Equity market volatility took centre stage last week, with continued uncertainty about China. The AUD depreciated sharply, bids for safe haven assets continued and Australian government bonds rallied
Economic Wrap
International markets
China
Last week, the Shanghai Composite Index dropped 8.5% on Monday and 7.6% on Tuesday before clawing about half way back by the Friday close.
Global equity markets followed the initial Chinese correction, with the ASX 200 and S&P 500 indices both dropping about 4% on Monday, before finishing the week marginally higher.
Many have been concerned about China since its stockmarket began to falter in June and the Chinese Government recently allowed a record devaluation of its currency to stimulate growth (as well as support its case for inclusion as an IMF reserve currency). In a further attempt to boost growth, the People’s Bank of China (PBOC) cut its benchmark interest rate by 0.25% to 4.6% on Wednesday. Immediately afterwards, the PBOC also lowered bank capital requirements by 0.5% to 18%, reducing the amount of capital that banks must hold against their lending.
US
In the US, second quarter GDP growth was revised up significantly to an annualised rate of 3.7% from the previous estimate of 2.3%. This was well above expectations for a revision to 3.2%. The strong GDP figure increased speculation about a prospective September rate hike, however, markets are still favouring December for the move. We saw that sentiment echoed within the Federal Reserve, with the New York Fed President William Dudley commenting that: “the decision to begin the normalisation process at the September FOMC meeting seems less compelling to me than it was a few weeks ago”.
Domestic markets
In currency markets the AUD depreciated sharply against the USD on Monday following sharp falls in Chinese stocks. The AUD fell from 73.11 to 71.56 US cents, before tracking sideways for the remainder of the week to close at 71.73 US cents.
Bond markets continued to attract bids for safe haven assets in the face of turmoil in risk markets. Five and 10 year Australian government bonds rallied, with yields down 9 and 20 basis points to finish at 1.99% and 2.73% respectively. Credit spreads also contracted over the week, with the iTraxx credit index peaking at 117.50 last Monday and tightening to around 108 currently.
Flows
With bond markets calm in the face of volatility elsewhere, government bonds and investment grade names were in demand last week as investors continued their search for quality.
As a result, our usual names in the inflation linked space - the Sydney Airport and Royal Women’s Hospital - attracted high trading volumes as investors sought an inflation hedge with a strong essential-infrastructure exposure.
In investment grade corporate bonds, the Sun Group 2024 floating rate note has attracted considerable interest. A high quality household name with a senior secured exposure that also pays a floating rate coupon, it has been traditionally hard to source. While our supply in this name has been reasonable, we now have better access to the bond at an improved level. Please contact your dealer to take advantage of this current supply.
With the recent fall in the AUD, investors with USD bonds have benefitted and interest remains strong. We were quite active in Newcrest, FMG, Newcastle Coal and Virgin last week with good 2 way flow. Some investors looked to secure profits made on the currency while others who had the view of continued AUD weakness increased exposures.