ASX closes lower as financials fall on disappointing inflation figures

​An overnight base metal rebound was positive for the major miners on Wednesday. BHP Billiton's and Rio Tinto's US-listed shares rose 4 per cent and 3.9 per cent, respectively on Wall Street on Tuesday and Australian investors followed suit. BHP Billiton's shares rose 2.2 per cent to $33.75 on the local market, while Rio Tinto closed 1.5 per cent higher at $82.10. South32 shares lifted 1.7 per cent to $3.63.

The smaller miners also rose and were among the index's best performers. Independence Group shares advanced 3.7 per cent to $4.81, Alumina closed 2.2 per cent higher at $2.83 and Oz Minerals rose 3 per cent to $9.75. CSR shares also advanced, rising 2.7 per cent to $4.22 as the price of aluminium hit a two-week high.

A2 Milk shares rose 1.7 per cent to $9.94 on the back of a positive note out of Macquarie. While the broker made no changes to its earnings, price target or recommendation, it reiterated its belief that its strategic partnership with Fonterra could be beneficial, particularly if it co-brands products in markets where Fonterra already has a strong position.

Stock watch

Medibank Private

JP Morgan is forecasting a poor year ahead for Medibank Private, downgrading its price target from $2.81 to $3.04. The broker said it was expecting soft premium growth for the private health insurer, an industry-wide trend. The broker said it was expecting profits to fall from $461 million in the 2018 financial year, to $424 million in 2020. The company's loyalty program is also set to weigh in the second half of the year, impacting Medibank's revenue by $20 million for the half. "We expect MPL's underlying gross margins for health insurance to have peaked in FY18 - an industry thematic," the broker said in the note. "MPL will in our view be away to offset some of this from improvements in expense ratio. We note there will also be impacts from their loyalty program in 2H18."

What moved the market

Chinese bonds

While most government bond yields in major advanced economies were stable on Tuesday following the global jump on Monday, China's bond yield soared just as high as it had done in the previous session. The initial move was caused by concerns that the Bank of Japan would dial back is monetary policy at next week's meeting. While China's bond yield moved considerably on Monday, it continued to move higher on Tuesday as most other economies stabilised. The People's Bank of China's injection of money into the country's banking system and the State Council's announcement that fiscal policy would be loosened to support growth both sent the bond yield higher.

Aluminium

Aluminium prices on the London Metal Exchange lifted to two-week highs on Tuesday as funds cut bets on lower prices placed in anticipation of sanctions on Russian aluminium giant Rusal being lifted. On Friday, US Treasury Secretary Steven Mnuchin said that the government was open to removing Rusal from a list of companies which the US would place sanctions on. Investors were also thinking of China where a drop in supplies is expected. Analysts are forecasting China's growth demand to outstrip supply growth both this year and next. A cheaper US dollar overnight supported an overall base metal price rise.

Turkish Lira

The Turkish lira dropped by 3 per cent on Tuesday against the US collar after the country's central bank left its one-week repo rate on hold as 17.75 per cent, surprising the market. Analysts had been predicting that rates would rise by at least a percentage point to combat the country's soaring inflation which hit 15.4 per cent in June, its highest annual rate in 15 years. While Turkish President Recep Tayyip Erdoğan is pressuring the nation's Monetary Policy Committee to keep rates lower, analysts are expecting market pressures to force the central bank to do an emergency rate hike as it attempts to combat the country's inflation.

Inflation

Australia's CPI inflation has come in below expectation, rising 0.4 per cent for the quarter. Analysts had been predicting a slight increase for the quarter with CPI expected to be at 0.5 per cent, up from 0.4 per cent in the first quarter. This was expected to lift the annual rate from 1.9 per cent to 2.2 per cent. The Aussie dollar fell by 0.8 per cent in response to the underwhelming figures, dropping below US74¢. "From a policy perspective, the Q2 data supports the case that the RBA is a long way from tightening," said Jo Masters, senior economist at ANZ. "In our view, inflation will rise only very gradually, with sufficient progress toward the mid-point of the policy target band unlikely to emerge until H2 2019."