Tag Archives: Bonds/Interest Rates

article 3 months old

Safety In (The Right) Numbers

By Tim Price, PFP Wealth Management

 “Gross: Global yields lowest in 500 years of recorded history. $10 trillion of neg. rate bonds. This is a supernova that will explode one day.”

- Tweet from Janus Capital.

Bill Gross’ warning is, of course, tautological. A supernova is an exploding star. What he probably meant to say is that the bond market is a star that will turn into a supernova one day. But then so what ? At some point our own sun will die and the planet Earth will likely be engulfed by it as it explodes. Since that’s not likely to happen for roughly 5 billion years, we can probably renew our monthly travel cards with a sense of equanimity.

But then Bill Gross has form here. It was Bill Gross, modeller of sunglasses and billionaire bond investor, who suggested back in January 2010 that the UK Gilt market was “a must to avoid” and that UK Gilts were resting on a bed of nitroglycerine.

In January 2010, 10 year Gilts yielded 4%. They now yield roughly 1.25%. In 2010, the UK national debt was just under £1 trillion. It now stands at over £1.6 trillion. If Gilts were resting on a bed of nitroglycerine six years ago, they are now bouncing up and down, in spiked running shoes, on a bed of picric acid and octanitrocubane whilst firing flaming napalm arrows at a dartboard made of pure antimatter.

The pitiful yields available from the likes of UK Gilts and US Treasuries are bad enough. But if there’s money figuratively burning a hole in your pocket, may we suggest the iShares Swiss Domestic Government Bond 1-3 year exchange traded fund, instead. This little peach of a product owns just two bonds. 53% of the fund is invested in the Swiss 3% bond maturing 8 January 2018. This bond yields minus 1.06 percent. The remaining 47% of the fund is invested in the Swiss 3% bond maturing 12th May 2019. This bond yields minus 1.04 percent. How many did you want again ?

As George Cooper of Equitile tweeted some months ago, the combination of indexing, ratings agencies and syndication means that collectively the investment industry does not provide effective discipline to borrowers.

George is being polite. Not only does the investment industry not provide effective discipline to borrowers, it allows something to happen that should be beyond the scope of rational investment markets. It actively supports negative interest rates rather than abhorring them. Allocating the blame is only part of the issue. Who, after all, is really at fault – the investors in iShares’ Swiss government bond fund, for buying an investment product of questionable utility, or iShares, for constructing it in the first place ? The answer, of course: Mario Draghi. And Janet Yellen. And Mark Carney.

So we might collectively come to the conclusion that while the bond markets have become essentially uninvestible, the duration for this environment of uninvestibility might prove to be longer lasting than anyone, including Bill Gross, ever anticipated. The pragmatic solution is surely to seek out real assets that should hold up tolerably well in deflation but which offer the potential for participating in any ultimate reflation – rather than being destroyed by it. As we view the world, the assets that would seem to fit the bill are not bonds but equities. And rather than blithely tracking the indices with all the risk that that entails, we prefer to go the extra mile and insist on owning stocks that offer a ‘margin of safety’ by dint of trading at especially attractive valuation discounts versus the rest of the market.

The good news: such value stocks exist, albeit not necessarily in those markets that are most obviously appealing to index trackers. (The US, for example, accounts for roughly 60% of the MSCI World Equity Index, but is a) not cheap, and simultaneously b) extremely well covered by the analyst community.)

Even better news: the valuation discount to growth has rarely been bigger. We highlighted the following chart at the end of May.
 


The chart shows the performance of value stocks versus growth stocks – as defined by MSCI – since 1975. When the red line is rising, value stocks are outperforming. When the red line is falling, value stocks are underperforming. And as Rob Arnott of Research Affiliates points out in his April research note ‘Echoes of 1999’, for the three year period ending in March this year, value has endured its worst performance relative to growth for forty years:

Historical experience shows that starting valuations similar to those we see today in value stocks have led to their prolonged, massive outperformance, making a strong argument for rebalancing into a deeper value tilt and avoiding the popular, bull-market growth stocks.

It’s hardly rocket surgery. If bonds are outrageously expensive, which they are, buy stocks instead. And if growth stocks are expensive, which by and large they are, buy value stocks instead.

Human nature doesn’t change, which causes markets to oscillate between cycles of greed and fear. Though they may not seem like it, especially at their extremes, or when they’ve persisted for some time, those cycles represent opportunity. In his first edition of ‘Security Analysis’, Benjamin Graham quoted Horace:

Many shall be restored that now are fallen, and many shall fall that are now in honour.


Tim Price
Director of Investment
PFP Wealth Management
3rd February 2014.

Follow me on twitter: timfprice
Weblog: http://thepriceofeverything.typepad.com

Reprinted with permission of the publisher. Content included in this article is not by association the view of FNArena (see our disclaimer).

Important Note:
PFP has made this document available for your general information. You are encouraged to seek advice before acting on the information, either from your usual adviser or ourselves. We have taken all reasonable steps to ensure the content is correct at the time of publication, but may have condensed the source material. Any views expressed or interpretations given are those of the author. Please note that PFP is not responsible for the contents or reliability of any websites or blogs and linking to them should not be considered as an endorsement of any kind. We have no control over the availability of linked pages. © PFP Group - no part of this document may be reproduced without the express permission of PFP. PFP Wealth Management is authorised and regulated by the Financial Conduct Authority, registered number 473710. Ref 1005/14/JB 310114.

Technical limitations

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article 3 months old

The Overnight Report: Will I Stay Or Will I Go Now

By Greg Peel

The Dow closed down 57 points or 0.3% while the S&P lost 0.2% to 2075 and the Nasdaq fell 0.1%.

