Tuesday 26 April 2016 by Week in review

Trading Desk

Cash crisis in the oil sector, domestic rates rise and McPherson’s buy up to $10m of outstanding fixed and floating rate bonds

Economic Wrap

Oilfield services company, Schlumberger CEO, Paal Kibsgaard warns there is a full scale cash crisis in the oil sector. Schlumberger is the world’s largest oilfield services company, and has had to cut one third of its workforce since mid-2014.

The AUD has held onto its gains, closing Friday above 77 US cents and briefly trading above 78 US cents. The currency was helped by the rebound in commodity prices with spot iron ore trading above $70 over the last week.

US government bonds have sold off with the 10 year yield up 15 basis points (bps) in the last week to 1.915%. The Fed is meeting Tuesday and Wednesday US time, with its statement released Thursday morning Australian time. Fed watchers will be looking for any sign that the Fed may raise rates in May or June.

Other news:

  • RBA Governor Glenn Stevens spoke in New York, stating that the reaction to recent financial market volatility might have been “overdone”. Stevens pointed out that growth is higher than it was in 2001, which was a “relatively mild slowdown”
  • The UK PMI opinion poll showed that 54% of people surveyed wish to remain in the EU, while 46% would opt to leave. The UK Treasury released a report stating that a Brexit could permanently damage both the EU and UK economies and leave the UK economy 6% smaller by 2030
  • China data for new credit, industrial output, fixed asset investment and retail sales all exceeded estimates for March
  • China’s debt load reached a record high of 237 percent of GDP, as risk to the economy mounts with fears the improved data from spending may give way to a ‘hard economic landing’

Credit indices spreads were lower over the last week with the US Investment Grade Index (IG) finishing at 74.5bps, down 4bps on the week. The US High Yield Index (HY) tightened 10bps last week to 428bps.

Domestic market

Domestic interest rates are higher over the last week, with the AUD 3 and 10 year swap rates currently at 2.23% and 2.78% respectively. The Australian iTraxx is circa 130.0 basis points (or 1.30%, for this index of 25 Australian Investment Grade names). Our iTraxx decreased 6.46 bps over the week.

Australian CPI for Q1 2016 is released this Wednesday 27th April. The expectation is for a 1.7% YoY number, with a quarterly number of 0.2% and a ‘trimmed mean’ quarterly number of 0.5%.

Flows

Last week, McPherson’s buy back up to $10m of outstanding bonds in each of their fixed and floating rate notes. We saw clients accepting the attractive tender offer and using proceeds to switch into other FIIG originated deals.

In the non AUD space, Newcastle Coal Infrastructure Group has had renewed interest with talk of a proposed refinancing and capital restructure. A more detailed article on NCIG can be found here (access for wholesale clients only, requires login).External link - opens in a new window


As a reminder, the IG 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.