Monday 21 September 2015
by Casper Wolski
Week in review
Trading Desk – Fed decision drives Australian market, new retail bonds available
Last week’s most important news arrived late on Thursday night when the Fed left rates on hold in the US – we summarise the response from markets. In FIIG deals, two new bonds, both maturing in 2019, have become available to retail investors – the Coffey floater and 360 Capital fixed rate bond
Last week’s most important news arrived late on Thursday night when Federal Reserve Chairwoman Janet Yellen announced the Federal Open Market Committee’s (FOMC) decision to hold the US Federal Funds target rate unchanged between zero and 0.25%.
The Fed’s highly anticipated decision not to raise rates was primarily attributed to continued, albeit improving, under-utilisation of the labour force, concerns for sluggish inflation and global economic conditions putting downward pressure on domestic growth. Yellen elaborated during her press conference, noting that while the pace of job gains has been solid and the unemployment rate declining, inflation had fallen short of their long run objective.
In regards to the prospect of a future rate hike, Yellen stated that the Fed’s short run outlook had not shifted, with most members expecting that it will be appropriate to raise rates later this year. Interestingly though, four FOMC members now expect that economic conditions will not warrant a rate increase until 2016, up from two members previously. It was clarified that monetary policy will remain accommodative for quite some time after the initial rate rise, which is to say that the future path of increases will be more gradual than history suggests.
Internationally, Standard and Poor’s downgraded Japan’s credit rating from AA- to A+ on Wednesday (in line with rival credit rating agency Moody’s A1 rating), highlighting concerns surrounding Japanese growth and the Bank of Japan’s ability to reach its inflation target over the next few years. The downgrade came immediately after the Bank of Japan met to determine the country’s cash rate, deciding to leave rates unchanged despite concerns surrounding stagflation in the Japanese economy and the central bank’s continued accommodative monetary policy. Additionally, Standard and Poor’s also cut Brazil’s credit rating by one notch to BB+, maintaining a negative outlook on the country’s future credit worthiness. S&P also added that “the negative outlook reflects what we believe is a greater than one-in-three likelihood of a further downgrade due to a further deterioration of Brazil’s fiscal position”.
Domestically, the RBA released the minutes for its September meeting on Tuesday. Some downside risks were noted but there was little to suggest further rate cuts in the near term. The RBA is aware of global market developments and, despite the volatility in China, its outlook has not yet changed. In regards to the domestic market, a depreciation of the Australian dollar is working to offset declines in commodity prices and support growth, while the labour market is seen to be operating with a degree of spare capacity, with muted wages growth. Moreover, RBA Governor Glenn Stevens addressed parliament on Friday, indicating his relatively optimistic view of the Australian economy, claiming that a lot of the commentary surrounding our economy is “more negative than the facts actually warrant”.
Interestingly, the change in Australia’s Prime Minister had little discernible impact on domestic financial markets.
The Australian dollar had a volatile week around the Fed’s rate decision. It began the week trading at 70.86 US cents and appreciated by about 1 cent leading into the rate decision, before spiking another cent to 72.76 US cents after US rates were left on hold. The Australian dollar ended the week at 71.89 US cents.
Yields drifted higher over the week before correcting on Thursday night, as bonds rallied in response to the Fed rate-hold. Australian Government 3 and 10 year bonds were 6 basis points higher over the week to finish at 1.93% and 2.77% respectively, despite having dropped in yield by about 7 basis points after the US Fed news.
The two new FIIG transactions - for PMP and Integrated Packaging Group - meant investors sought to lighten exposures to existing FIIG deals. As a result, and as is typical on the back of FIIG-led bond issues, we have excellent supply in a range of existing high yield bonds at attractive levels. We also have some supply in other names that we would not traditionally see, so the post issue landscape continues to be favourable for those opportunistic buyers.
Also, on the FIIG-led front, we have two new bonds that have seasoned and become available to retail investors. These are the Coffey 2019 floating rate note and the 360 Capital 2019 fixed coupon bond. Both are available in minimum $10,000 parcels.
BlueScope is the latest addition to the US dollar denominated DirectBonds suite. This senior unsecured bond pays a fixed coupon of 7.125% and matures in May 2018. Please see our update here and contact your dealer for further information and pricing.
The contents of this document are copyright. Other than under the Copyright Act 1968 (Cth), no part of it may be reproduced, distributed or to a third party without FIIG’s prior written permission other than to the recipient’s accountants, tax advisors and lawyers for the purpose of the recipient obtaining advice prior to making any investment decision. FIIG asserts all of its intellectual property rights in relation to this document and reserves its rights to prosecute for breaches of those rights.
The information has been prepared solely for informational purposes only and does not constitute or form part of any offer for sale or subscription of, or solicitations or any offer to buy or subscribe for, or any invitation to subscribe for or purchase any securities and nothing contained herein shall form the basis of any contract or commitment whatsoever. The information is being furnished to you solely for your information and may not be reproduced or redistributed to any other person. No action has been taken to permit the public distribution of the information in any jurisdiction and the information should not be distributed to any person or entity in any jurisdiction where such distribution would be contrary to applicable law.
