Monday 07 November 2016 by Scott Whitecross Week in review

From the trading desk

All eyes on the US election with latest polls predicting a Clinton win, a Democrat senate and a Republican House of Representatives

Economic Wrap

US voting results will start occurring between 8pm and midnight EST which is between 10am and 2pm AEDT on Wednesday. The crucial states of Georgia, Arizona, Florida, Ohio and North Carolina should all be known by 2pm Wednesday, Australian time unless it's a very close poll.     

The FBI has ended its investigation into Clinton’s email usage, saying she committed nothing wrong when she was Secretary of State.

The AUD is trading slightly higher today at 0.7665, as the market focuses its attention on the US election. A Clinton win should see further US dollar strength and we note speculators have increased purchases of USD according to US futures exchange data (CFTC).

US government bonds are lower in yield over the week, with the 10 year bond currently at 1.775%. Other major economy government yields are also lower over the week. Current 10 year Japanese government bonds are trading at a negative 0.062% yield, 10 year German bunds are trading at positive 0.135% and 10 year UK government bonds (gilts) are trading at 1.13%.

Other news:

  • Stocks were lower again on Friday. In Europe, the Eurostoxx was down 0.64% and the FTSE 100 was down 1.43%. In the US, the Dow Jones and S&P500 were down 0.24% and 0.17% respectively
  • US jobs data was mixed, with nonfarm payroll weaker than expected at 161,000. However average earnings rose by 0.4% versus expectations of 0.3% which should seal the way for a hike by the Fed in December assuming orderly markets from a likely Clinton presidential victory
  • Oil fell throughout the week, with no output curb agreement by OPEC. The Nymex crude oil (WTI) contract closed just above USD44 on Friday, close to 8% lower on the week
  • Britain’s PM, Theresa May vowed to continue EU withdrawal following the High Court ruling requiring parliamentary voting and endorsement
  • Bank of England Governor, Mark Carney confirmed that he will remain leader of the UK’s Central Bank until June 2019, to assist in an “orderly transition to the UK’s new relationship with Europe”
  • Italy’s anti EU Five Star party could win the upcoming referendum on constitutional reform on 4 December. This party wants to hold a consultative referendum on the euro and badges itself as anti corruption
  • Ten thousand people marched in Hong Kong protesting what they view as a heavy handed approach by China towards rule on the island. Hong Kong currently has a degree of autonomy and judicial rights

Credit indices spreads are higher over the last week with the US Investment Grade Index (IG) finishing Friday up 4 basis points (bps) at 81.0 bps, whilst the US High Yield Index (HY) widened 14 bps on the week to finish Friday at 433.75 bps.

Domestically, the 10 year Australian government bonds last traded at 2.345%, 1.5 bps higher on the week. The Australian iTraxx is at 106.0 bps (or 1.06% for this index of 25 Australian investment grade names), up 2.5 bps over the week.

The RBA left the domestic cash rate unchanged at 1.50%. They highlighted concerns around consumers, stating that “the forecasts for growth in consumption and disposable income now imply a slightly more gradual decline in the household saving ratio than had been projected”. That said, the RBA is still expecting a gradual pick up in underlying inflation from 1.5% to between 1.5% to 2.5% by late 2018.

Flows

USD denominated securities remained a primary focus for investors last week as good supply continued. Canadian gold miner IAMGOLD’s 2020 fixed rate bond proved a popular target for clients looking to move out of the BlueScope 2018 fixed rate bond, of which the issuer has announced they will call on 21 November 2016. As bonds can become increasingly difficult to trade this close to a call/maturity date, there will be a limited ability to exit the BlueScope line prior to the call date after the end of this week. The IAMGOLD 2020 bond is currently offered at an indicative yield to maturity of 6.63%*.

In the USD space last week we added Genworth September 2021 USD to our DirectBond list. Genworth is a leading Fortune 500 insurance holding company, assisting with the financial challenges of aging through its leadership positions in mortgage insurance and long term care insurance. The senior unsecured bond is tradeable in USD10,000 minimum parcels, at an indicative yield to maturity of 8.91%* and is available to wholesale clients only.

Newcastle Coal Infrastructure Group (NCIG)’s traditionally tightly held March 2017 bond became available, with supply remaining moderate in the immediate term. The bond is currently offered at an indicative yield to call of 9.98%*.

Renewed demand was seen among inflation linked assets, particularly the Royal Women’s Hospital (RWH) June 2033 annuity and the index linked Sydney Airport 2020, providing investors with an opportunity to take profits. The RWH and Sydney Airport lines are currently at a bid price nominal yield to maturity of 6.37% and 5.62% respectively.

*Note: Prices accurate as at 7 November 2016 but subject to change.

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