Tag Archives: Bonds/Interest Rates

article 3 months old

The Monday Report

By Greg Peel

Friday

I mentioned on Friday morning, with regard Thursday’s trade on the local market, that telcos had traded up 0.8% and utilities down 1.7%, with no real rhyme or reason. Well on Friday, telcos were down 1.2% and utilities up 1.0%, so go figure that one.

Beyond that, there was an air of “Friday” about Friday’s trade. We had the run-up into the technical target range of 5300-5400 and having done so, ran out of any reason to push higher. Materials fell 1.2% with a bit of help from weak metal prices but energy was down 0.5% despite a stronger oil price.

Consumer staples led the market down 1.5% as traders took profits after having successfully ridden the rally back in the supermarkets from oversold conditions, to the point further catalysts are not apparent. Discretionary (+0.8%) is getting more attention now thanks to the RBA’s urgent change in policy.

With Wall Street down on Friday night, the SPI down 15 points and the weekend’s Chinese data releases disappointing, it looks like we’ll be in for some further consolidation as the new week begins.

It’s Structural

All last week on Wall Street we saw large US chain stores lining up to report earnings misses and suffer share price drops as a result. On Friday it was JC Penney’s turn to join the queue, falling 3%. By Friday night an ETF made up of all these big brick & mortar retail names was down 15% for the week alone, prompting concerns for the US economy.

The consumer represents two thirds of US GDP. If Americans are not spending, then the US economy is in trouble. On Friday night the April retail sales numbers were released, which were hoped would throw some light on the issue.

Vale bricks & mortar. April sales rose 1.3%, exceeding forecasts of 1.0% and marking the biggest monthly gain in a year. While autos represent a chunky component, sales ex-auto were still up a solid 0.8%. Outside of autos, one of the best performing segments was “non-store sales”. In other words, online.

Good news – the US economy is not in trouble. Bad news – such a stellar result will not have been missed by the Fed. Could June once again be back in play?

On the sales result, the US dollar index rose another 0.5% to 94.38. The greenback continues to rebound from what were previously encouraging lows, thus weighing on shares of multinationals. The US two-year yield spiked up on a return of the June possibility, before settling back to be down one basis point. But the ten-year yield closed down 5 basis points to 1.71%.

This “flattening of the yield curve” suggests that while the Fed may hike again in the short term, in the longer term the bond market does not anticipate strong US growth. Flat yield curves do not offer banks much opportunity to profit, thus the financials were sold down on Wall Street on Friday night. Slow economic growth does not bode well for consumer staples, so Wal-Mart led the Dow down.

The Dow closed down 185 points or 1.1% while the S&P fell 0.9% to 2046 and the Nasdaq lost 0.4%. The S&P breached its 50-day moving average at 2054 and thereafter the selling accelerated. Typical “risk-off” ahead of a weekend was exacerbated by a monthly options expiry.

Commodities

The sell-off on Wall Street had nothing to do with oil prices, which for once were very flat on Friday night. West Texas was barely changed at US$46.38/bbl and Brent was down a tad at US$47.80/bbl.

Thursday night’s selling on the LME gave way to retrospection on the strong US sales result, but also squaring ahead of the weekend’s data out of China. Only a 1% rally in zinc is worth noting.

Iron ore fell US90c to US$53.50/t.

Despite the stronger greenback, gold managed to rally US$9.60 to US$1272.80/oz. Because of the stronger greenback, and a change in trend since the RBA rate cut, the Aussie fell 0.7% to US$0.7268.

The SPI Overnight closed down 15 points or 0.3% on Saturday morning.

China

On Saturday Beijing released monthly Chinese data for April.

Industrial production rose 6.0% year on year, down from 6.8% in March and missing forecasts of 6.5%. Retail sales rose 10.1%, down from 10.5% and missing 10.5% forecasts. Fixed asset investment rose 10.5% in the four months to April, down from 10.7% for the three months to March, and missing 10.9% forecasts.

So all were disappointing. But then, the March numbers had been stronger than expected so once again, we must factor in the Lunar New Year distortion. Beyond that, just how worried should the world be about an economy growing output at a 6% annual rate, retail sales at 10% and construction spending at 10%?

The Week Ahead

The minutes of the April Fed meeting will be released on Wednesday night. As usual, the market will be looking for any clues as to what the Fed might do next.

US data this week include housing sentiment and the Empire State index tonight, housing starts, industrial production and the CPI tomorrow, the Chicago national and Philly Fed indices on Thursday, and existing home sales on Friday. More grist for the Fed mill.

Japan will report March quarter GDP on Wednesday.

The minutes of the RBA’s May meeting are due tomorrow and these, too, will be closely scrutinised.

