Monday 27 July 2015 by Casper Wolski Week in review

From the Trading Desk

Last week, APRA announced an increase to capital requirements for the four major banks and Macquarie. Greece used a bridging loan to pay its maturing debt to the IMF, ECB and Bank of Greece. The RBA released its minutes for the month stating further depreciation of the Australian dollar is likely and necessary. On the trading front, the flight to quality theme continues

Economic Wrap

Regulatory changes

Last Monday, APRA announced increased capital requirements for ANZ, CBA, Westpac, NAB, and Macquarie. This was done to address a recommendation by the Financial System Inquiry, which is in line with the Basel Committee’s adjustments to Global Regulatory Requirements. APRA has indicated that the average capital weighting on residential mortgage loans between these five banks must increase from an average of 16% to an average of 25% by the 1 July 2016.

The major banks are expected to increase dividend reinvestment and issue additional equity and hybrids to raise approximately $12bn of capital between them. These capital buffers are designed to assist banks in absorbing losses and improve risk management.

Similarly, in the US, the Federal Reserve announced increased capital requirements for the eight largest banks in the country - to maintain an additional layer of capital. These increased requirements range from 1-4.5% depending on the size of the banks’ risk weighted assets, and could amount to US$200bn. The announcement is one of the Fed’s more aggressive moves to encourage banks widely perceived as “too big to fail” to shrink and reconsider their risk appetites.

Greece

Greece managed to pay the EUR6.8 billion that it owed to the IMF, ECB, and Bank of Greece last week. They mainly used funds derived from a bridging loan given to Greece on the basis of its acceptance of the initial austerity measures, required as preconditions of a third Greek bailout package.

As a result, S&P increased Greece’s long term sovereign credit rating to CCC+, stating that: “the upgrade reflects Greece’s improved liquidity perspective following last week’s consent, in principle, from the Eurogroup to the three year loan program for Greece”.
Finally, former anti-austerity Greek Prime Minister, Alexis Tsiparis, managed to gain parliamentary approval for the second stage of austerity measures required by creditors on Wednesday, primarily relying on votes from opposition parties to ensure their safe passage through parliament.

Markets

The RBA released its July minutes last Tuesday, which showed it remains relatively positive towards Australia’s current employment climate. It stated that: “demand for labour could be sufficient to maintain a stable or even falling unemployment rate in the near term” even though forward looking indicators suggest “only modest growth” for employment in the near future. The RBA also stated that despite falling commodity prices and the depreciation of the AUD within the last few weeks, further depreciation of the Aussie was “both likely and necessary” for achieving balanced growth in the economy.

Domestically, CPI data was also released last week, with headline CPI coming in at 1.5% (0.2% below expectations) and the trimmed mean at 2.2% (0.1% above expectations). Markets didn’t move substantially as a result, with yields briefly rallying about 5 basis points before retracing gains.

In currencies, the AUD has continued to depreciate from its 74.19 cent high on Tuesday, primarily due to the continued rout in global commodity markets. The AUD currently sits at around 72.8 US cents.

Bond yields continue to fall with 5 and 10 year Government bond yields down 17 and 19 basis from last Monday. They currently sit at 2.04% and 2.76% respectively.

Flows

The general ‘flight to quality’ theme among clients continues, with the strategy paying off last week as bonds rallied. Commodities continue to sell off, as do related credits.
A few clients are seeing opportunity in depressed pricing of commodity related debt, with Newcrest now an interesting case. With gold relatively flat over the week and the company reporting positive production numbers, its bonds have sold off along with US broad based selling and capital outflows from the sector.

Some more aggressive investors are considering whether this presents a buying opportunity. High yield debt is also getting caught up in the commodity sell off and flight to safety.

With inflation being a focus last week, inflation linked bonds continue to be the main beneficiary as investors search for high quality names in which to invest. Sydney Airport 2030 ILBs continue to see strong buying, with good supply of this name. In inflation linked annuities, the Novacare 2033 and MPC 2033 (Melbourne Convention Centre) IABs continue to attract interest.

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