Market-Wide

There is not a lot to say about yesterday’s sell-off on the ASX, which simply echoed global fears that have built since Friday night with regard a possible Brexit. The public holiday in Australia meant some catching up was needed.

All sectors were hammered yesterday, and those involving larger caps more so.

Energy led the charge with a 3.9% fall, exacerbated by the lower oil price. The banks had the biggest impact with a 2.2% drop. Healthcare, which has exposure to Europe, fell 2.9%. Telcos, which might otherwise be a defensive but for mega-cap Telstra, fell 2.0%, and ditto the supermarkets, which fell 1.8%.

The true defensive – utilities – was the outperformer on the day in falling only 0.6%.

The index suffered technical damage in falling through 5225 to rest at 5200, which offers up the potential of a move back to 4800. However what we are dealing with here is a binary risk event. Either Britain will vote stay or go. Markets are currently building in “go” risk and if the polls keep swinging that way over the next few days, there may be more such risk to build in. But then the result may be “stay”, which is still the bookies’ tip to date.

“Stay” would take us all the way back again, presumably. And it is possible “go” will have less of an impact now markets have begun to adjust.

Taking a back seat yesterday was NAB’s business confidence survey for May, which was conducted after the federal budget but before anyone started worrying about a Brexit.

Business conditions continued to improve in May, to 10.1 on the index from 9.7 in April. This bodes well for Australia’s economic transition and employment prospects. But business confidence fell, to 2.7 from 5.3, suggesting concern about the future.

This time last year, confidence surged following the Abbott government’s small business friendly budget. This year’s Turnbull government budget is also business friendly, but it would appear there is concern as to whether there will still be a Turnbull government after July, or worst still, some unworkable hung parliament.

Trader’s Market

What is most notable about Wall Street’s response to sudden Brexit paranoia is a lack of major stock market volatility despite a spike in the VIX volatility index. That index is not measuring volatility based on daily market movement, it is measuring volatility implied by the cost of put option protection. Wall Street is covering its backside, but not bailing out in any mad panic.

Having already fallen substantially on Monday night, last night stock markets were down 2.0% in London, 2.3% in France and 1.4% in Germany. The German ten-year bond yield traded into the negative before settling at 0.00%.

Stock market selling rolled across the pond to send the Dow down 130 point in the morning, accompanied by bond buying that saw the ten-year yield heading towards 1.50%. But once Europe closed, Wall Street turned around. The fact the S&P500 closed down only 0.2% when all about were losing their heads suggests US traders believe the panic is overdone and/or if Europe is about to suffer upheaval, the US is a much safer place to be.

The US ten-year yield ultimately returned to 1.61%.

Adding to the confusion was a 0.5% jump in US retail sales in May, beating 0.3% forecasts. While Brexit is dominating the current market psyche, we must not forget the Fed will release a policy statement tonight. If, as many believe, the May jobs number turns out to be a statistical blip, then the positive retail sales number plays back into Fed rate hike possibility.

But not tonight. Maybe next month, after the Brexit result is known.

Commodities

West Texas is down another US$1.36 at US$47.90/bbl. Of all commodities, oil is most closely linked to the global economy as a whole.

Less so are base metals, which continue to play individual games dependent on actual supply-demand balances, inventories, China and currency moves. The US dollar index has risen 0.6% to 94.93 and copper and lead fell 1.5% and zinc 3%, but aluminium and nickel held steady.

Iron ore fell US$1.00 to US$50.80/t.

Gold is steady at US$1285.50/oz.

Reflecting the stronger greenback, the Aussie is down 0.6% at US$0.7346.

Today

The SPI Overnight closed down 9 points.

Was yesterday’s hundred point wipe-out enough to price in the Brexit factor, ahead of next week’s actual outcome? We are poised at 5200.

Today sees the Westpac confidence survey for June.

Tonight the Fed will release a policy statement, and update its forecasts, and Janet Yellen will hold a press conference.

Nib Holdings ((NHF)) will host an investor day today.
 

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's - see disclaimer on the website)

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article 3 months old

The Monday Report (On Tuesday)

By Greg Peel

Friday

The SPI futures suggested a 27 point opening to the downside on Friday morning but instead the ASX200 dropped 50 points in the first half hour, which again looked like computers gone mad. This assumption was backed up by an immediate attempt to rally back such that within the subsequent half hour, the index was only down 30.

But this time what might otherwise have been another session of grafting back towards square turned into a “just sell and get out of here by lunchtime” session. The index declined again to be down 50 points once more by midday and there it stayed all afternoon as offices emptied for the long weekend.

Word is a couple of large lines were sold in the futures market early in the session, so maybe it wasn’t all the computers’ fault this time.

Aside from the desire to square up ahead of a holiday, we may also point to the fact the index had tried on about three occasions now to break up through 5400, without success. Typically if markets find they just can’t go up, they go down instead. Friday did look like a bit of a capitulation on that front.

And as it transpired, a prescient one.

Commodity price weakness and accusations against BHP Billiton had materials falling 2.3% on Friday but a 1.0% fall for the banks was the standout, and did the bulk of the index damage. Energy dropped 1.3% but thereafter, sector falls were not as significant.

If a proprietary desk made the market for the lines of futures and was hit on the bid, that desk then has to sell “the index” of stocks to hedge their position. One need only slap the big caps – even just the top ten – to have the bulk of the market cap covered. The first thing one thus does is hit the banks, the big miners and so on.

It may have been that come this morning, the market would be ready to regain some of Friday’s lost ground on a bargain hunting basis, assuming nothing came out of left field overseas on the weekend.

But it did.