The information has not been lodged with Australian Securities and Investments Commission or any other authority. The information is intended for distribution only to financial institutions and professional investors whose ordinary business includes the buying or selling of securities in circumstances where disclosure is not required under Chapter 6D.2 or Chapter 7 of the Corporations Act 2001 of Australia (the “Corporations Act”) and only in such other circumstances as may be permitted by applicable law. Any securities that may be offered by the Issuer in, or into, Australia are offered only as an offer that would not require disclosure to investors under Part 6D.2 or 7.9 of the Corporations Act. This information is directed only to persons to whom disclosure is not required under Part 6D.2 or 7.9 of the Corporations Act. The information is a summary only and does not purport to be complete. It does not amount to an express or implied recommendation or a statement of opinion (or a report or either of those things) with respect to any investment in the Issuer nor does it constitute a financial product or financial advice. The information does not take into account the investment objectives, financial situation or needs of any particular investor. FIIG does not provide accounting, tax or legal advice. Prospective investors are required to make their own independent investigation and appraisal of the business and financial condition of the Issuer and the nature of any securities that may be issued by the Issuer. By accepting receipt of the information the recipient will be deemed to represent that they possess, either individually or through their advisers, sufficient investment expertise to understand the risks involved in any purchase or sale of any financial securities discussed herein.
Certain statements contained in the information may be statements of future expectations and other forward-looking statements. These statements involve subjective judgement and analysis and may be based on third party sources and are subject to significant known and unknown uncertainties, risks and contingencies outside the control of the Issuer which may cause actual results to vary materially from those expressed or implied by these forward looking statements. Forward-looking statements contained in the information regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. You should not place undue reliance on forward-looking statements, which speak only as of the date of this report. Opinions expressed are present opinions only and are subject to change without further notice. No representation or warranty is given as to the accuracy or completeness of the information contained herein. There is no obligation to update, modify or amend the information or to otherwise notify the recipient if information, opinion, projection, forward-looking statement, forecast or estimate set forth herein, changes or subsequently becomes inaccurate.
Any offering of any security or other financial instrument that may be related to the subject matter of this communication will be made pursuant to separate and distinct documentation (“Offering Documents”) and in such case the information will be superseded in its entirety by any such Offering Documents in its final form. In addition, because the information is a summary only, it may not contain all material terms and the information in and of itself should not form the basis for any investment decision. Any decision to purchase securities in the context of a proposed offering of securities, if any, should be made solely on the basis of information contained in the Offering Documents published in relation to such an offering.
Neither FIIG nor the Issuer shall have any liability, contingent or otherwise, to any user of the information or to third parties, or any responsibility whatsoever, for the correctness, quality, accuracy, timeliness, pricing, reliability, performance or completeness of the information. In no event will FIIG or the Issuer be liable for any special, indirect, incidental or consequential damages which may be incurred or experienced on account of the user using information even if it has been advised of the possibility of such damages.
FIIG has been engaged by the Issuer to arrange the issue and sale of the Notes by the company and will receive fees from the issuer of the Notes. FIIG, its directors and employees and related parties may have an interest in the company and any securities issued by the company and earn fees or revenue in relation to dealing in those securities.
FIIG provides general financial product advice only. As a result, this document, and any information or advice, has been provided by FIIG without taking account of your objectives, financial situation and needs. FIIG’s AFS Licence does not authorise it to give personal advice. Because of this, you should, before acting on any advice from FIIG, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If this document, or any advice, relates to the acquisition, or possible acquisition, of a particular financial product, you should obtain a product disclosure statement relating to the product and consider the statement before making any decision about whether to acquire the product. Neither FIIG, nor any of its directors, authorised representatives, employees, or agents, makes any representation or warranty as to the reliability, accuracy, or completeness, of this document or any advice. Nor do they accept any liability or responsibility arising in any way (including negligence) for errors in, or omissions from, this document or advice. Any reference to credit ratings of companies, entities or financial products must only be relied upon by a ‘wholesale client’ as that term is defined in section 761G of the Corporations Act 2001 (Cth). FIIG strongly recommends that you seek independent accounting, financial, taxation, and legal advice, tailored to your specific objectives, financial situation or needs, prior to making any investment decision. FIIG does not provide tax advice and is not a registered tax agent or tax (financial) advisor, nor are any of FIIG’s staff or authorised representatives. FIIG does not make a market in the securities or products that may be referred to in this document. A copy of FIIG’s current Financial Services Guide is available at www.fiig.com.au/fsg.
An investment in notes or corporate bonds should not be compared to a bank deposit. Notes and corporate bonds have a greater risk of loss of some or all of an investor’s capital when compared to bank deposits. Past performance of any product described on any communication from FIIG is not a reliable indication of future performance. Forecasts contained in this document are predictive in character and based on assumptions such as a 2.5% p.a. assumed rate of inflation, foreign exchange rates or forward interest rate curves generally available at the time and no reliance should be placed on the accuracy of any forecast information. The actual results may differ substantially from the forecasts and are subject to change without further notice. FIIG is not licensed to provide foreign exchange hedging or deal in foreign exchange contracts services. The information in this document is strictly confidential. If you are not the intended recipient of the information contained in this document, you may not disclose or use the information in any way. No liability is accepted for any unauthorised use of the information contained in this document. FIIG is the owner of the copyright material in this document unless otherwise specified.
The FIIG research analyst certifies that all of the views expressed in this document accurately reflects their views about the companies and financial products referred to in this document and that their remuneration is not directly or indirectly related to the views of the research analyst. This document is not available for distribution outside Australia and New Zealand and may not be passed on to any third party without the prior written consent of FIIG.