On Wednesday Australia’s March quarter wage price index result will be released – the first of the quarterly releases ahead of our own GDP result in a couple of weeks. The April jobs numbers will be released on Thursday to a country in election mode.

God help us.

On the local stock front, Elders ((ELD)) will report earnings today, while DuluxGroup ((DLX)), James Hardie ((JHX)) and Ozforex ((OFX)) will report tomorrow. There is another handful of AGMs to be held this week and Woodside Petroleum ((WPL)) will hold an investor day on Friday.

National Bank ((NAB)) goes ex tomorrow.

Rudi has a busy TV appearances schedule ahead of him this week. On Tuesday he'll Skype-link with Sky Business around 11.15am to discuss broker calls. Later that day, he'll host a webinar for clients of VFSGroup. On Wednesday he'll host Your Money, Your Call Equities (8-9.30pm). On Thursday, he'll appear twice; first as guest on Sky Business (12.30-2.30pm) then later as guest on Switzer TV, between 7-8pm. On Friday, he'll linkup again through Skype, probably around 11.05am, to discuss time broker calls one more.

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: Retail Wreck

By Greg Peel

The Dow closed up 9 points while the S&P was flat at 2064 and the Nasdaq fell 0.5%.

By Greg Peel

Mixed Bag

I thought thirty points down in the SPI ahead of yesterday’s open on the local market looked a bit pessimistic but we got there early on, only to stumble back by the close. The 13 point drop in the index for the session represents no more than Westpac going ex.

That’s also why the financials sector was down 0.9% yesterday but elsewhere we closed with very mixed results, suggesting the market is trying to sort out its allocations as we flirt with the highest index levels of 2016 to date.

Myer ((MYR)) posted a less worse than expected result and shot up 7%, dragging consumer discretionary up 0.9%. Myer is nevertheless the second most shorted stock on the market – 14% according to ASIC’s most recent data – and thus short-covering was a primary driver.

Energy jumped 3% on the rise in oil, as this sector just refuses to settle down. A tick up in iron ore saw materials up 0.7%. Thereafter, funny things were going on in the defensives with telcos up 0.8% and utilities down 1.7%.

The ASX200 is sitting between 5300 and 5400, right in the middle of what has been a technical target range for the past couple of months. Following on from central bank domination in April the macro story has gone a bit quiet, leaving the current swathe of micro-story corporate earnings results, quarterly trading updates and AGMs to provide impetus in individual sectors, but not in clear index direction.

We have Chinese monthly data out over the weekend and the eurozone GDP result tonight, which may or may not spark some movement. We have Japan’s GDP next week. But it is likely we will need to wait to June for some more macro action, when the Fed meets and the Poms hold their referendum.

The King is Dead

Having not released any ground-breaking new iThings for a while, Apple has been on the slide. Last night manufacturers who make components for iThings reported weaker than usual demand in the second quarter, and Apple shares fell further. The result is that the most recent company to be included in the Dow, on the basis of it being the biggest company in America, is as of last night no longer the biggest company in America.

Long live the artist formerly known as Google. Alphabet is now the biggest company in America – a title that for so long belonged to Exxon but not, for obvious reasons, in recent times. Alphabet is not in the Dow.

Nor are any of America’s big department store and apparel chains in the Dow, which is probably just as well. Following on from Macy’s 14% plunge on Wednesday night, Kohls fell 9% last night on an earnings miss and after the bell, Nordstrom is down 17% for the same reason. JC Penney reports tonight.

While consumer discretionary alone is not enough to send Wall Street hurtling southward, ongoing concern over just why these chain store results are so bad is weighing on investor sentiment, and on hopes for the US economy. Is it structural? Because that’s okay. That’s just a changing of the guard. Is it because of a warm winter? Because that’s just seasonal. Or is it because the US consumer is simply not spending? Because that’s a worry.

It’s probably a conflagration of all three, but with the US savings rate running at 5%, the latter remains an issue in the June quarter. Americans are buying cars, and spending on home renovation, but they’re just not buying clothes and accessories – what women would call “staples” and men would call expensive and unjustifiable indulgences (as they queue up at Home Depot). Gucci belts, it would seem, have been tightened.

Also weighing on Wall Street last night was the weekly new jobless claims number. I usually don’t follow this weekly number too closely given its volatility but last night’s sudden jump to a 14-month high of 294,000 new claims, coming off the back of the weak April non-farm payrolls result, has Wall Street wondering whether the solid run for the US labour market these past few years has now reached a peak.

Of course the balance is yet another reason not to expect the Fed to raise in June. So having been up over 80 points early and down over 80 points mid-session, the Dow closed flat, as did the S&P. The Nasdaq’s drop was all about Apple.

