Monday 22 February 2016 by Week in review

Trading Desk – UK to exit EU?

A range of interesting news this week among the international developments, the Mayor of London has voiced his support for the UK to exit the EU. Domestically, employment data was disappointing and interest rates were slightly lower over the week. In trading, we have had renewed buying interest in old style over the counter Tier 1 securites and Glencore’s Australian dollar fixed rate bond has been added to the DirectBond list

Economic Wrap

London Mayor, Boris Johnson has thrown his support in favour of a UK exit from the EU. The pound fell on the news. Johnson, who is seen as a potential future PM has an opposing position to David Cameron who has been negotiating a new deal for the UK, mainly with Angela Merkel. Cameron’s position is clear that the UK needs to be part of Europe to share in future growth and not be seen as a financial and political as well as geographic island. 

The trouble is that Euro sceptics are gaining traction, demanding more control of the UK as mass migration from Europe coupled with the troubles of members like Greece is worrying voters. 

Other international news over the week includes:

  • David Cameron (UK Prime Minister) set 23 June as the date for the UK vote on continued EU membership
  • The Fed released the minutes of its January meeting highlighting recent financial market volatility and weaker commodity prices as particular threats to growth
  • Deutsche Bank announced a senior bond buyback, allaying some investor concern about its fiscal standing, which caused Deutsche’s equity to rally from its lowest level since the early 90s
  • US CPI increased 0.3% in January versus 0.2% in December

Credit indices spreads moved slightly on Friday. The US Investment Grade Index (IG) finished Friday largely unchanged at 118.0bps but narrowed 4 bps on the week. The US High Yield Index (HY) was also unchanged on the day at 552 bps but narrowed 20 bps on the week.

US government 10 year bonds continue to hover around 1.75%. There will need to be a week or two of stronger US data and further declining credit spreads to see these yields back above 2.00%.

Domestic market

Locally, domestic employment data was disappointing with 7,900 jobs lost in total. However 40,600 of these were full time jobs while 32,700 part time jobs were created. This was substantially lower than the 13,000 extra jobs that economists anticipated. Thus, the unemployment rate rose to 6.0%, somewhat above the 5.8% expectation despite the participation rate remaining stable at 65.2%. Markets took this positively as an increased possibility of RBA rate cuts later in the year and our sharemarket (measured by the S&P 200 Index) finished the week up 2.2%, but still below 5,000 points.

Domestic interest rates are slightly lower over the last week, with the AUD three and 10 year swap rates currently at 2.04% and 2.61% respectively. The Australian iTraxx is around 157 bps (or 1.57%, for this index of 25 Australian Investment Grade names). Our iTraxx had a similar performance to its US peer, being 1.5bps wider on Friday but 14bps narrower on the week (Friday to Friday).  


With the sell-off in credit we have had renewed buying interest in old style AXA and Swiss Re Tier 1 paper last week. Historically, as these legacy assets become shorter dated, investors have moved out into higher yielding alternatives, however, as supply is cheaper these investments now look attractive compared to other short term options.

Following BlueScope’s strong results last week, buying interest has continued while the bond has proved to be more difficult to source. We can indicatively show an offer in the 2018 USD line at 8.11% and we are working on getting further stock at these levels.

On Friday we added a new DirectBond, the Glencore 2019 fixed rate AUD bond. The factsheet can be accessed here and our comprehensive research report here. Initial feedback has been very positive with strong initial buying interest.

Note: The Investment Grade Index is comprised of the credit default swaps of 125 equally weighted names whereas the HY is comprised of 100 non investment grade names. Changes in them are reflected in prices of securities of varying credit quality.