Friday Night

A new poll was published on Friday night suggesting – for the first time – that more British are in favour of leaving the EU than staying. Prior polls have indicated the opposite balance but Friday night’s poll showed not just a slight bias, but a 55/45 leave/stay split.

The London FTSE fell 1.9%, the French CAC 2.2% and the German DAX 2.4%. Hardest hit were the British and European bank stocks. However, by the time the UK and European markets were closed on Friday night, that Brexit poll result had not yet been published.

Weakness was a reflection of the rolling tide of bond buying in Europe, ahead of next week’s Fed meeting and the following week’s Brexit vote, turning into a torrent. The German ten-year yield traded as low as 0.01%. Ahead of the weekend, European investors were getting out of risky stocks and into safe haven bonds.

Wall Street opened lower as a result but was beginning another familiar graft back again when the poll news hit the wires. The Dow subsequently closed down 119 points or 0.7%, having been down as many as 173 points. The S&P closed down 0.9% at 2096 and the riskier Nasdaq fell 1.3%.

The British pound fell 1.4% against the greenback on the poll news, sending the US dollar index up 0.6% to 94.65.

The US ten-year bond yield closed down 4 basis points at 1.64%.

In the US, it was also the banks that suffered most on the day. The US banks had previously been leading Wall Street back to all-time highs on Fed rate hike expectations, but then along came that May jobs numbers, and now this.

The LME had already closed on Friday night before the Brexit news and greenback rally, and moves among base metal prices were minimal.

Oil was still open nonetheless, and West Texas crude fell US92c to US$49.53/bbl. Aside from the impact of the stronger greenback, the weekly US rig count showed another slight tick up.

Despite the stronger greenback, gold rose $3.80 to US$1273.30/oz as a safe haven.

The SPI Overnight closed down 61 points or 1.2% on Saturday morning.

Sunday

May data released by Beijing on Sunday showed Chinese industrial production rose 6.0% year on year as expected, and retail sales rose 10.0% as expected. The concerning result was fixed asset investment, which fell to a growth rate of 9.5% in the year to May, down from 10.5% in the year to April. Economists had forecast 10.5%.

Within that fixed asset number, private sector investment rose only 3.9% compared to 22.3% growth from the state. This is the figure that has economists worried, as it suggests China’s economy is almost solely been driven by government stimulus at present.

It is nonetheless assumed Beijing will need to bump up that stimulus to offset a weak private sector if year-end GDP growth targets are to be met.

Monday Night

While Orlando provided the shock, the focus of attention for markets across the globe was still the Brexit poll. While there is more than one poll being conducted on a regular basis, and others have a much closer outcome at this stage, suddenly the world is realising the vote is only ten days away and the result is unclear. Previously the “stay” vote was winning in the polls, leading to a level of complacency.

That has now changed.

Having already closed to the downside on Friday night before the latest poll was published, the London FTSE fell another 1.2% last night, while the French CAC fell 1.9% and the German DAX 1.8%.

Wall Street attempted a recovery from the open, prompted by news Microsoft had made a takeover bid for LinkedIn. The bid sent LinkedIn shares soaring 50% and floated all similar boats, while Microsoft (Dow) shares came off around 2%. But it wasn’t long before the mood returned to Brexit concerns.

There is also, of course, a Fed meeting and press conference this week, and meetings for the Banks of Japan and England.

While no one expects a Fed rate hike, the market is simply unsure now whether the Fed will be back in dovish mode or remaining in hawkish mode since the May jobs numbers were released. The Fed is also even less likely now to do anything ahead of the Brexit vote and on that score, nor is the BoE.

It could be a different story for the BoJ nevertheless, who again through no fault of its own is being faced with a surging yen. Seen as a “safe haven” currency, then yen has risen on the poll news as carry trades are reversed in the face of increased volatility. Will this force the BoJ to move further into the negative, or at least step up QE?

That volatility was reflected in the VIX index on the S&P500 last night, which rose 23% to 21 as investors moved to hedge their positions. The sidelines seemed a safer place to be, resulting in the Dow closing down another 132 points or 0.7% last night, the S&P falling 0.8% to 2079 and the Nasdaq dropping 0.9%.

It is going to be an interesting two weeks.

The US dollar index actually managed to slip back a bit last night as the yen became flavour of the month, down 0.3% to 94.38 despite ongoing weakness in the pound and euro. There was therefore no reason not to buy the other safe haven – gold – which is up US$10.50 to US$1283.80/oz.

Having been quiet on Friday night, base metals were mixed last night. Copper rose 0.7% and aluminium and lead both rose 1.5% but nickel and zinc slipped slightly.

Iron ore is down US30c at US$51.80/t.

West Texas crude is down US97c at US$48.56/bbl.

The SPI Overnight closed down 40 points or 0.8% this morning. That equates to a net 101 points down since the ASX closed on Friday for the long weekend.

The Week Ahead

The Fed statement and press conference are due on Wednesday night. The BoE and BoJ meet on Thursday night.

The US will see retail sales and business inventories tonight, industrial production, the PPI and Empire State activity index on Wednesday and the CPI, housing sentiment and the Philadelphia Fed activity index on Thursday.

On Friday it's housing starts and if there were not enough volatility on offer this week already, Friday is the quadruple witching derivatives expiry for the June quarter.

In Australia we’ll see the NAB business confidence survey today and the Westpac consumer confidence survey tomorrow. On Thursday the May jobs numbers are due.

Investor days will be held this week by nib Holdings ((NHF)) tomorrow and Goodman Group ((GMG)) and Graincorp ((GNC)) on Thursday.

Rudi will appear on Sky Business today, via Skype, to discuss broker calls around 11.15am. He'll return on Thursday, twice. First from 12.30-2.30pm and then again, between 7-8pm, for an interview on Switzer TV. On Friday he'll Skype-link again to discuss broker calls around 11.05am.
 