Commodities

You can’t keep a good oil price down at the moment which is rather disconcerting. The higher it rises…

West Texas is up US40c at US$46.39/bbl and Brent is up US62c at US$47.92/bbl.

Base metal traders in London did not like the US jobless claims number at all, nor the fact that the US dollar index rose 0.4% to 94.15 when such a result would suggest the opposite. Aluminium fell 1%, copper and zinc fell 1.5%, nickel fell 2% and lead and tin fell 3%.

After a one-session bounce, iron ore is down US$1.00 at US$54.40/t.

Gold is down US$13.50 at US$1263.20/oz.

The Aussie is down 0.8% at US$0.7322.

Today

The SPI Overnight closed down 11 points or 0.2%.

The US retail sales result for April is out tonight, just to add further fuel to the consumer fire. The eurozone will release its March quarter GDP result tonight and tomorrow, Beijing will release April retail sales, industrial production and fixed asset investment numbers.

Before that, Oil Search ((OSH)) and Santos ((STO)) will both hold AGMs today.

Rudi will Skype-link with Sky Business at around 11.05am to discuss broker calls and then re-appear as guest on Your Money, Your Call Fixed Interest, 7-8pm.
 

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: Earnings Bite

By Greg Peel

The Dow closed down 217 points or 1.2% while the S&P fell 1.0% to 2064 and the Nasdaq lost 1.0%.

Technical Madness

It was another case of the computers going nuts from the opening bell on Bridge Street yesterday, this time to the upside, sending the ASX200 up 83 points in a blink. By midday the index was only up 27 points – basically where it ended the session – suggesting that’s about what where we should have been from the start.

Yes, it had been the biggest day on Wall Street in two months and oil prices were higher, likely triggering the algorithms as the rest of the market stood aside. It is becoming increasing dangerous to play the opening rotation – something ASIC should be having a chat to the ASX about. But Wall Street’s rally was largely technical, and itself computer-driven, and lo and behold the ASX200 breached a longstanding upside technical target of 5400 from the open before the buying simply disappeared.

Back on earth, we saw the rotation trade of Tuesday – selling resources and buying yield through the banks and telcos – partly reverse. Interestingly, it was materials that fully reversed, rising 2.7% despite another fall in the iron ore price, while energy managed only a 0.3% recovery despite a higher oil price. The banks only fell back 0.1% and the telcos actually rose again, up 0.5%.

Put it down to chatter from CEOs yesterday but clearly the “value” players have been out in force since the bottom of the market earlier this year, buying up beaten-down large caps because they lack the imagination to see that often the world actually changes. Thus stocks like BHP Billiton ((BHP)) and Woolworths ((WOW)) had another good run yesterday and have had very good runs all the way from the bottom. Money has certainly been made in the short term, but what of long term trajectories?

One problem is the “growth” stories of 2015 have to a large extent run too far away in 2016, leaving investors disinclined to play at stretched PEs. This has been reflected in the past couple of weeks in the number of ratings downgrades implemented by major broking houses for no other reason than over-valuation. Yet by the same token, short-side traders are also abandoning the market. The shorters have been increasingly burnt, it appears, and for the time being have crawled back into their holes.

The ASX200 has now hit 5400 which on a technical basis, should open up the door to 5700 and ultimately 6000 if the tea leaves are accurate. But what will get us there? Ongoing buying-back of overproducing miners and yesterday’s-model supermarkets? Pushing milk powder and Big Data names ever higher still? A Turnbull victory? Another RBA rate cut?

I’d suggest that if we’re going to see 6000 again we would have to see the economies of China and the US both pick up.

Australian consumers are brimming with confidence nevertheless. Westpac’s confidence index jumped 8.5% this month to its highest level in two years. Mind you, one might see it as “upside-down” confidence. The RBA cut its cash rate, which it wouldn’t do if the Australian economy was strong, and the federal budget produced no howlers, albeit pre-election budgets never do.

Speaking of the RBA, there would have been some head-scratching going on in Martin Place yesterday after March housing loan data showed a resurgence in loans to investors and a drop in loans to owner-occupiers. The central bank was able to cut the cash rate because the opposite has been true in prior months, supposedly taking some heat out of the housing bubble.

Structural or Cyclical?

Iconic US department store Macy’s posted its seventh quarter of declining sales growth last night and missed broker forecasts, sending Macy’s shares down 14% and dragging the whole US bricks & mortar consumer sector down with it, including America’s Bunnings (Home Depot) and America’s Woolies (Wal-Mart), both Dow names.

The question on everyone’s mind was: Does ongoing decline represent the slow death of bricks & mortar retail as online rises, or does it reflect a presently weak US consumer? Commentary tended to favour the latter, although the elephant in the room must be Amazon’s forecast-smashing result posted last month.

