights from our specialist business reporters on our live blog.
Disclaimer: this blog is not intended as investment advice.
By Michael Janda
Nassim Khadem and Gareth Hutchens will be with you for the blog tomorrow.
A highlight will be Michele Bullock's morning speech (9:20am AEDT) at the AusPayNet conference in Sydney, which you can listen to live via the RBA.
Thanks for sticking with me and asking some great questions.
By Michael Janda
While we're still worrying about surging prices and the risk of further interest rate rises, Chinese authorities are worried about the opposite problem — how to boost a moribund economy suffering from falling prices.
China's Consumer Price Index fell from -0.2% in October to -0.5% in November, with falling food and energy prices mainly responsible.
"Core inflation stayed unchanged at 0.6% y/y last month," wrote Julian Evans-Pritchard, the head of China economics at Capital Economics.
"Core goods inflation rebounded last month, from 0.0% y/y to 0.2%. But it remains low, reflecting price cutting by Chinese manufacturers in a bid to defend export market share as the pandemic boom in global goods demand peters out.
"More importantly, services inflation, which more narrowly reflects domestic conditions, declined from 1.2% to a five-month low of 1.0%, adding to evidence of renewed weakness in the labour market."
There's also evidence from the Producer Price Index that deflation is becoming entrenched and getting worse.
"Producer price deflation deepened further, falling from -2.6% y/y to -3.0%, also below expectations (Bloomberg and CE: -2.8%). Factory-gate prices dropped 0.3% m/m, the most since July. The biggest declines were in energy and metal prices," continued Evans-Pritchard.
"Chinese inflation looks set to stay low in the near term, but we don't think it will enter a deflationary spiral.
"Core inflation is likely to rise in the first half of 2024, with the recent step up in policy support on course to boost domestic demand and push up services inflation. In addition, food and energy price deflation is likely to alleviate soon due to shifting base effects.
"We expect CPI inflation to average 1.0% in 2024, up from 0.3% so far this year."
By Michael Janda
Prices current around 4:50pm AEDT.
Live updates on the major ASX indices:
By Michael Janda
It was a pretty lacklustre afternoon of trading on the Australian share market, which dipped from gains approaching half a per cent early on to close just 0.1% higher at 7,199 points for the ASX 200.
There wasn't a lot of change in the trends, just that bigger falls for the mining sector weighed, while gains softened for the banks and non-discretionary retailers.
In the end, there were more companies falling (95) than rising (90) on the ASX 200, with 15 treading water or not trading.
One of those not trading was Sigma Pharmaceuticals, which has reached a deal with Chemist Warehouse to create a merged, listed company potentially worth up to $9 billion.
Biggest gains:
Biggest falls:
By Michael Janda
Within the Stage 3 Tax cut information, would it not have been more balanced if the story was about percentages saved by each group over all the stages and not a monetary value? Stage 1 has been available since 2018, Stage 2 since 2022 and you never talk about the benefit that's provided those in those tax brackets. It's always very easy to make a story about high income earners ripping of society when you throw simple high/low numbers at them – without the balance of the benefit is saving those two stages already provided the economy and those in those categories.
– GTR-1000
While stage 3 only benefits middle-to-higher-income earners, even adding in the benefits of stages 1 and 2, Grattan Institute modelling from before the tax plan was originally legislated show that it would flatten tax rates to the benefit of higher-income earners.
"The tax cuts as proposed will make Australia's tax system less progressive: the top 15 per cent of income earners would pay a lower share of their income in tax than they do now, while middle-income earners would pay a higher share of their income in tax.
"Indeed, we estimate that if the stage 3 cuts pass, the income tax system in 2024-25 will be less progressive than it has been at any point since the 1950s. And Australia will go from having a relatively progressive income tax system by international standards to below-average among OECD countries.
"Whether this is desirable is a value choice. But the government should be transparent that this is the choice being made."
