Tuesday 24 January 2017 by Week in review

From the trading desk

Markets pause as Trump takes office and Australian CPI is released Wednesday

Economic Wrap

Markets continue to consider Trump’s election positively with credit and stocks performing well. The emphasis now shifts towards Trump’s ability to bring the US nation together, and focus on his plans to stimulate the economy and restrict immigration.

The Australian treasurer starts talks with the UK on our trade relationship post Brexit this week. This demonstrates the opportunity for us and other Commonwealth linked countries to rebuild a greater share of trade with the UK, assuming its EU position changes.

On a similar theme, the UK supreme court decision on Brexit is due Tuesday. Although, some of the decision has been muted by PM Theresa May’s comments that final deal terms will be approved by Parliament. The court decision is likely to confirm the position of the Scottish, Irish (northern) and Welsh parliaments in relation to the British parliament’s position and status regarding triggering of Article 50.

On Wednesday, Australian CPI is released, with forecasts of 0.5% to 0.7% for the quarter and 1.5% to 1.75% for the year. This is likely to increase chances for further rate cuts in Australia, during a period of possible rate hikes in the US, with government 10 year rates expected to converge. Both the US and Australian 10 year government bond yields have risen 1.00% from their 2016 lows.  

We continue to recommend portfolios of equally weighted proportions of fixed, floating and inflation linked bonds, noting that this is easier for wholesale investors to achieve. 

US government 10 year bonds are currently yielding 2.46%, which is seven basis points higher over the prior week. The same pattern is true for the other major economy government yields, with  current 10 year Japanese government bonds  trading at 0.06%, 10 year German bunds trading at 0.42% and 10 year UK government bonds (gilts) trading at 1.43%.

Other news:

  • Stocks were generally higher on Friday. In Europe, the Eurostoxx was up 0.28% although the FTSE 100 was down 0.14%. In the US, the Dow Jones was up 0.48% and the S&P500 up 0.34%
  • The US dollar has given up some of its recent strength. Notably, there has been a reduction in the number of speculators looking for a rise in the US dollar, especially in the US where participants in currency futures are labelled as either hedgers or speculators
  • China GDP for Q4 2016 was 6.8% YoY, higher than the forecast of 6.7%. Economists are divided on whether this signals a stabilisation in the China growth numbers 
  • Oil prices held above US$52 for the benchmark NYMEX west Texas intermediate contract, with an OPEC meeting to be held in Vienna next weekend. The meeting will focus on production cuts and adherence to the cuts by the participating nations

Credit indices spreads are largely unchanged over the last week, with the US Investment Grade Index (IG) finishing Friday at 66 bps. For high yield we will now focus on the Bloomberg Barclays US Corporate High Yield Index, as this concentrates on physical bonds rather than synthetic swaps. The index closed marginally lower on Friday at 1833.88.

Domestically, the 10 year Australian government bonds last traded at 2.783%, 9 bps higher on the week. The Australian iTraxx is at 98.3 bps (or 0.983% for this index of 25 Australian investment grade names), unchanged over the week.

The Aussie dollar is trading at 0.7560 today, which is up 0.50 US cents from last week. Australian currency versus the British Pound has risen again to above 0.6100. The recent high was 0.6285 in October 2016.  

Flows

The recent redemption of 360 Capital bonds remained a focus last week. With many clients looking to reinvest in AUD high yield debt, we continue to be better buyers of FIIG originated transactions across most names. The AAT 2020 and Capitol Health 2020 fixed coupon bonds are in supply, with yields to maturity in the low 6% and mid 7% per annum. Apart from these, we are well placed to bid on existing FIIG originated issues for those looking to take advantage of the rally in credit.

The AUD continued to push higher against the USD last week, as clients looked to some of the newer USD denominated lines that we’ve added to the DirectBond menu. The Frontier 2025 fixed coupon bond received the most buying interest, with bonds in good supply and indicatively offered in the low 10% pa.

We saw increased selling in both Fortescue’s secured and unsecured USD lines following Moody’s upgrade of its credit ratings by one notch, largely due to debt and cost reduction initiatives. The upgrade was priced in following S&P’s similar rating action in December, however we did see a marginally improved institutional bid which encouraged selling.