If it is the latter, then the US economy is not going to be picking up pace anytime soon.

Meanwhile Disney (Dow) posted a rare earnings miss with its result, and subsequently fell 4%. The combination of Disney and retail turned Tuesday night’s rally on Wall Street, which seemed no more than technical, into a full reversal, this time on reality, despite another strong jump in oil prices.

Commodities

Last night’s weekly US oil data showed a bigger than expected drop in inventories and another reduction in production. As a result, West Texas crude is up US$1.44 or 3.2% to US$45.99/bbl and Brent is up US$1.83 or 4% at US$47.30/bbl.

Just when it looked like oil might head south again, the opposite is true.

And iron ore has also bounced, up US$1.20 to US$55.40/t.

There has been a bit of assistance from the US dollar which, having risen back steadily for several session, last night fell 0.5% on its index to 93.81. This assisted all commodity prices. Base metals were mostly 0.5-1% stronger, although zinc jumped 3%.

Gold is up US$11.40 at US$1276.70/oz.

Despite the drop in the greenback, the Aussie is holding its ground at US$0.7377.

Today

The SPI Overnight closed down 33 points or 0.6%. Not sure what Macy’s and Disney has to do with Australian banks and resources.

The Bank of England will hold a policy meeting tonight but despite some surprisingly weak data of late, is not expected to budge ahead of the increasingly worrying Brexit vote.

Before that we will see AusNet Services ((AST)) post earnings today and Myer ((MYR)) provide a quarterly update. AMP ((AMP)) and Westfield Corp ((WFD)) will hold AGMs.

Westpac ((WBC)) will go ex today which will distort the financials sector performance.

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

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

The Overnight Report: Mystery Rally

By Greg Peel

The Dow closed up 222 points or 1.3% while the S&P gained 1.3% to 2084 and the Nasdaq rose 1.3%.

Rotation

For a long time analysts have been suggesting the strong rebounds in oil and iron ore prices these past couple of months would not last given the fundamentals remain unsupportive in the medium term. Yesterday’s action on the local market smacked of investors suddenly fearing they might be right.

The energy sector closed down 2.3% and materials 2.0%. Yet the index closed up 0.4%, so clearly there were offsetting trades. But they were hardly market-wide.

Every other sector closed the day little changed except two – the banks (+1.5%) and telcos (+0.9%). Here we see a very old-fashioned “rotation” trade among Australia’s mega-caps, out of resources and into the banks and Telstra.

With the bank reporting season now out of the way the market knows where the sector stands. Yields on offer are still hard to ignore and become even more attractive if the RBA cuts again. If the RBA is not already set to cut again, lower commodity prices provide further impetus. It must be noted that lower rates are a drag on bank earnings, but rate cuts provide the opportunity for the banks to reprice their mortgage rates, ie not pass on the full cut.

Telstra has its issues in adapting to a more competitive industry but still pays a hefty fixed-quantum dividend that analysts expect to rise further very soon.

Oil prices rebounded solidly overnight, so it will be interesting to see what the rotators plan to do today. Iron ore fell sharply again nevertheless.

Commodities

Last night the US Energy Information Administration issued a report which raised its 2017 average WTI price forecast by a whopping 25% to US$50.65/bbl. This seems to counter current fears that ongoing excessive OPEC production will only send prices lower again.

But in actual fact, the EIA also raised its 2017 US production forecast to 8.19m barrels per day from a prior 8.04m. The difference is in the rarely discussed demand side. The EIA believes growing demand out of China and India will usurp increased production to the extent prices will rise.

This was one reason to buy oil again last night, after having sold it the night before. Another reason was supply outages, specifically in Canada, where fires have shut down 1.6m barrels per day of production that will take a week to restart, and in Nigeria, where an escalation of hostilities have prompted Chevron and Shell to evacuate non-essential staff.

This was enough to send West Texas crude US$1.31 or 3% higher last night to US$44.55/bbl and Brent up US$1.84 or 4% to US$45.47/bbl.

No one paid much attention to Kuwait, which last night announced a targeted 50% increase in production over the next four years.

Base metals quietened down last night having tumbled on Monday night. Lead, nickel and zinc rebounded slightly while aluminium, copper and tin held their ground.

Iron ore fell US$1.40 or 2.5% to US$54.20/t.

The US dollar index ticked up another 0.1% to 94.24 and gold is relatively steady at US$1265.30/oz.

The Aussie has bounced back somewhat after its precipitous fall, up 0.8% at US$0.7372.