That's from this article I wrote the day the tax changes passed the Senate.
By Michael Janda
Another typically entertaining note from the global strategy team at Rabobank, this time from Benjamin Picton, looking at the global market hopes for an economic soft landing, where inflation comes down before higher interest rates cause a recession.
"The soft-landing becomes important in this context as office fund managers sweat on the double-whammy of refinancing risk and vacancy rates driven higher by the work from home trend that just won't die," Picton warns.
"Assets bought off funny-money cap rates don't make much sense in a normalized free market where supply and demand of credit is determined by free exchange between willing borrowers and lenders. Mispricing is just one negative legacy of interventionist easy money policies.
"Obviously, there are financial stability risks here, and the Fed already demonstrated a willingness to ride to the rescue with new liquidity when similar risks were exposed earlier in 2023.
"This is the underlying tension between r* (the neutral rate of interest) and r** (the financial stability rate of interest). The Fed is talking about the former, the market is pricing for the latter.
"Who can blame them if CRE (commercial real estate) managers are heading towards the holidays saying 'for lease Navidad' as all of the white-collar workers telecommute from their living room."
For those who haven't had the pleasure of spending the festive season in a Spanish-speaking country, here is the pop culture reference.
We'll get the latest decisions on rates from central banks in the US, UK, Europe, Switzerland, Norway and Brazil this week, before they all head off to enjoy their festive seasons.
A lot of borrowers will be hoping they've clocked off for holidays early.
By Michael Janda
I can remember only a few months ago the government was spruking a big surplus $20+billion how things change in such a short time
– Scrooge
Hi "Scrooge", you are correct that the final budget outcome for financial year 2022-23 was a surplus of $22.1 billion, which was equivalent to 0.9% of the economy (as measured by GDP).
However, there were some hints in that document about why this current financial year's budget position may not be quite as good.
"The 2022–23 outcome represents an improvement in the underlying cash surplus of $17.9 billion compared with the surplus estimated in the 2023–24 Budget," the 2022-23 Final Budget Outcome document noted.
"Receipts were $13.9 billion higher than expected, primarily driven by strong company tax returns. Payments were $4.0 billion lower than estimated in the Budget, reducing real growth in payments to -4.9 per cent in 2022–23.
"The outcome for payments is largely driven by lower demand for some programs and reflects delays in some payments, due to ongoing market capacity constraints. Payments for a number of affected programs are expected to occur, instead, in 2023–24 and beyond."
So, there you go. Some things have been delayed, and will be paid for this year and beyond.
Businesses are also doing it a lot tougher now that cost increases are catching up with their margins and consumer demand is weaker due to higher interest rates, meaning less upside for company tax receipts.
The budget will also take a $20 billion+ per year hit from the 2024-25 financial year onwards due to the already enacted stage 3 tax cuts, which the Albanese government has so far given no indication of repealing or winding back.
By Michael Janda
No businesses have a bigger vested interest in mitigating the disastrous effects of climate change than insurers.
While they've already massively increased a lot of insurance premiums to cope with both rising risks and costs of replacement/repair, there's only so much more most households and businesses can pay for insurance before it becomes unaffordable.
Insurance giant IAG commissioned AECOM to prepare a report on what can be done to minimise the risks and insurance costs associated with climate change.
"The key to improving insurance affordability in Australia is reducing the natural disaster risk our communities face," the report noted.
"At Insurance Australia Group (IAG) we believe risk can be reduced in three main ways: Mitigation (to reduce risk), planned relocation (when risk can't be reduced), and land use planning reform (to stop placing communities in harm's way)."
Sounds pretty logical so far, but IAG argues it's not happening nearly enough.
"Between 2005-2022, the Federal Government spent $24 billion on disaster recovery and relief through funding mechanisms including the DRFA.
"Comparatively, $510 million was spent on pre-disaster resilience initiatives. Since January 2020, the insurance bill for storms and floods alone have exceeded $12.3 billion."