For further global economic release dates and local company events please refer to the FNArena Calendar.

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article 3 months old

The Overnight Report: Nowhere To Run To

By Greg Peel

Do Not Pass Go

Up 18 points from the open, down 34 at lunchtime, down 8 at the close. That was the story for the ASX200 yesterday in what one would assume was a session packed full of conflicting reports and releases, sending investors hither and thither. But it wasn’t.

The only report of any note was a rare profit warning from ever reliable Amcor ((AMC)), confessing to a Venezuelan forex impact in its upcoming result. That stock lost 8% on the day.

The only release of any note was Chinese inflation for May. Annual CPI came in at 2.0%, slightly lower than 2.3% expectations, while the PPI printed minus 2.8%, better than minus 3.1% expectations. So nothing to cause any great anxiety there.

Not only did the index close almost flat, there were no stand-out performers among the sectors either. Telcos (-0.7%) and healthcare (-0.5%) were the worst performers on the day, while utilities, energy and consumer discretionary (all up 0.3%) were the best performers. The banks were off a tad and materials flat.

We still seem to be in Limbo Land, with no great incentive to break away in either direction. Today is a Friday before a long weekend and not a great deal has happened offshore overnight, although the futures are down 27 points this morning to suggest a weak open.

More Work Needed

The common trend on Wall Street at present is to open lower and spend all day grafting back again. This has occurred many times in the last several sessions. It happened again last night, with the Dow opening down to be off 90 points by lunchtime before recovering.

The Dow was sitting smack on 18,000 with only minutes to go, before sell-on-close orders ensured a slight down-day at the bell.

Again, there was not a lot of news to inspire conviction either way. Having shot up over 50, oil fell back a dollar to be just above 50 this morning. Oil’s fall helped Wall Street lower from the outset, but the direct correlation that existed in the March quarter has now all but disappeared in the June quarter.

It would appear Dow 18,000 has been selected by the market as the pivot point as we move towards next week’s Fed meeting and the following week’s Brexit vote. Brexit continues to dominate debate, and we’ve two more weeks to wait.

Commodities

West Texas crude is down US$1.08 at US$50.45/bbl. The selling can be attributed to nothing more than consolidation following the long awaited breach of the 50 mark, with traders now assuming longstanding resistance at 50 will now become support.

It might be interesting to make note at this point that as the price of oil has risen on falling US production, the price of natural gas in the US has also been on a run of late. This seems logical, other than natural gas did not collapse in January as oil did. Having hung around under the US$2/mmbtu mark for a very long time, the Henry Hub price is currently US$2.60, representing a substantial rise.

Not only has US oil production been curtailed, US gas production is being curtailed. The price rise belies the seasonal trend of demand falling off into summer.

While there is no direct correlation between the closed-shop US domestic gas price and the price at which Australia’s LNG producers can sell their product to the Chinese, it’s better to see higher US prices than lower, now that the US is moving towards export.

Having run hard on Wednesday night, last night aluminium fell back 1% and lead 2%. Copper did not run up on Wednesday and has fallen 1% overnight.

Iron ore is unchanged at US$52.10/t.

Gold is up another US$7.00 at US$1269.50/oz despite the US dollar index jumping 0.6% to 94.10.

That jump has helped the Aussie down 0.7% to US$0.7432.

Today

The SPI Overnight closed down 27 points or 0.5%.

Chinese markets are closed today.

Beijing will release May industrial production, retail sales and fixed asset investment numbers on Sunday.

The ASX will be closed on Monday, as will FNArena.

Rudi will Skype-link with Sky Business around 11.15am to discuss broker calls.
 

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's - see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

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article 3 months old

Australian Corporate Bond Price Tables

PDF file attached.

Corporate bonds offer an alternative to equity investment in providing a fixed “coupon”, or interest payment, unlike equities which pay (or not) non-fixed dividend payments, and a maturity date, unlike equities which are open-ended.

Listed corporate bonds can be traded just as listed shares can be traded. Bonds bought at issue and held to maturity do not offer capital appreciation as an equity can, but assuming no default do not offer downside capital risk either. Pricing is based on market perception of default risk, or “credit risk”, throughout the life of the bond.

Bonds do offer capital risk/reward if traded on the secondary market within the bounds of issue and maturity. Coupon rates are fixed but bond prices fluctuate on perceived changes in credit risk and on changes in prevailing market interest rates.

Note that the attached tables offer three “yield” figures for each issue, being “coupon”, “yield” and “running yield”.

If a bond is purchased at $100 face value and a 5% coupon, and face value is returned at maturity, the running yield is 5% and the yield, or “yield to maturity” is 5%.

If a bond is purchased in the secondary market at greater than $100, the running yield, which is the per annum yield for each year the bond is held, is less than 5% because the coupon is paid on face value. The yield to maturity is also less than the coupon as more than $100 is paid to receive $100 back at maturity.

If a bond is purchased in the secondary market at less than $100, the running yield, which is the per annum yield for each year the bond is held, is more than 5% because the coupon is paid on face value. The yield to maturity is also more than the coupon as less than $100 is paid to receive $100 back at maturity.

Note that if a bond is trading on the secondary market at a price greater than face value the implication is the market believes the bond is less risky than at issue, and if at a lesser price it has become more risky. Bonds trading on yields substantially higher than their coupons thus do not offer a bargain per se, just a higher risk/reward investment. In all cases, bond supply and demand balances will also impact on secondary pricing.

Note also that while most coupons are fixed, the attached table also provides prices for capital indexed bonds (CIB) and indexed annuity bonds (IAB).

