Monday 30 January 2017 by Casper Wolski Week in review

From the trading desk

Trump executive orders spur uncertainty, Australian Consumer Price Index misses estimates and results season gets started

Economic Wrap

US President, Donald Trump has taken full advantage of his power by signing a number of executive orders that have caused international controversy. Of particular note have been those concerning immigration – an order for “a contiguous, physical wall or other similarly secure, contiguous, and impassable physical barrier”, and a ban on travel to the US for citizens of Iran, Iraq, Somalia, Syria, Sudan, Libya, and Yemen which includes all refugees. This follows an earlier executive order to withdraw from the proposed Trans Pacific Partnership which could very well open the door to increased Chinese influence over trade in the region.

On Wednesday, the latest domestic CPI figures were released with misses for both the quarter on quarter 0.5% vs 0.7% estimate and year on year 1.5% vs 1.6% estimate. This highlights the growing disparity between Australian central bank policy and the US Federal Open Markets Committee (FOMC), where the tightening cycle began recently. Although US releases show that its economy grew at 1.9% pa in the December quarter, well short of the 2.2% estimate, employment figures are strong and the FOMC is likely to lift rates again later this year.

To hark back to our commentary last week, the UK Supreme Court handed down their Brexit decision and ruled that PM Theresa May will require parliamentary approval to trigger Article 50. As a consequence, 18 Labour MPs have tabled a motion to throw out the Brexit bill and have described it as “masochist madness”, according to The Independent.

Australian results season has begun and there are expectations of strong numbers from the major banks as well as the miners. Some key dates for clients holding FIIG originated bonds include the following, with a full schedule available on request:

Company name Date
Capitol Health Ltd 8/02/2017
NRW Holdings Ltd 20/02/2017
PMP Ltd 22/02/2017
G8 Education Ltd 22/02/2017
McPherson's Ltd 23/02/2017
Cash Converters International Ltd 28/02/2017
Dicker Data Ltd 28/02/2017


The FIIG research team will provide results and commentary in The WIRE and we suggest you monitor the website. 

Other news:

  • Equities were mostly higher over the course of week. In the US, the S&P500 and NASDAQ closed 1.03% and 1.90% higher; Asian indices Nikkei and Hang Seng were up 1.72% and 2.07% respectively. European indices were mixed, with EuroStoxx50 up 0.12% and FTSE100 down 0.19%. The ASX200 was 0.41% higher
  • USD currency pairs did not move significantly with key numbers AUD/USD (0.7557), GBP/USD (1.2560), and EUR/USD (1.0710) at time of writing
  • Japanese, British, and US central bankers release their latest monetary policy announcements later this week with no change expected from the three. Statements will be watched carefully for changes in tone
  • Domestically, December trade balance figures will be interesting, with NAB and CBA projecting north of $3bn relative to a median estimate of $2bn.  The two and a half years to October were consecutive, large deficits. These improved forecasts are driven by strong pricing across Aussie commodity staples   
  • Over the week, global 10 year bonds were higher. US 10 year bonds are trading up 2bps to 2.48%, Japanese 10 year bonds up 2bps to 0.077%, UK 10 year gilts up 4 bps to 1.47% and German bunds up 4bps to 0.46%. Australian 10 year bonds bucked the trend and tightened from 2.783% to 2.779%

The Australian five year iTraxx sits at 92.179bps, coming off a significant 6bps during the week after quite a benign January. The iTraxx is composed of five year credit default swaps for the 25 most liquid Australian investment grade issuers and is a proxy for perceived market credit risk.

As a reminder, for high yield we now focus on the Bloomberg Barclays US Corporate High Yield Total Return Index, which concentrates on physical bonds rather than synthetic swaps. It sits at 1841.42, up from 1833.88 over the week.

We continue to recommend portfolios of equally weighted proportions of fixed, floating and inflation linked bonds, noting that this is easier for wholesale investors to achieve. 

Flows

Last week we added the recently issued NAB Tier 2 to the DirectBond suite. This issue differs slightly as it pays a fixed annual coupon of 5% and has a 10 year non call period, ahead of its 15 year final legal maturity in 2032. A factsheet with further detail is available hereExternal link - opens in a new window. Bonds are in good supply, with an indicative yield to the 2027 call currently around 4.8% as of 30 January 2017.

Last week S&P placed NCIG on CreditWatch positive, following the company’s plans to implement a debt service reserve account (DSRA) of USD85m, which is around six months of senior debt servicing. Following successful implementation, S&P expects to be able to upgrade the company’s credit rating, with more information available hereExternal link - opens in a new window. The news was positive for the USD bond and we are left buyers, after initial two way flow with some holders choosing to realise profits with the improved bid.

In other resource related credits, we managed to source the Alumina 2019 fixed coupon bond last week. This has been a line in short supply, so clients were quick to react to the relatively short dated exposure with a mid 5% yield to maturity. We are left looking for further supply given the limited stock we had available has already been sold.