Monday 05 December 2016 by Casper Wolski Week in review

From the trading desk

New Zealand Prime Minister John Key resigns in a surprise move and Italy votes “no” in a referendum, resulting in the resignation of their Prime Minister Matteo Renzi  

Economic Wrap

US nonfarm payrolls rose 178k in November, cementing the interest rate rise by the Federal Reserve when they meet on 13 and 14 December.

The surprise resignation of New Zealand PM John key after eight years in office will result in a vote for a new leader on 12 December. John Key has endorsed Bill English as his successor, who is currently the deputy PM and minister of finance.  

Italian PM Renzi announced his resignation after the “no” vote triumphed in a referendum on plans to reduce the role of the Italian senate. The referendum throwing up political uncertainty is not on a similar scale to the Brexit vote. Nevertheless, Italy is still one of the larger countries in the EU, and notably Germany and German banks have a large exposure to the country. Further, Italian banks also need recapitalisation with Monte Paschi and UniCredit currently investigating capital raisings.  

US government bonds finished unchanged in yield over the week, with the 10 year bond currently at 2.36%, although the yield did peak at 2.45% during the week. Other major economy government yields are generally higher. Current 10 year Japanese government bonds are trading at a positive 0.04% yield, 10 year German bunds are trading at positive 0.28% and 10 year UK government bonds (gilts) are trading at 1.38%.

Other news:

  • Stocks were lower on Friday. In Europe, the Eurostoxx was down 0.52% and the FTSE 100 was down 0.33%. In the US, the Dow Jones was down  0.11% although the S&P500 was up 0.04%
  • Austria had a presidential election, with Alexander Van der Bellen victorious for the Greens. The vote was a rerun of May’s poll which the Greens also won but had postal vote problems plaguing the result
  • Oil prices are off their highs which resulted in Brent crude for February closing at 54.46 dollars on Friday according to Bloomberg. The OPEC production cuts agreed last week led to the spike high, however most oil contracts have declined in price by about 1% as doubts linger on the ability of OPEC to ensure its members stick to the agreement
  • The UK’s supreme court meets this week to start hearing the UK government’s appeal against their need to seek a Parliamentary vote before Brexit talks can commence
  • Donald Trump has risked a diplomatic rift with China by having a phone call with Taiwan president Tsai Ing-wen. China views Taiwan as part of its territory and regards any recognition of the Taiwanese leader as unacceptable behaviour. The US appreciates China’s view on Taiwan but officially considers Taiwan’s status as ‘not settled’

Credit indices spreads are broadly unchanged over the last week, with the US Investment Grade Index (IG) finishing Friday down 0.50 basis points (bps) at 73.00 bps, whilst the US High Yield Index (HY) narrowed 3 bps on the week to finish Friday at 389 bps.

Domestically, the 10 year Australian government bonds last traded at 2.795%, 9.0 bps higher on the week. The Australian iTraxx is at 109.0 bps (or 1.09% for this index of 25 Australian Investment Grade names), down 1.0 bps over the week.

The Aussie dollar is trading at 0.7440 today, which is little changed from last week. The RBA meet tomorrow with no expectation of any change to the cash rate, and third quarter GDP is due out Wednesday with expectations of a low number being circa 2.5% year over year compared to 3.3% previously.

Flows

The recent buyback offer on the Adani 2018 fixed coupon bond spurred some activity in the line. Given the uncertain nature of the offer, we saw some clients selling to remove the risk of participating and not getting bought back while taking advantage of a better institutional bid. There was some outright selling, while other clients looked at reinvesting in the longer dated Adani 2020 line as well as the Alumina 2019 fixed coupon bond. The Adani 2020 remains in good supply, yielding over 7% to maturity, while Alumina supply has currently been exhausted, but is indicatively offered at around 5.7% to maturity.

Bendigo and Adelaide Bank issued a new subordinated floating rate note last week, callable after five years with a ten year final legal maturity. As a relatively small institutional deal at A$125m, the book was well oversubscribed with around A$400m in bids. That unfilled appetite saw trading ramp up in secondary subordinated debt, with some clients selling the existing Bendigo and Adelaide subordinated line, callable in 2019, into an improved bid. We also continue to see buying in the Suncorp subsidiary AAI and Genworth subordinated bonds, callable in 2022 and 2020 respectively. AAI and Genworth are indicatively offered in the high 4% and low 5% on a yield to call basis respectively, however supply in the Genworth is becoming scarce.

In the USD space, a key theme was client selling in the BHP 2020 and 2025 callable subordinated bonds. With the commodity rally this year and improved risk on sentiment, the bonds have outperformed with many clients sitting on strong gains in what is typically a volatile sector. With consensus forecasting for iron ore to move lower than its current trading price and US yields trending upwards, investors wary of downside risks have been selling and considering more defensive options.