This service is provided for informative purposes only. It is not, and should not be treated as, a solicitation or recommendation to buy corporate bonds. Investors should always consult their financial adviser before acting on any information gleaned from this service. FNArena does not guarantee the accuracy of information provided. Note that while FNArena publishes this table weekly, prices are fluid and potentially changing throughout each trading day. Hence prices tabled may not reflect actual market prices at the time of reading.

FNArena disclaimer

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article 3 months old

The Overnight Report: Slow Grind

By Greg Peel

The Dow closed up 66 points or 0.4% at 18,005 while the S&P gained 0.3% to 2119 and the Nasdaq rose 0.3%.

Flat

The ASX200 yet again suffered one of its first-half-hour plunges yesterday before immediately being bought back up again, to be only down slightly by midday. The futures only signalled down 18 on the open, so the rest was up to the computers.

The morning saw the release of the local housing finance numbers for April.

While the number of loans to owner-occupiers increased in April to be 4.6% higher year on year, the net value of those loans fell 1.8% to be 4.4% lower year on year. Meanwhile, loans to investors fell 5.0% in the month to be down 20.8% from a year ago, cycling a comparable reading ahead of the RBA/APRA clamp-down on investor lending mid-2015.

This is the housing market that has been offsetting the impact of weak commodity prices. Just as well commodity prices have rebounded, and China is buying greater volumes to offset the impact of weaker prices.

China’s net imports nevertheless fell 0.4% in May year on year but this was a better result than the 6.0% drop forecast, and the 10.9% fall in April. Exports fell 4.1% -- more than the 3.6% forecast and worse than the 1.8% April decline.

It was a mixed result which saw the ASX200 take another stumble at midday before grafting back again in the afternoon to a flat close.

Higher oil prices ensured a 2.1% gain for the energy sector yesterday so there needed to be an offset to square up the index. The banks were only a little weaker so it required materials to fall 0.6% due to weaker base metal prices, and despite a stronger iron ore price, and telcos to fall 0.9%.

Two sectors that have really been bouncing back and forth for no major reason these past few sessions have been telcos and consumer staples – both sectors one would normally expect to be plodders. Seems no one can make up their mind.

The index is poised at 5370, a number which is neither here nor there on a technical basis. We’re heading into a long weekend locally.

Muted Cheers

The Dow chopped around last night in an insignificant range before finally closing above 18,000 for the first time since April. But no corks were popped. The S&P 500 is within 0.6% of its all-time high, but no one is particularly excited.

It has been described as the unloved rally – a slow graft higher without any real impetus beyond the rebound in oil prices, which may yet fade, and central bank policy. A lot of attention is being focused on Europe at present, where the German ten-year yield (0.06%) continues to fall to reflect a step-up in corporate bond issuance. That step-up is all about the ECB.

The ECB’s latest QE upgrade included the addition of corporate bond purchases, on top of purchases of government bonds issued by eurozone members. Corporate Europe knows it has a willing buyer, and rates have never been so low. Why not borrow, even to buy back shares, as has been all the rage in the US. Deutsche Bank did it recently and in so doing, halted its share price slide and turned all European banks around.

Meanwhile on Wall Street, all discussion is about the Fed. Occasionally there is mention of actual corporate earnings, but they’re just a sub-text. The markets are being controlled by the central banks. In such an environment, the only real explanation many can come up with for the stock market rally on Wall Street is the TINA trade – there is no alternative investment one can make to provide any sort of positive real return.

At this rate the S&P will likely hit a new all-time high next week, possibly when the Fed puts out its statement on Wednesday night and no sign of the next rate hike is provided.

But there will likely be little excitement. An interesting element of last night’s trade was that oil rallied again, but the energy sector actually closed weaker.

Commodities

Amongst those Chinese May trade numbers was an indication of increased oil imports. US crude inventories fell again last week. There has been another pipeline attack in Nigeria. The US dollar index is down 0.3% at 93.56.

Add it all up and West Texas crude is up US$1.10 at US$51.53/bbl.

China was also importing buying base metals in May. Seems like the commodity funds picked the wrong day to bail out on Tuesday. In a session smacking of short-covering, lead rose 1%, aluminium 2%, zinc 3% and nickel 4%. Only copper stood still.

Iron ore fell US20c to US$52.10/t.

Having stalled for three days, gold appears to have decided the dip in the US dollar last night was enough reason to buy once more. It’s up US$19.30 at US$1262.50/oz.

The Aussie is up 0.4% at US$0.7485.

Today

The SPI Overnight closed up 9 points.

Presumably yesterday’s selling in the materials sector will turn into buying today on base metal and gold strength.

Chinese inflation numbers for May are due today.

ECB president Mario Draghi will speak tonight.

Rudi will make his weekly appearance on Sky Business today, 12.30-2.30pm.
 

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article 3 months old

Challenges Mounting For Retailers

- Oz retail sales strong, currently
- House prices and rate cuts supportive
- Income growth negligible
- Housing boom temporary


By Greg Peel

What is a “normal” interest rate?

Effectively it is the level of cash rate a central bank can set that ensures an economy is neither overheating nor receding, but rather ticking along nicely at a “normal” pace. Which brings us to the next question: Are interest rate cuts always a good thing for markets, and hikes always bad?

If we consider the rally in the ASX200 which has occurred since the RBA’s surprise rate cut in May, and assumptions of further cuts to come, we would have to conclude yes: rate cut good, rate hike bad. But to take such a simplistic approach is to ignore the reason behind any change in policy, which is where “normal” comes in.

One of the sectors to enjoy the benefits of the May rate cut is retailers. The thesis is simple: Rate cuts mean lower mortgage payments means more money in punters’ pockets to spend, and lower rates mean higher house prices mean greater perceived household wealth means greater incentive to spend.

