Given the uncertainty in China, there was some volatility in government bonds but yields finished flat over the course of the week
Domestic markets
The CBA was the latest bank to announce an additional $5bn capital raising of Tier 1 equity, on Wednesday. This follows CBA’s record reported profit of $9.1bn last financial year, as announced last week. In spite of this, Australian bank shares were predominately sold off following ANZ’s announcement of its $3bn capital raising last week, and may fluctuate further as the banks attempt to raise more capital after having raised an additional $15bn in capital since May.
CBA’s announcement of its additional capital raising is good news for bank bond and hybrid investors, who will be better protected by increased subordination.
In currencies, the AUD was particularly sensitive to China’s surprise currency devaluations, starting the week at US74.01 cents and then dropping to a low of 72.35 on Wednesday, before reclaiming lost ground to finish the week at US73.79 cents.
In yields, our 5 and 10 year government bond yields started last week at 2.12% and 2.77% respectively. Bonds then rallied as the bid for safe haven assets increased, given uncertainty in China. Yields on both the 5 and 10 year fell by 9 basis points to their lows on Wednesday, before finishing the week relatively flat at 2.13% and 2.78%.
Flows
Sydney Airports dominated inflation linked trading last week. We started the week with ample supply. By the end of the week, we had sold all available 2020 supply, but the 2030 bonds are still available. The Royal Women’s Hospital (RWH) 2033 inflation linked annuity continunes to attract interest and is available in $10,000 parcels.
The flight to quality continues, with buying interest picking up in other investment grades names, notably the Asciano 2025 and RWH first call 2017, fixed rate bonds and the Sun Group 2024 floating rate note.
We also note an emerging theme with clients buying Qantas, as an oil hedge. With Qantas placed to benefit from lower oil prices, and with some clients seeing depressed prices for the long term, Qantas saw a small rally in the context of relatively flat yields over the week.
In non AUD, trading was dominated by NCIG and Transfield USD bonds. Supply has shored up the NCIG for the moment, representing a good opportunity for this previously scarce line. Recent positive reporting results from Old Mutual and Suncorp have also led to increased activity in their respective GBP lines. Similarly we expect some more buying interest in Newcrest after today’s positive results.
International markets
China
The People’s Bank of China (PBOC) allowed a 3.5% devaluation of the yuan over the course of the week, resulting in a four-year low and the largest single-day move for China’s currency in 20 years. This comes in the context that the Chinese Government does not allow financial markets to price its currency. Instead the PBOC sets a daily target for the yuan on the basis of the previous day’s trading movements and its price relative to a basket of other currencies. The PBOC then allows the currency to trade within a 2% band of their daily target. The devaluation of the yuan was widely perceived to be a bid by the Chinese government to boost export competitiveness in light of lower growth expectations. The government however insists that they are merely giving markets greater input in the valuation of the yuan, possibly to strengthen their claim as a prospective IMF special drawing right reserve currency.
US
Despite the recent devaluation of the yuan, last week 77% of Bloomberg’s economists indicated that they expect the FOMC to increase the cash rate in September. In addition to this, another voting member of the FOMC provided some rate hike commentary last week, with the Vice Chairman of the Federal Reserve, Stanley Fischer stating that
“employment has been rising pretty fast relative to previous performance, and yet inflation is very low … and the concern about this situation is not to move before we see inflation, as well as employment, returning to more normal levels”.
Further supporting a data dependent outlook, New York Federal Reserve President William Dudley stated that he was hopeful that there would be
“progress in terms of our goals for maximum sustainable employment and inflation of around 2%”.
All eyes are still toward the FOMC’s meeting on September 16-17, when the ultimate decision regarding the Fed Funds rate will be made.
Greece
In Greece, the Hellenic Parliament gave approval for its third bailout package since the Global Financial Crisis. The bailout has already split Prime Minister Alexis Tsiparis’ Syriza Party, with many senior members, including former finance minister Yanis Varoufakis, criticising the deal. The IMF has also been critical of the latest bailout package and lack of debt restructuring, with Senior IMF official Delia Velculescu stating that the IMF will make
“an assessment of its participation in providing any additional financing to Greece once the steps on the authorities’ programme and debt relief have been taken”.