So, as with medicine, we're spending a lot more repairing damage that could often have been prevented.
IAG says one key change that would help is a uniform national assessment of natural disaster risks for each property, and how those might be affected by climate change, that is available not only to decision-makers like councils and state governments, but also individual home buyers.
"Current land use decisions rely on static and outdated risk assumptions and community members do not have the ability to access natural hazard risk information and climate change projections to make informed decisions about their home's current and future risks," the report lamented.
"Consultation highlighted the need for a 'single source of truth' of natural hazard data and climate change projections," it suggested.
"Property information can include flood mapping, bushfire safety, cyclone ratings in cyclone risk areas, sea level rise and coastal erosion, decentralised energy and water options (rainwater tanks and batteries), heating and cooling costs, and expanded to include other natural hazards including tsunami risk and seismic."
Combined with consistently better planning decisions to either prevent people building in known hazard areas or force them to design their buildings to an appropriate level of resilience, IAG says home insurance premiums could be kept lower.
By Kate Ainsworth
The big news that's got the ASX abuzz today is the merger between Chemist Warehouse and Sigma Healthcare.
Combining the pharmaceutical wholesaler with the retail pharmacy franchise giant will give the two a combined market cap of more than $8.8 billion.
(Currently, Sigma's market cap is $0.8 billion.)
Sigma's executives told an investor presentation this morning that the merger will create "a leading healthcare wholesaler, distributor and retail pharmacy franchisor".
The deal will also see the merged companies be eligible for inclusion on the ASX at the next quarterly rebalance, and is expected to be within the top 100 publicly listed companies on the ASX.
Part of the merger will require $400 million to be raised, underwritten by investment bank Goldman Sachs to "fund increased working capital required to implement the new Chemist Warehouse supply contract" which is set to start on July 1, 2024.
As for Chemist Warehouse founders Jack Gance, Sam Gance and Mario Verrocchi, the trio will hold 49% of the merged company, and will receive $700 million in cash from the transaction.
The remaining shareholders of Chemist Warehouse Group will collectively hold 37% of the merged company, while Sigma shareholders will hold the remaining 14%.
The deal however still requires approval by the ACCC, Sigma shareholders and the Court under the Corporations Act, but Sigma told investors that they expect to be given the green light in the second half of 2024.
By Michael Janda
Prices current around 12:40pm AEDT.
Live updates on the major ASX indices:
By Michael Janda
As we approach the halfway mark for trade on the Australian Securities Exchange, the benchmark ASX 200 index is up just 0.1% at 7,203 points.
Having risen more strongly at the open, the local market is just clinging onto gains with 107 of the top 200 companies up and 85 down.
The leading sectors remain energy, industrials and consumer cyclicals, but the big banks have pared gains and the huge mining sector has slipped into the red.
Biggest gains:
Biggest falls:
By Michael Janda
With OPEC+ having met last week to discuss voluntary cuts to output to shore up flagging oil prices, RBC commodity analyst Michael Tran has taken a look at what it might mean for the year ahead.
"The bottom line is that we see less bearish demand surprises in the year ahead, but we are re-entering a supply driven market, one that more closely resembles the decade leading into COVID rather than the demand led market seen in the post-pandemic era," he writes.
"As experienced through much of last decade, supply driven markets are often fraught with bull traps."
In other words, he doesn't see the likelihood of oil prices sustainably rocketing higher, especially with electric vehicles now accounting for 40% of Chinese new car sales.
In the near-term, Tran says the focus will be on how well the OPEC+ oil cartel sticks to its commitments to limit output.
"Prices will likely remain volatile and potentially directionless until the market sees clear data points pertaining to the voluntary output cuts," he notes.
"With cuts not physically implemented until next month, and country level production and export data to follow subsequent to January, it will be a long and volatile two months before there is even preliminary clarity on quantifiable data points on compliance.