Consumer confidence duly rose following the May rate cut. But did anyone stop to think just why the RBA was forced to cut?

While Australian retail sales growth slowed in early 2016 to an annual pace of 3.6% over the year to April, for some time now retail sales growth has outpaced lacklustre underlying income growth, notes Deloitte Access Economics. Sales growth has instead been driven by rate cuts and rising housing wealth.

The Australian economy has to date offered strong resilience in the face of falling commodity prices and rapidly declining mining investment, but quite a toll has nevertheless been taken on national income growth. It is against this backdrop that the RBA announced its May rate cut. “Many of the challenges to the Australian economy to which the Reserve Bank is responding,” notes Deloitte, “are also challenges for retail”.

A rate cut might be seen as a form of stimulus, but if an economy needs such stimulus clearly there is something wrong with the economy. If a central bank raises its cash rate to levels above normal, it is to put the brakes on an economy growing too fast. If it works the central bank can then cut its rate again in order to prevent the economy slowing down too fast, but any rate above normal suggests a positive economic environment.

If a central bank raises its cash rate when rates are below normal, as in the Fed last December, the negative of a rate hike is outweighed by the positive implication of a recovering economy. If the cash rate is cut when already below normal, this implies a safety net but confirms the economy is in trouble.

If a central bank cuts its cash rate from historically low to historically lower, the economy is in quite a lot of trouble. Is this the appropriate time for consumers to rush out and update their wardrobes?

Deloitte notes the current 3.6% retail sales growth rate is being driven by non-food retailing, with clothing retailers and department stores the stand-out sectors in early 2016. Retail sales growth has been able to outstrip growth in income largely due to the willingness of consumers to run down their savings, Deloitte points out, assisted by a house price boom which provided a big boost to the housing wealth of many consumers. In addition, a boom in housing construction has encouraged spending on consumer durables, while a fall in petrol prices had diverted some income from petrol retailers to other retailers.

The difficulty now facing retailers is that many of these supports are temporary, Deloitte warns.

Many an analyst is assuming the Australian housing boom will soon slow. Further RBA rate cuts, if they are forthcoming, would prolong the boom but not prevent the inevitable. Already there are grave fears for an overheated apartment construction frenzy. When supply finally outstrips demand, prices will fall and construction will cease in their wake.

Oil prices have already rebounded considerably.

All the while the challenges to income growth are continuing, with wage growth remaining at record lows.

Real (adjusted for inflation) retail sales growth was 3.3% in 2014-15, Deloitte notes. Following that strong outcome, Deloitte’s analysts see growth slowing to 2.5% in 2015-16 and 1.9% in 2016-17.

At present, retail sales growth is balanced between outperformance in the non-mining states, particularly NSW and Victoria, and underperformance in the mining states, particularly Queensland and Western Australia. “But the likelihood is that housing markets will be less of a positive for retail going forward,” Deloitte warns, “meaning that retail sales growth may slow elsewhere through the year ahead, particularly in NSW and Victoria”.
 

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article 3 months old

The Overnight Report: Bridge Too Far

By Greg Peel

The Dow closed up 17 points or 0.1% while the S&P gained 0.1% to 2112 and the Nasdaq fell 0.1%.

Policy Shock

In his April policy statement, RBA governor Glenn Stevens concluded: “Continued low inflation would provide scope for easier policy, should that be appropriate to lend support to demand.” Inflation proved to indeed be low, so the RBA cut in May to 1.75%.

So low was inflation, as evidenced by the March quarter CPI numbers, that economists immediately pencilled in further rate cuts. August was assumed as the next move, with potentially as many as two more into 2017. Nobody expected a follow-up June cut, so yesterday economists were simply looking for confirmation that the RBA remained in an easing mode. But this was the conclusion of yesterday’s statement:

“Taking account of the available information, and having eased monetary policy at its May meeting, the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and inflation returning to target over time.”

The RBA is not in an easing mode at all. Having cut once, it has returned to a “holding stance”.

That is why the Aussie dollar shot up a cent yesterday at 2.30pm. This morning the Aussie is 1.2% higher over 24 hours at US$0.7458.

It’s also why the ASX200, having peaked at 32 points up on the day around lunchtime yesterday, was back to square by 3.20pm. A slight recovery thereafter left a close of up 10 points.

Among those sectors suddenly turning tail were the banks, although they still managed to close with a sufficient gain to offset further insurance company selling in the financials sector. Utilities managed a flat close, while telcos fell 0.4% and consumer staples 1.0% as yield-plays lost some of their gloss. Although the flipside is the benefit of the Fed supposedly not raising.

The Fed not raising implies less strength in the greenback, so the resources sectors were able to lead the gains yesterday to offset the losses in other sectors, thanks to higher commodity prices. Materials rose 1.1% and energy 1.7%.

But for local investors, it’s back to square one. If the ASX200 was to push up through 5400 as the technicals have been suggesting, it would require a combination of a lower local interest rate and a subsequently weaker Aussie dollar to provide support. That doesn’t look like happening now, so we have to look forward past the June Fed meeting, the Brexit vote and the local federal election towards the August result season before – left field events notwithstanding – this market finds a new impetus.

Perhaps that impetus could come from rising commodity prices – oil closed above 50 last night and iron ore is up another 3% -- but just how far can these rallies run when capacity is idled?

Getting High

WTI crude rallied 1.4% last night to its first close above US$50/bbl in ten months. Disruptions in Nigerian supply aside, the oil market has begun to focus more on rising global demand.

