Last week the US released GDP figures, volatility in China persisted and the AUD continued to come under pressure. On the trading front, good supply and opportunities exist in high yield, RMBS and inflation linked bonds
Economic Wrap
US
The US Commerce Department released its quarterly GDP estimate on Thursday, with the 2.3% year-on-year figure coming in below market estimates of 2.5%-3.0%. The government also revised its first quarter growth estimates, stating that the US economy grew 0.6% in the first quarter, rather than contracting 0.2% as they had estimated previously. The mixed figures left the short end of the US Treasury curve relatively unchanged, as expectations of a Fed funds fate hike were relatively unchanged, while the long end rallied with yields down, in response to the weaker than expected Q2 data.
China
In China, the incredibly volatile Shanghai Composite Index suffered its largest one-day loss in eight years on Monday, when the index dropped 8.5%. China’s stock market is worrying investors, having fallen 28% from its peak in mid-June. The Chinese Government has attempted to contain their stock market collapse, using techniques that include suspending selling and utilising a USD480bn backstop. Continued concerns surrounding China’s economic stability have spurred a rout in global commodity prices, with copper hitting a six-year low on Monday. This is hardly surprising given that China is estimated to account for roughly 40% of the global demand for copper. The nation’s PMI fell in July to 48.2, indicating the largest contraction of China’s manufacturing industry since April 2014, when PMI was recorded at 48.1.
Markets
The Reserve Bank kept interest rates on hold at 2.00%. Prior to the RBA announcement, markets were pricing in only a 9% chance of a rate cut.
In currencies, the AUD opened the week at US72.7 cents, its lowest valuation in six years. This was primarily attributed to the weak Chinese PMI release, coupled with falling commodity prices. However, following a brief rally in the price of iron ore, the AUD peaked for the week at US73.38 on Tuesday. The dollar then fell back to US72.95 on Wednesday, where it has sat for the remainder of the week. Stephen Miller, head of Australian fixed interest at BlackRock, told the Australian that “there is a risk that things get worse”, and that the dollar could drop to “mid-to-high US60 cents” within the year. Miller’s commentary is supported by an IMF staff assessment released on Tuesday, which stated that the value of the AUD looks “relatively high when set against the fall in the terms of trade”.
In yields, 5 year Australian Government bonds opened last week at a recent low in yield of 2.06% and continued to trade in a wide band from 1.99% to 2.13% over the week, but finished relatively unchanged at 2.07%.
Flows
With markets seeking credit quality, we have seen a general sell off in high yield markets. The last week saw that market returning to some equilibrium, with price stabilising and good two way flow across a range of names. The theme of diversifying existing high yield holdings over a wider range of credits is continuing and with high yield returns as good as we’ve seen theme, given the sell off, opportunity also exists for those adding to their fixed income portfolios.
We have also been active in the Residential Mortgage Backed Security (RMBS) space of late, with high quality, highly rated bonds becoming available. The RMBS market offers floating rate returns in excess of their similarly rated counterparts. With investors looking to add dependable income and stable investments to their portfolios, our highly rated RMBS supply has attracted a lot of interest.
In the inflation linked space, the RWH 2033 IAB (indexed annuity bond) was our most traded security last week, as investors looked to the highest yielding option. The RWH continues to be available, as does the Sydney Airport 2030, both our highest yielding bonds in the inflation linked annuity and nominal bond space.