Technical

The rebound in the oil price was enough to provide a lift on Wall Street last night but now that the direct correlation has faded, commentators were left scratching their heads as to why the US indices had their best session in two months. If anything, recent talk has been of the rally running out of steam.

There may be some clue in the fact three Dow components hit new all-time highs last night – McDonalds, Johnson & Johnson and Home Depot. The three consumer stocks are all consistent yield payers (In Wall Street Land, 2% is considered “yield”), and their strength would suggest ongoing reverberations from last week’s soft US jobs number and subsequent assumptions the Fed will not move in June.

But perhaps the real clue lies in the fact all of the Dow, S&P and Nasdaq posted equivalent 1.3% gains. Such consistency is rare. Traders noted that resistance in the broad market S&P500 was breached at 2074 thanks to the energy sector, opening the door to the next resistance level of 2082. The S&P bumped up against that level for a while before finally settling at 2084.

When 2074 was breached, the computers kicked in. Computers tend not to be stock pickers but market-buyers. At 2082, the computers took profits, but by then momentum traders were in on the act and probably FOMO traders as well.

(Fear of missing out.)

But when all is said and done, in a world where economic data is soft and corporate earnings are weak, central bank stimulus rules.

Today

The SPI Overnight closed up 30 points or 0.6%, no doubt anticipating a rebound in the local energy sector today.

Local housing finance data are out today for March, while Westpac will release its monthly consumer confidence survey.

CSR ((CSR)) will post its earnings result today.

News overnight that the Thailand government has ordered the Chatree gold mine closed will no doubt impact on the share price of Kingsgate Consolidated ((KCN)) 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)

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

The Overnight Report: No Correlation

By Greg Peel

The Dow closed down 34 points or 0.2% while the S&P rose 0.1% to 2058 and the Nasdaq gained 0.3%.

Eager

It was another up and down day on the local bourse yesterday, with up winning in the end. Wall Street had closed modestly positive on Friday night despite a weak jobs number, although that weakness likely keeps the Fed at bay in June.

The numbers to consider on the day were the Chinese trade data and the local ANZ job ads series.

Chinese exports fell 1.8% year on year in April having risen 11.5% in March. Imports fell 10.9% having fallen 7.5% in March.

The export number disappointed, as it appears to have killed off what looked like a Chinese economy finally in recovery following various stimulus measures. The import number is troubling as this reflects the new, domestic-focused economy Beijing is trying to engineer. But we go through this same charade every year – Chinese numbers are not seasonally adjusted, and thus often wildly distorted on the move into and out of the Lunar New Year holiday.

It appears that’s how the Australian market took the results yesterday. The materials sector was the only sector to finish in the red, but only by 0.6%. It’s not the stuff of panic. Energy, on the other hand, rose 1.2% to be one of the better performing sectors on the day.

Australia had the chance to respond to the Chinese numbers before the rest of the world. Overnight, the rest of the world has panicked. More on that in a moment.

Australian job ads fell 0.8% in April and remain broadly unchanged in number since October last year. “The number of job ads has been broadly flat now for six months,” ANZ noted. “This follows a period of substantial growth in employment, and some modest slowdown should probably not be surprising”.

So all up, no great surprise in either the local or Chinese numbers, it would seem. By the close on the ASX every sector bar materials had put on a relatively even performance to the upside, with consumer staples probably the only stand-out with a 1.7% gain. The banks were up 0.5% on Commonwealth Bank’s ((CBA)) not too bad result, while Orica’s ((ORI)) result was poorly received but again, probably not a major shock for a company selling explosives to miners.

Right now it looks like the market wants to be above 5300, and so doing push towards 5400 and beyond. The RBA has cut and will likely cut again, the Aussie has come off strongly as a result and also thanks to a stronger greenback, and in another couple of months we will have a new-look parliament, which throws up all sorts of possibilities. Majority in the Senate? Now that would be a breath of fresh air, whichever side of the aisle you sit. Australian governments of both stripe have been hamstrung for a decade.

Commodities

The Australian market may not have seen the Chinese trade numbers as particularly ominous but that’s not how commodity markets saw them last night.

West Texas crude is down US$1.32 or 3.0% to US$43.24/bbl and Brent is down US$1.70 or 3.8% to US$43.63/bbl. Oil markets were further affected by the announcement out of Saudi Arabia that the Crown Prince had moved aside the longstanding oil minister and appointed his own technocrat, only serving to fuel uncertainty.

Base metals markets have been hit in recent selling by the speculators and commodity funds who chased prices up in the February rebound, and last night, thanks to China, that trickle became a flood. Lead fell 1%, tin 1.5%, copper 2%, aluminium and zinc 2.5% and nickel 4.5%.

Iron ore fell US$2.10 or 3.6% to US$55.60/t.