The energy sector drove Wall Street higher last night, backed up by an ongoing feeling of relief following the Fed’s apparent back-down on a summer rate hike. Having closed above 2100 on Monday night, the S&P500 was also supported by the technicals, with traders beginning to eye off the all-time high of 2134.

But while the S&P500 is the traders’ preferred indicator, being a broad market, cap-weighted index, the antiquated Dow average still has lingering power. When the Dow hit 18,000 last night, the sellers moved in.

Round numbers are always difficult to breach in one go. The S&P is still sitting above 2100, but clearly more work will need to be done to get to the Dow all-time high of 18,188.

Next week’s June Fed meeting is no longer as critical as it was a week ago, given no one is expecting a rate hike. Then there’s the Brexit vote, which is the big unknown for markets. Perhaps new all-time highs on Wall Street will have to wait until a Brexit outcome is clear.

Then there’s the small matter of a looming presidential election, which many believe will also serve to keep the Fed at bay. Rate hike expectations have shifted away from the summer and towards year-end, with September a chance but December now preferred. By December, the Fed will know who will be controlling fiscal policy for the next four years.

Commodities

West Texas crude is up US71c at US$50.43/bbl. Many are assuming 50 is the line in the sand for the recovery rally, given it is a sufficient price to trigger the restart of idled production. The US Energy Information Administration nevertheless begs to differ.

“Low oil prices continue to cut into domestic oil production, with US monthly oil output not expected to start steadily increasing until the end of 2017,” said an EIA statement last night. This implies oil prices still have further upside on increasing demand.

The Fed-inspired base metals rally of the past few days came to an abrupt halt last night as commodity funds decided a weaker US dollar is not in itself enough to suggest higher prices. Copper was slapped 2.7% in London, while lead fell 2% and nickel and zinc 1%. Only aluminium was spared, with a 0.5% gain.

Iron ore rose US$1.70 to US$52.30/bbl.

The US dollar index is down 0.2% at 93.84 but gold remains steady at US$1243.20/oz.

Today

The SPI Overnight closed down 18 points or 0.3%. The RBA statement has taken the wind out of the sails.

Locally we’ll see housing finance numbers out today, while much attention will be paid to the release of China’s May trade data.

Vicinity Centres ((VCX)) will host an investor day today.
 

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article 3 months old

Wait-And-See RBA To Encourage Larger Aussie Rebound

Please note: This article contains a selection of tables which cannot be reprinted here. To view these tables please refer to the original story on the FXCM website (direct link below).

By David Song, currency analyst, FXCM

- Reserve Bank of Australia (RBA) to Keep Official Cash Rate at Record-Low of 1.75%.

- Will Governor Glenn Stevens Keep the Door Open for Lower Borrowing-Costs?

Trading the News: Reserve Bank of Australia Interest Rate Decision

According to a Bloomberg News survey, 25 of the 26 economists polled forecast the Reserve Bank of Australia (RBA) to keep the benchmark interest rate at the record-low of 1.75%, but the fresh batch of central bank rhetoric may prop up the Australian dollar and generate a larger rebound in AUD/USD should Governor Glenn Stevens and Co. soft their dovish outlook for monetary policy.

Why Is This Event Important:

The RBA may largely endorse a wait-and-see approach over the remain of 2016 after cutting the Official Cash Rate (OCR) to a fresh record-low of 1.75% in May, and a shift in the policy outlook may prop up the Aussie over the near to medium-term should the central bank show a greater willingness to gradually move away from its easing cycle.

Expectations: Bullish Argument/Scenario

Signs of a stronger-than-expected recovery accompanied by the improvement in the terms of trade may encourage the RBA to adopt a more upbeat outlook for the region, and the Australian dollar may face a bullish reaction should the central bank talk down bets for lower borrowing-costs.

Risk: Bearish Argument/Scenario

Nevertheless, the slowdown in private-sector consumption paired with the contraction in business investment may force Governor Stevens to further support the rebalancing of the real economy, and the higher-yielding currency may face near-term headwinds should the central bank keep the door open to further embark on its easing cycle.

How To Trade This Event Risk

Bullish AUD Trade: Growth Rate Slows to Annualized 2.8% or Lower

  • Need green, five-minute candle following the rate decision for a long AUD/USD trade.
  • If market reaction favors a bullish aussie position, buy AUD/USD with two separate lots.
  • Set stop at the near-by swing low/reasonable distance from entry; look for at least 1:1 risk-to-reward.
  • Move stop to breakeven on remaining position once initial target is met, set reasonable limit.

Bearish AUD Trade: Australia GDP Report Exceeds Market Forecast

  • Need red, five-minute candle to consider a short AUD/USD position.
  • Carry out the same setup as the bullish Aussie trade, just in the opposite direction.

Potential Price Targets For The Release
 

AUD/USD Daily


 

  • Longer-term outlook for AUD/USD remains tilted to the downside as the Relative Strength Index (RSI) preserves the bearish momentum from March, but the pair may continue to retrace the selloff from earlier this year should it break out of the downward trend from April, with a break/close above 0.7380 (50% retracement) to 0.7390 (78.6% expansion) to open up the next topside region of interest coming in around 0.7490 (61.8% retracement) to 0.7500 (61.8% expansion).
  • Key Resistance: 0.7848 (June 2015 high) to 0.7860 (61.8% expansion)
  • Key Support: 0.6826 (2016 low) to 0.6830 (161.8% expansion.

