The Overnight Report: Bonds On The Move

This story features NATIONAL AUSTRALIA BANK LIMITED, and other companies. For more info SHARE ANALYSIS: NAB

By Greg Peel

The Dow closed down 85 points or 0.5% while the S&P lost 0.5% to 2105 and the Nasdaq fell 0.2%.

Bad Move

The local market took off on a flyer yesterday morning, fuelled by the well-received US jobs report and the weekend’s Chinese rate cut. It was a fair enough call for resource sector stocks, aided by improving oil and iron ore prices, but those assuming all was forgiven in the banking sector and yield stocks in general made the wrong call.

No sooner had the ASX200 gained 64 points from the opening bell the sellers moved in, sending the index rapidly south to a close of down 9. Materials (+1.0%) and energy (+1.5%) maintained their ground but banks (-0.5%), supermarkets (-0.9%) and the telco (-1.7%) were summarily slapped.

The issue for local yield stocks is rising local bond yields, which are being attacked on two fronts. Domestically, the market remains concerned the RBA has implied its easing cycle ended with the May rate cut. Internationally, US bond yields are finally on the rise, about two years after all and sundry assumed they would.

If we think back to the Fed tapering announcement of late 2013 we recall the US ten-year yield shot up to 3%, briefly, in early 2014. The tapering of QE in the face of an improving US economy implied stronger yields. But as the US economy stumbled through the winter of 2014, and one by one the central banks of major economies took the lead from the Fed and introduced drastic easing measures of their own, global yields collapsed. At the same time, Australian yield stocks became ever more attractive.

There is still no agreement on when the Fed might raise its rate but the US bond market is not going to hang around to find out. The international market is very, very long US Treasuries. As the picture begins to improve for the eurozone economy, Greece notwithstanding, near-zero eurozone bond rates have now been left behind and this is forcing US bond markets to respond in kind. We are now coming off a much lower base than late 2013, but last night the US ten-year yield jumped 12 basis points to 2.27% and the US yield curve has now steepened for a consecutive three weeks.

As bond rates here and abroad start rising, the value of Australia’s dividend-paying stocks is undermined on the yield differential.

Note that National Bank ((NAB)) will come out of its trading halt this morning in the wake of its announced capital raising at a 25% discount.

In yesterday’s Australian economic news, NAB’s business survey for April showed conditions falling to plus 2 from plus 4 in March (long-run average zero) and the confidence index holding steady at plus 3 (long-run average plus 5).

Greece Holds On

There has still been no breakthrough in negotiations between Greece and its creditors and as the deadline for Greece’s obligatory E750m incremental repayment to the IMF approached last night, talk of a Greek default heightened. But with only hours to spare and just ahead of the close of European markets, the Greek finance minister pulled his hand out from the back of the couch and came up with the payment.

While this may have provided temporary relief for markets, and keeps Greece in the game for now, the E7.2bn tranche of additional bail-out funds Greece so desperately needs is still tied up and subject to Greece bowing to its creditors’ demands.

And so it goes on.

Aftermath

On Friday night Wall Street decided the April jobs number was “just right” but by last night not everyone was too sure. The 223,000 number may keep the Fed wolf from the door but throwing in March’s downwardly revised 85,000 result, it implies only 154,000 jobs added on average over two months as the US emerged from another snow-bound winter.

The implication is that unlike 2014, a solid economic rebound in the June quarter cannot be safely assumed. So unsure is Wall Street that last night saw unusually thin trading on both the stock and bond markets. No one was much surprised that stocks pulled back after the big surge on Friday but thinness in bond markets is one reason the ten-year yield was able to jump 12 basis points.

The fact that Greece’s last minute repayment actually does nothing to lift the impasse, and thus nothing to quell Greek default and Grexit fears, meant the euro was sold down last night and the US dollar index rose 0.2% to 95.01 as a result.

Rising Australian bond yields would normally imply a rising Aussie dollar but not when US rates are rising faster, reducing the differential. Thus the Aussie is down 0.5% to US$0.7893.

Cracks in China

The iron ore price rebound continued a-pace last night, with the spot price rising another US$1.50 to US$62.00/t.

One might also be forgiven for assuming base metal prices would also have seen buying interest on the LME last night in response to the weekend’s Chinese rate cut, but not so. What we saw is yet another debate over what is good and what is bad.

While Chinese stimulus may seem positive on face value, the accelerated pace of Beijing’s easing measures is beginning to smack of desperation. Thus markets are now looking through the stimulus itself to the reason why stimulus is needed in the first place – the Chinese economy is rapidly slowing.

Copper and nickel were only slightly weaker last night but aluminium fell 0.6% and lead, tin and zinc all fell 1.5-2%.

Chinese stimulus is nevertheless considered positive for oil markets given that while last week’s Chinese trade data showed a big fall in net imports, the breakdown showed China is buying more and more oil every month. But as oil traders pondered the rate cut implications, OPEC came out and suggested oil would not see US$100/bbl again this decade.

Hardly a knock-me-down-with-a-feather prediction, but enough to keep a lid on any enthusiasm. West Texas crude fell US22c to US$59.24/bbl and Brent fell US53c to US$64.86/bbl.

Gold is down US$4.10 to US$1183.70/oz.

Today

Gather your friends, order the pizzas and chill the beers. It’s budget night tonight, in case you’ve been visiting another planet. The local market may just put in a quiet session today ahead of whatever nasties or even kickers Joe might officially deliver, and the SPI Overnight is down just 3 points.

Already there’s talk the government’s new childcare policy, announced on the weekend, which effectively increased rebates for the wealthy and reduced them for the not so wealthy, is destined to crash and burn in the Senate.

Today we’ll see monthly housing finance data, which are always a source of angst for the RBA.

CSR ((CSR)) and Orica ((ORI)) will provide profit results, Qantas ((QAN)) will host an investor day and Coca-Cola Amatil ((CCL)) will hold an AGM.

An don’t forget, as noted, the index will adjust on the open to account for NAB’s capital raising, but as to how much lower NAB shares will open will depend on how keen investors are to participate in the discounted issue.
 

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