Commodity prices were not helped by the US dollar, which rose another 0.3% on its index to 94.15 thanks to a lower yen, which responded to talk out of Tokyo that currency intervention has not been ruled out.

Gold is down US$24.30 at US$1263.40/oz.

Nor were commodity prices helped by an article appearing in the China People’s Daily – the Communist Party propaganda rag – suggesting the government was not prepared to use excessive investment or rapid credit expansion to counter subdued growth.

The Aussie is down another 0.7% at US$0.7314 thanks to the stronger greenback and weaker commodity prices.

Material Move

The US materials sector led down Wall Street last night, aided by energy. But the firm correlation with oil prices seen earlier in the year is now but a memory and other sectors managed to post sufficient gains to offset the resource sector drag, particularly healthcare. Volatile biotech had a good day, helping the Nasdaq up 0.3% when the Dow was down 0.2%.

There is much talk on Wall Street now that the market has run about as far as it can, and if nothing comes along to provide the next shot of upside adrenalin, surely it must go down. Many are worried that oil prices are set for a pullback. While the correlation has abated for now, there is little doubt it will be back in spades were oil prices to fall out of bed once more.

The S&P500 remains little changed for the year.

Today

The SPI Overnight closed down 16 points or 0.3%.

China will release inflation data today. Too strong and it will kill off hopes of further stimulus. Too weak and it will exacerbate slowdown fears.

Incitec Pivot ((IPL)) will release its earnings result today and QBE Insurance ((QBE)) will hold an investor day.

Rudi will Skype-link with Sky Business at 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)

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article 3 months old

Why The Aussie Won’t Go Down

- Inflation drives rate cut
- Australian economy healthy
- Little currency relief expected


By Greg Peel

The RBA’s cash rate cut to 1.75% last week caught many in the market by surprise, not the least forex traders. On the announcement, the Aussie plunged from above US76c to US75c in a heartbeat. Subsequent unrelated strength in the US dollar drove the currency further south to US74.5c.

While the RBA highlighted lower inflation expectations as the major reason for the cut, a persistently strong Aussie dollar has been cited by the central bank for the past couple of months as providing a “complication” as Australia attempts to transition away from reliance on mining investment. It is assumed, therefore, the cut was also delivered in the hope of affecting currency weakness.

The RBA’s Statement on Monetary Policy, released on Friday, saw a cut in the central bank’s 2016 inflation forecast to 1-2%, suggesting the target 2-3% band will not be reached this year. The Aussie has since fallen to US73.5c.

Commonwealth Bank’s economists have acknowledged that the rate cut has put some pressure on the currency, but do not believe it will ultimately be a lot. Indeed, CBA is forecasting an exchange rate of US75c at the end of June and US$78c at the end of the year, unchanged from prior forecasts.

It is important to make the distinction, CBA suggests, that the RBA did not cut its cash rate because the Australian economy is weak. It cut because inflation pressures “were unexpectedly low”.

We are reminded that for several months prior to May, Glenn Stevens’ policy statements all ended with the sentence “Continued low inflation would provide scope for easier policy, should that be appropriate to lend support to demand”. Clearly the shock March quarter CPI result, showing disinflation, provided sufficient scope.

The rate cut was then appropriate because the Aussie dollar was frustrating strong, and because earlier constraint from fear of fuelling a housing bubble had been tempered by stricter lending restrictions. Moreover, prior assumptions of ongoing US rate rises have so far proven unfounded, and Japan and much of Europe have cut rates into the negative, suggesting an RBA rate cut was necessary just to bring local rates into line with global policy settings.

And in so doing, take pressure of the Aussie dollar.

CBA points out that the Reserve Bank of New Zealand has delivered 125 basis points of rate cuts – equivalent to five RBA cuts – since June last year and over that period the NZ dollar is only US2.5c lower.

One problem is that lower inflation actually supports a currency. Exchange rates are more sensitive to movements in real interest rates, CBA points out, meaning the nominal rate minus the inflation rate. If the inflation rate falls the real interest rate rises, hence the currency rises.

In Australia’s case, the Aussie has not remained elevated simply because of the differential to a weaker US dollar, but because the Australian economy is actually looking moderately but relatively solid. The unemployment rate is trending lower and the trade deficit is also falling. Rising commodity prices, fresh LNG exports and lower debt-servicing requirements due to the lower cash rate will all drive improvement in Australia’s current account deficit, CBA notes, which is supportive of the currency.

At this stage the CBA economists are assuming the Fed will hike again in June, or maybe July, which will help keep the Aussie at bay. But they don’t see too much downside. Should a series of challenging global events occur, the economists can see a drop to the currency’s 200-day moving average of US72.6c, but there it should find support.