The Reserve Bank of Australia (RBA) unexpectedly cut the Official Cash Rate (OCR) to a fresh record-low of 1.75% in May, with Governor Glenn Stevens and Co. arguing that ‘the inflation outlook provided scope for a further easing in monetary policy’ as the central bank curbs its outlook for inflation. Moreover, the RBA warned ‘employment growth has slowed from the strong pace of last year and leading indicators of employment have been somewhat mixed of late,’ and the central bank may further embark on its easing cycle in 2016 in an effort to further assist with the rebalancing of the real economy. The Australian dollar slipped below the 0.7600 handle following the RBA rate-cut, with AUD/USD extending the decline throughout the day as it closed at 0.7483.
 

Reprinted with permission of the publisher. The above story can be read on the website here.

The views expressed are not by association FNArena's (see our disclaimer).

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article 3 months old

The Overnight Report: Flip Flop

By Greg Peel

The Dow rose 113 points or 0.6% while the S&P gained 0.5% to 2109 and the Nasdaq added 0.5%.

Interest Rate Tango

Three factors impacted on the local market yesterday: Friday night’s weak US jobs number; yesterday’s weak local inflation gauge; and the storms wreaking havoc on Australia’s east coast.

While Wall Street would have been surprised if the Fed chose to hike again as early as this month, Friday night’s shockingly weak US jobs number left markets in no doubt it’s not going to happen. Janet Yellen has since implied as much overnight. This has two implications for Australian stocks.

Firstly, the resultant plunge in the US dollar lifted commodity prices and in particular the gold price, lighting a fire under the materials sector yesterday. While gold stocks rallied hard, 4% gains for both BHP Billiton ((BHP) and Rio Tinto ((RIO)), thanks to stronger iron ore and copper prices, helped drive the materials sector up 3.8% to be the clear winner on the day.

Secondly, a move up in US rates makes Australian yield stocks incrementally less attractive to US investors, hence the fact the weak jobs number has killed that off for now provided incentive to buy the yield-payers, being the banks, utilities, consumer staples and to some extent, BHP and Rio. Telcos should also be in that group, but they stayed put yesterday, probably because of weekend outages due to the storm.

The flipside of no US rate hike being positive for yield-payers is an RBA rate cut also being positive for yield-payers. From May into June we’ve seen expectations of further RBA rate cuts leap up on the weak March quarter CPI result and fall back again on the strong March quarter GDP result. Yesterday the Melbourne Institute’s monthly inflation gauge showed a 0.2% fall in headline inflation in May.

That follows April’s 0.1% gain, and takes annual inflation to 1.0%, down from 1.2% in April. That’s the lowest annual reading ever in the history of the gauge. Result? The market is now back to expecting further RBA rate cuts – not today, but probably in August and beyond.

So yesterday the yield-payers were more attractive on two counts. At 0.3%, yesterday’s rise in the financials sector reflected a balance between bank buying and insurance company selling, thanks to the storm. Consumer discretionary missed out, likely due to the impact on retail trade, albeit this sector often sees benefits down the track as affected households look to replace damaged furniture, whitegoods et al.

Add it all up and we saw a 0.8% gain for the ASX200 to 5360. The lead-in is positive again overnight, suggesting further upside today. Technically, if the market holds above 5350 the trend remains to the upside.

Coming Months?

Wall Street opened higher last night before settling down to await a speech by Fed chair Janet Yellen which by coincidence happened to be scheduled for one trading day after the weak jobs number.

In her speech, Yellen echoed the view of many in the market that one should not read too much into one strange looking data release, ie the surprisingly weak May jobs number, but instead concentrate on the trend. Assuming the trend remains intact, the Fed still intends to raise interest rates.

Yellen also confirmed the view of many in the market that the next hike will not be this month, ahead of the Brexit vote. The Fed chair made specific mention of the potential of this event to impact heavily on market sentiment. July would then tighten in the odds, but for one rather glaring omission.

In her previous speech, Yellen had underscored the more hawkish views of her FOMC colleagues in suggesting the next rate hike would occur in “the coming months”. Now, while in theory every month is “coming”, hence this hardly nails down the date, Wall Street took this to mean quite possibly June/July. But last night, all of a sudden, the “coming months” suggestion was gone from Yellen’s rhetoric.

Thus while Wall Street had already assumed the weak jobs number took both June and July off the table, Yellen’s comments, or lack thereof, have now reinforced that view.

This was enough to kick Wall Street on last night to its strongest closing level in 2016.

Commodities

A decent jump in the oil price also contributed to Wall Street strength. Oil did not participate in the post jobs number commodity price rally on Friday night because of the first jump in the US rig count in eleven months. But with Yellen’s effective confirmation, and further pipeline attacks in Nigeria, last night West Texas crude rose US82c to US$49.72/bbl.

Copper was the star base metal on Friday night while the others were caught in the headlights, but last night aluminium and lead rose over half a percent, and nickel and zinc both rose around two percent. Copper had a rest.

Iron ore is up another US$1.10 at US$50.60/t – back above the psychologically critical 50 mark.

Gold had its big move on Friday night and is steady at US$1244.70/oz, thanks to the US dollar index ticking back up 0.2% to 94.04.

The Aussie is steady at US$0.7365.

Today

The SPI Overnight closed up 15 points or 0.3%.

We saw 4% gains for BHP and Rio on the local market yesterday, and in London overnight the big miners each gained 6%. While there’ll be an element of double-counting, gains in iron ore and oil last night should ensure further strength today.

At 2.30pm the RBA will release a policy statement that will leave the cash rate unchanged, so the market will be very eager to read between Glenn Stevens’ lines to gauge whether an August rate cut is still a likelihood.

Meanwhile, as the storm rages on through Tasmania and damage begins to be assessed in Queensland and NSW, the scramble is on amongst analysts to figure out which of the insurers will be hardest hit and by how much, and which have sufficient reserves set aside.

Rudi will link up with Sky Business via Skype at around 11.15am today to discuss broker calls.
 

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All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

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