Trump will use the President’s day holiday to assess candidates for the new national security adviser, after Robert Howard turned down the post
Economic Wrap
US financial markets are closed Monday for the President’s day holiday. Light trade on Friday in US markets and uncertainty over the new national adviser led to lower yields, despite stronger data as evidenced by the US leading index rising 0.6% in January.
Locally, both ANZ and CBA reported profits in Australia last week with strong results. Both banks reported slight contractions in interest margins, which was likely due to increased rates for depositors.
UK retail sales came in weaker than expected at a 0.3% drop for the month of January. This came on top of a drop in December and was well below expectations of a 0.75% rise. Commentators said that UK consumers were tightening their belts in the face of rising inflation and slowing earnings growth.
The RBA’s recent, more upbeat assessment of the Australian economy has seen an increase in AUD bond yields and a decrease in economists’ expectations of a cut in the cash rate in 2017. Consequently, we expect attention will shift to speeches by officials – with Governor Philip Lowe speaking Wednesday at the Australian and Canadian economic leadership forum and Friday at the House of Representatives.
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.
US government 10 year bonds are currently yielding 2.415% which is 2bps lower than a week ago. Other major economy bonds are also slightly lower in yield, with current 10 year Japanese government bonds trading at a 0.08%, 10 year German bunds trading at 0.30% and 10 year UK government bonds (gilts) trading at 1.21%.
Other news:
- Stocks were generally higher over the week. In Europe, the Eurostoxx was up 0.1.15% and the FTSE 100 was up 0.57%. In the US, the Dow Jones was up 1.75% and the S&P500 up 1.51%
- China’s FX reserves had a large fall in January. It comes at a time when Trump is clashing with the Chinese on trade, coupled with China’s almost 4.0x debt to GDP ratio
- Oil prices continue to find a floor above $50 with WTI crude at $53.38 a barrel and Brent crude at $55.75 a barrel. Goldman Sachs has predicted the global oil stockpiles will retreat during first half 2017 and a shortage of inventory as a resultCredit indices spreads are largely unchanged over the last week with the US Investment Grade Index (IG) finishing Friday at 63.50bps. In high yield, the Bloomberg Barclays US Corporate High Yield index closed up 3.5 points on Friday at 1853.77
Domestically, the 10 year Australian government bonds last traded at 2.775%, 6.5bps higher on the week. The Australian iTraxx is at 88.25bps (or 0.8825% for this index of 25 Australian Investment Grade names), down one basis point over the week.
The Aussie dollar is trading at 0.7667 today, up from 0.7640 last week. The high over the last year for the Aussie currency was 0.7813 in April 2016.
Flows
In AUD trading last week, we received strong buying in the Impact 2021 fixed coupon bond after it became available to retail investors. We’re now left a buyer as immediate supply was quickly taken up. Investors sold the Genworth AUD subordinated bond, which satisfied most of our buying interest. We had struggled for supply in the line, given it’s one the highest yielding AUD Tier 2 lines as well as being very highly rated – we are left with some residual buying interest and looking for supply.
Trading in both Sydney Airport inflation linked bonds spiked around their results
announcement. Clients were better buyers of the shorter 2020 line following positive results, while they were happy trading both ways on the 2030s, given longer term uncertainty around inflation and Western Sydney Airport.
In USD trading, improved institutional bids on the Virgin 2019 fixed rate bond continues to encourage selling. Most reinvestments were directed at the US high yield Talen 2025 and Kindred 2023 bonds, recent additions to the USD DirectBond menu. Both remain in good supply, with indicative yields to maturity in the low 9% and low 10% areas respectively.