Otherwise, CBA’s forecast of US78c by year-end remains intact.


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article 3 months old

The Monday Report

By Greg Peel

Derivative Dive

On Friday afternoon a very large trade was booked in May 5000 put options on the SPI futures contract. Clearly the deal had been agreed upon the night before, which is why the SPI Overnight closed down a surprising 47 points on Friday morning and the SPI continued to plunge when daylight trading commenced at 9.30am.

The put options were likely bought as a market hedge and were sold by local market makers, who themselves then had to “delta hedge” by selling futures contracts. Heavy selling in the SPI then dragged down the physical ASX200 from the opening bell, and within a blink the market was down 80 points for reasons that were not immediately apparent.

Then the futures selling stopped.

It took till lunchtime to be back to square, and eventually the ASX200 finished up 12 points for the day. Given a flat Wall Street on Thursday night, the only explanation for initial market weakness – until such time as the options deal was revealed – was weakness in iron ore and base metal prices but as it was, the materials sector closed up a percent on the day. Oil prices were slightly stronger overnight but energy closed down a percent.

The only other sector to finish in the red were financials, but only just, while otherwise we saw squaring up ahead of the weekend and the Friday night release of the US April jobs numbers.

The talking point of the day came from the release of the RBA’s quarterly Statement on Monetary Policy. The board has reduced its 2016 core inflation forecast range to 1-2% from a prior 1.5-2.5%, suggesting inflation will not reach the RBA’s target 2-3% range this year. Once again it is clear the weak March quarter CPI data came as quite a shock to the central bank. Not only can we see why we had a rate cut last week, the market is now baking in a second cut, if it were not already suspecting such.

By Saturday morning the Aussie was down a further 1.3% at US$0.7367, which was all to do with the RBA and very little to do with a slight tick up in the US dollar.

Goodbye June?

The US added 160,000 new jobs in April, well short of the 200,000 expected. Previous results for March and February were revised downward. The unemployment rate remains steady at 5.0% due to a tick down in participation. On the other hand, wages grew by a reasonable 0.3%, in line with expectation.

On the release of the report, a handful of major houses issued their own reports informing that prior expectations of a Fed rate hike in June had now been pulled back to September. There is one more jobs report to go before June and another Fed meeting in July but by September, June quarter GDP growth numbers will be known. (Note: the Fed meets six-weekly, not monthly).

Once again Wall Street was caught between the benefits of lower for longer rates and the unsettling reality of a slowing pace of US growth. The Dow fell and recovered and fell again, before finally recovering to finish the session up 79 points or 0.5%. The S&P rose 0.3% to 2057 and the Nasdaq added 0.4%.

While September is now the preference for some, more dovish commentators suggest that in a year which is yet to see the Brexit vote and the US election, December is the most likely option, if only to save face. The trend in US economic data would need to turn around significantly in that time to even justify December.

This is not the sought of news incoming RBA governor Philip Lowe really needs. While local inflation has forced a rapid reaction in RBA policy, the problem of the too-strong Aussie was meant to be alleviated this year by rising US rates.

Commodities

Australians can no doubt empathise with our Canadian friends who saw a 25,000 acre wildfire in Alberta grow to 250,000 acres in the space of 24 hours. While the fires have moved close to oil sands production, no infrastructure has as yet been damaged. Production has ceased nonetheless given the evacuation of local residents means there is no one there to run operations.

The fires have put a floor under oil prices for now, but has not sent them skyward, suggesting that once Canadian production is back to normal there might not be much holding oil prices up. West Texas was only slightly higher at US$$44.56/bbl on Saturday morning and ditto Brent at US$45.33/bbl.

Lower for longer rates in the US means a weaker for longer US dollar, hence base metals prices were mostly positive in London on Friday night. Nickel and zinc were the best performers with gains in excess of one percent but aluminium fell half a percent.

Iron ore fell another US$1.80 or 3% to US$57.70, to mark a fall for the week of US$7.50 or 11.5%.

While the reduced likelihood of June Fed rate hike did not impact on the US dollar index, which was up 0.1% at 93.89, gold rallied US$10.10 to US$1287.70/oz.

The SPI Overnight closed up 22 points or 0.4% on Saturday morning.

The Week Ahead

It’s a quiet week ahead for US data releases until we get to Friday, which features retail sales, business inventories and fortnightly consumer sentiment.

The eurozone will release a first estimate of March quarter GDP on Friday.

The Bank of England meets on Thursday night but nothing is expected, especially ahead of the Brexit vote.

Beijing will release Chinese inflation data for April tomorrow.

It’s now game-on in Australia, with a double dissolution election confirmed for July 2. We knew that anyway, but confirmation still removes uncertainty.

