Monday 17 October 2016 by Casper Wolski Week in review

From the trading Desk

The UK has announced the committee to oversee negotiations on its exit from the EU, Clinton and Trump face off in the last TV debate this Wednesday night US time and we saw strong buying in Suncorp subsidiary AAI’s 2022 bond

Economic Wrap

The September FOMC minutes released last Wednesday indicated that the probability of a rate hike had strengthened in recent months, and would be appropriate soon if “the labour market continued to improve and economic activity strengthened”. Additionally, Fed Vice Chairman Fischer stated that US unemployment is “somewhere very close to the natural rate”, but that growth was “not what we used to view as normal”. Meanwhile, voting Fed member Loretta Mester implied that it made sense to raise rates, and that the US is “at full employment”.

The UK committee to negotiate Brexit includes Boris Johnson, Liam Fox, David Davis, Priti Patel, Chris Grayling, and Andrea Leadsom. These were the pro Brexit campaigners during the June referendum. The establishment of the committee has increased the chances of protracted disagreement between the UK and EU, a hard landing as the UK becomes a target for European countries to attract European corporate headquarters currently domiciled in Britain, and consequential selling of the Pound. 

An inquiry into GBP denominated bonds has picked up given the Sterling sell off, however we’re yet to see a material increase in flows in that space.

The AUD is trading at 0.7600 today, and is likely to be rangebound until Australian labour force data on Thursday. According to Bloomberg, the unemployment rate is forecast to be 5.7% and up 15,000 jobs according to Bloomberg.     

US government bonds are higher in yield over the week, with the 10 year bond currently at 1.795%. Other major economy government yields are higher too with the exception of Japan which is unchanged. Current 10 year Japanese government bonds are trading at a negative 0.0525% yield, 10 year German bunds are trading at positive 0.05% and 10 year UK government bonds (gilts) are trading at 1.095%.

Other news:

  • Stocks closed higher on Friday. In Europe, the Eurostoxx was up 1.69% and the FTSE 100 was up 0.51%. In the US, the Dow Jones and S&P500 were up 0.22% and 0.02% respectively.
  • US producer prices (PPI) beat expectations rising 0.3% versus expectations of 0.2%. Nevertheless, many economists still point to the series showing benign data.
  • US Retail sales rose 0.6% (seasonally adjusted) in September versus falling 0.2% in August. Year over year this represented a 2.7% increase from September 2015.
  • China’s trade surplus of US$41.99bn for September marked the lowest figure in six months, missing analyst expectations of US$53bn. China’s September exports figure marked a 10% fall on the year, falling short of analysts’ predictions of a 3.3% contraction on the year. Imports also fell by 1.9% on the year, with analysts’ forecasting a 0.6% increase.
  • China CPI beat expectations, rising 1.9% in September versus forecasts of 1.6%. This helped stock and bond markets on Friday.
  • US banks JP Morgan, Citigroup and Wells Fargo all reported Q3 results last week. All three banks beat the expectations of analysts and this has helped the USD gain ground against the Euro and the Yen.

Credit indices spreads are slightly higher over the last week with the US Investment Grade Index (IG) finishing Friday up 2bps at 75.75bps, whilst the US High Yield Index (HY) widened 4bps on the week to finish Friday at 405.75bps.

Domestically, the 10 year Australian government bonds last traded at 2.312%, which is 13bps higher on the week. The Australian iTraxx is at 104.5bps (or 1.045% for this index of 25 Australian Investment Grade names), 1.5bps higher on the week.

Flows

The recent AAI 2022 callable Tier 2 floating rate bond continued to receive strong buying last week. As a highly rated Tier 2 that’s yielding better than comparable bonds, clients were attracted by the relative value proposition. We saw clients switching from shorter dated Tier 2s, such as the ANZ and Westpac 2019 callable lines, with the switch offering a pickup in margin of around 60bps, or close to 100bps on a projected yield to call/worst basis.

We came in to supply in the Adani 2020 and Alumina 2019 fixed rate bonds last week. After a period of limited supply in higher yielding rated corporates, clients who were waiting were quick to react and take up the offers. We’re again left with limited supply which is indicatively offered in the high 6% and mid 5% areas on a yield to maturity/worst basis, for both Adani and Alumina respectively.

Our recent originated deal for StockCo settled and started trading last week. The 8.75% fixed coupon bond, callable in 2021, was very well received at issue and only small volume has been made available in secondary trading. We remain buyers of the deal with supply looking difficult to secure at the moment. 

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