"This is a long stretch for a market that is seeing a high degree of uncertainty, lack of risk deployment and a liquidity vacuum leading into the holidays.
"We expect WTI and Brent to average $79.00 and $82.50/bbl for the full year in 2024, followed by $75.00 and $78.50/bbl in 2025."
Those are US dollar prices, and not too much above the $US76.05 and $US70.77 prices for Brent and West Texas crude oil on today's market.
By Michael Janda
Peter Ryan keeps digging up the gold when it comes to the Australian dollar float.
This was the ABC News report on the day it started trading.
And Peter also sent me this helpful chart from Refinitiv tracking the Aussie dollar's fluctuations over time.
Guess when I lived in the US for a couple of years? That little patch between 2000-2002 where the Aussie dollar fell below 50 US cents for the only time in recent history.
Murphy's law.
By Michael Janda
With news around the federal government's migration review dominating the headlines, HSBC Australia's chief economist Paul Bloxham has published a timely note on the economics of Australia's record net migration intake of 510,000 people last financial year.
He's picked it as his chart of the year.
While, over the longer term, the increased supply of workers should work to limit price increases, in the short term at least Bloxham says record net overseas migration "is adding to the sticky inflation challenge, keeping the RBA comparatively hawkish".
There's a few channels where it is doing this, the first being housing costs.
"The key story here is the boost to population growth, which has sharply tightened the rental market, lifted rents and supported rising, rather than falling, housing prices through the year," Bloxham observes.
"Housing prices rose by 10% y-o-y to November. The sharp rise in rents has been adding to inflation. Our assessment has been that the strong inward migration supported overall inflation in the short run, even if it's effect is more neutral in the medium-term."
Then there's the effect on aggregate (total) demand in the economy, which the RBA is trying to reduce through interest rate rises so that it more closely balances with supply and limits price rises (inflation).
"Existing residents are being squeezed by sharply higher interest rates, high inflation and rising taxes, as high inflation pushes taxpayers into higher tax brackets. However, with over 500k new migrants arriving, overall consumer spending has slowed, not fallen over the year," Bloxham notes.
"Given that per capita household consumption has fallen by 2.0% y-o-y, the fixed rate [mortgage] resets through the year do appear to have played a role, but of course the boost to spending from many extra people in the economy has meant it has not shown up as much in aggregate spending."
Bloxham also says the downward effect on wages from strong migration has not been as pronounced in the short term as many might have expected.
"Workers have arrived, but they are not just a boost to labour supply, but also support demand for goods, services and housing all of which adds to labour demand too," he explains.
So where does this leave us, especially with the government planning to see net migration fall considerably over the next couple of years, back to more typical pre-pandemic levels?
"We see GDP growth slowing from 2.0% in 2023 to 1.5% in 2024. That said, we see per capita GDP recording two consecutive years of contraction in 2023 and 2024," Bloxham forecasts.
"Will Australia have a recession? The typical definition, of two consecutive quarters of falling GDP seems unlikely, given the strength of population growth.
"However, we do expect the unemployment rate to continue to rise through 2024. Real household disposable incomes are also falling sharply, particularly on a per capita basis. So it depends what you mean by recession."
In other words, even if it doesn't meet some technical definitions of a recession, Australian households probably already feel as if they're in one and things are likely to remain tough for most of next year.
By Michael Janda
Prices current around 10:30am AEDT.
Live updates on the major ASX indices:
By Michael Janda
The Australian share market has opened 0.4% higher, with the benchmark ASX 200 index at 7,226 points in the first 15 minutes of trade.
Sectors more sensitive to interest rates and economic conditions have been among those posting the strongest gains, with industrials, energy, consumer cyclicals and financials all beating the broader market.
Education and utilities were the only two sectors falling in early trade. No doubt the government's proposed clampdown on international student visas is sending some jitters through that sector.
