Monday 24 October 2016 by Leigh Winton Week in review

From the trading Desk

Australian CPI is released Wednesday by the ABS for the first time under Lowe’s stewardship as RBA governor

Economic Wrap

Australian unemployment data last Thursday underwhelmed, with employment dropping by 9,800 following seasonal adjustments. Full time employment declined by 53,000, whilst part time employment increased by 43,200. 

Britain’s largest banks plan to relocate from London due to Brexit uncertainty according to Anthony Browne, head of the British Banker’s Association. In an article in The Observer, he stated banking is probably more affected by Brexit than any other sector of the economy.

The ECB held interest rates at their record low of -0.4% on Thursday, leaving the central bank’s asset purchasing campaign unchanged at EUR80bn per month. ECB President Draghi refused to comment on recent speculation that the ECB may begin tapering the asset purchase program. Draghi made clear that all decisions would be deferred to the ECB meeting on 8 December.

The AUD is trading at 0.7600 today, with CPI likely to be its main catalyst this week. The quarterly CPI number is forecast at +0.5% and the year on year number at 1.1% according to Bloomberg.  A weaker number will heighten the chance of a rate cut by the RBA. Note that Goldman Sachs has increased its inflation forecast for Australia to 2.3% for 2017 and 2.5% for 2018.      

US government bonds are lower in yield over the week, with the 10 year bond currently at 1.74%. Other major economy government yields are lower too, with the exception of Japan which is unchanged. Current 10 year Japanese government bonds are trading at a negative 0.0425% yield, 10 year German bunds are  trading at positive 0.01% and 10 year UK government bonds (gilts) trading at 1.09%.

Other news:

  • Stocks closed broadly unchanged on Friday. In Europe, the Eurostoxx was up 0.03% and the FTSE 100 was down 0.09%. In the US, the Dow Jones and S&P500 were down 0.09% and 0.01% respectively
  • Post the latest US Presidential debate, more commentators are volunteering their opinion towards a Democratic President and Senate, with emphasis moving towards Brexit and the US debt ceiling next year.
  • China GDP was released last week at 6.7%, in line with market expectations
  • Oil opened above 50 dollars in Asia for the Dec West Texas Intermediate (WTI) contract, despite Iraq’s oil minister saying Iraq should be exempt from any agreed production cuts

Credit indices spreads are slightly lower over the last week with the US Investment Grade Index (IG) finishing Friday down 2 basis points (bps) at 73.8 bps, whilst the US High Yield Index (HY) narrowed 7.5 bps on the week to finish Friday at 398.0 bps.

Domestically, the 10 year Australian government bonds last traded at 2.27%, 4 bps lower on the week. The Australian iTraxx is at 103.5bps (or 1.035% for this index of 25 Australian Investment Grade names), 1.0bps lower on the week.

Flows

In the USD space last week we had a new addition to the DirectBond suite in the Virgin 2021 USD line. The senior fixed rate bond is available in USD10,000 minimum size and is in good supply. The addition was well received with a current return over 7% on a yield to maturity/worst basis. Most buying was outright, though we did see some switches from the older 2019 Virgin line as investors looked to increase return by moving along the yield curve.

Floating rate subordinated debt continued to see good buying, with the recent AAI line callable in 2022 seeing consistent interest. We also came into supply of the Genworth subordinated line, callable in 2020, with investors attracted by one of the highest yielding rated subordinated options in the AUD space. We continue to have limited access to Genworth at around 5% on a projected yield to call basis.