IDP Education was down 1.9% to $22.77.
While the mining sector was marginally up overall, gold miners dominated the list of the biggest falls in early trade, with the precious metal's price dropping back towards $US2,000 an ounce, away from recent record highs.
But the market is overwhelmingly positive, with more than three quarters of the top 200 companies gaining ground.
Biggest gains:
Biggest falls:
By Michael Janda
We might be rapidly hurtling towards Christmas and the summer holiday period, but there are still a few big economic events before most people clock off for the cricket and the beach.
The ABC's senior business correspondent Peter Ryan previewed some of them with News Radio this morning.
The first is the Mid-Year Economic and Fiscal Outlook (MYEFO) to be handed down by Treasurer Jim Chalmers on Wednesday.
The ballooning cost of servicing the debt bill is a major weight on the budget — an $80 billion blowout in the projected interest bill over the next 10 years.
The official line from Mr Chalmers's office is that Treasury is "not forecasting a surplus" for the current year, but it also hasn't been ruled out.
They'd want to avoid forecasting a surplus and then not achieving it, so under promising and over delivering.
Former Treasury economist Chris Richardson still thinks a $10 billion surplus is likely — the Commonwealth Bank had tipped a $20 billion surplus a few weeks ago — although AMP's Shane Oliver now sees a $14 billion deficit.
There's a drip feed of good budget news — today's one is about gross debt being down from previous forecasts of more than a trillion dollars for 2023/24 to $909 billion — $147 billion lower.
There'll also be an update on the labour force on Thursday from the Australian Bureau of Statistics.
Economists think the official jobless rate in November ticked up to 3.8% (up from 3.7%) — with only 8,000 new jobs created.
So not a dramatic increase in the jobless rate but heading higher up from the historic lows of less than 3.5% and evidence that the economy is slowing from aggressive interest rate rises.
By Michael Janda
Tomorrow will mark 40 years since the Australian dollar started trading freely on international currency markets, a so-called "floating" exchange rate.
To celebrate the RBA is releasing some archival documents to the public, which you can access via the bank's website.
I'm off work tomorrow, so I'll get in early to say happy birthday to the Aussie, as traders affectionately call it, otherwise sometimes less affectionately dubbed the Pacific peso at various times of weakness.
By Michael Janda
Prices current around 9:15am AEDT.
Live updates on the major ASX indices:
By Michael Janda
Who could forget Captain Chesley "Sully" Sullenberger and co-pilot Jeffrey Skiles guiding their stricken airliner to a safe landing on New York's Hudson River after both engines failed following bird strikes.
Now the markets seem to be firmly betting that US Federal Reserve chair Jerome Powell and his co-pilots can guide the American economy to a similarly miraculous safe landing.
Historically, when the Fed has had to raise rates this aggressively, a recession has almost inevitably followed.
But jobs data out on Friday in the US showed unemployment going back down from 3.9 to 3.7%, with a touch under 200,000 jobs created in November.
NAB's Rodrigo Catril writes that the jobs data is very unlikely to push the Fed into a rate hike when it meets this week, but it has pushed back bets on rate cuts.
"Reaction to the solid labour market report resulted in the market delaying expectations for the first Fed rate cut, prior to the data a full 25bps [basis points] rate cut was priced for March, now a full rate cut is expected in May," he notes.
While delayed rate cuts have recently been enough to sink US stocks — and initially did on Friday — traders seemingly swung to the view that later rate cuts with a soft economic landing was something worth celebrating.
The benchmark S&P 500 share index rose 0.4% and, perhaps more importantly, market volatility is near three-year lows.
"Friday's positive close helped the S&P 500 record a sixth consecutive week of gains, its longest weekly win streak since 2019 and of note too the VIX (Volatility) index closed at its lowest level since January 2020," adds Catril.
That positive mood appears to be infectious, with the ASX 200 futures up 0.2% an hour before local trade is due to kick off.
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