Local data releases this week include ANZ job ads today and Westpac consumer confidence tomorrow, along with housing finance numbers.

Commonwealth Bank ((CBA)) will wrap up bank reporting season today with a quarterly update, and we now shift into a new reporting mini-season. Orica ((ORI)) will report today, Incitec Pivot ((IPL)) tomorrow, CSR ((CSR)) on Wednesday and AusNet Services ((AST)) on Thursday.

Myer ((MYR)) will release quarterly sales numbers on Thursday and there’s a handful of AGMs to be held throughout the week.

ANZ Bank ((ANZ)) goes ex-dividend today and Westpac ((WBC)) on Thursday.

Rudi will appear on Sky Business on Tuesday, via Skype-link, to discuss broker calls. He'll be back on Thursday from 12.30-2.30pm and again via Skype-link on Friday morning, around 11.05am, to discuss broker calls. Later that day he'll re-appear as guest on Your Money, Your Call Fixed Interest, 7-8pm.
 

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: Waiting For Jobs

By Greg Peel

The Dow closed up 9 points while the S&P was flat at 2050 and the Nasdaq lost 0.2%.

Meandering

As the dust settled over the RBA rate cut, federal budget and BHP’s larger than expected fine, the local market seemed at a loss as to what to do next yesterday. We opened down over 20 points, rallied back to be up over 20 points, and then faded away at the close. One thing is clear nevertheless – we’re not following Wall Street around like a faithful pet.

Yesterday’s data releases were on the positive side.

Retail sales rose 0.4% in March when 0.3% was expected, to a 3.6% annual growth rate. That’s below the ten-year average rate of 4.5%, but that average will continue to recede and eventually step down once the pre-GFC years roll off. We just don’t spend like we used to.

Retail spending represents around 30% of household spending and 55% of GDP. But again we have to consider such metrics to be going out of date. Commonwealth Bank’s economists note Australians are now spending less on traditional retail items, of which some 80% is “goods”, and more on non-traditional items we can call “experiences”. The savings rate, at near 9%, is historically high.

New home sales rose 8.9% in March, having fallen 5.3% in February. While many an analyst is warning of a cooling housing market, that cooling process is not a linear one. The home sales growth trend is still waning, but March sales and building approvals data and April house prices all showed a pop.

Australia’s trade deficit was $2.1bn in March when $2.9bn was expected. We can put the “beat” down to the commodity price bounce and weaker currency. Exports rose 4.3% and imports rose 0.7%. The export revival story continues for tourism, which posted a record surplus.

But none of the above seemed to make much difference yesterday. The yield stocks and offshore earners which had jumped sharply on the rate cut eased back. The banks were positive thanks to no dividend cut from National Bank ((NAB)), energy rose and materials fell. On a 0.3% gain, consumer discretionary couldn’t get too excited about the retail sales numbers.

Caixin’s measure of China’s service sector PMI fell to 51.8 in April from 52.2 in March, largely consistent with Beijing’s earlier result.

The local market may not be so ambivalent today, it appears. Base metal prices were slapped overnight and iron ore has fallen back through the psychological 60 mark. The SPI Overnight is showing down 0.9%.

Looking to June

The Dow was up over 80 points early in last night’s session but drifted back and wandered around before a flat close.

There had been a spike in oil prices early on, as wildfires in Alberta forced the closure of Canadian oil sands production, but a later report suggested production had resumed and oil fell back again.

Data releases on the day were not promising. April chain store sales posted a big miss, and left analysts scratching their heads and wondering just what’s going on with the American consumer. But as I suggested above, developed economies such of those of Australia and the US need to start adjusting their thinking away from traditional metrics that have been set in concrete for so long.

Or in bricks & mortar. US chain store sales have surprised to the downside. Last week, Amazon’s March quarter earnings release showed a much stronger than expected sales number. Perhaps there’s a clue here.

Traders were happy to square up last night ahead of tonight’s non-farm payrolls report. It’s the first of two that will be released before the June Fed meeting, but this one is not shaping up so well. The market is still tipping 200,000, but Wednesday’s ADP report fell well short of expectation and last night’s weekly new jobless claims number showed a surprise jump.

A weak non-farm payrolls number may further kill off thoughts of a June rate hike. But as to how Wall Street reacts is never easy to predict these days.

Commodities

After rising and falling back on oil sands news, West Texas is up US46c at US$44.51/bbl and Brent is up US47c at US$45.19/bbl.

Selling in base metals has intensified. This has been put down mostly to the rebound in the US dollar and the fact it was speculators and commodity funds, not end-users, that pushed prices up recently and now they are all bailing. Last night LME inventory data mostly showed lower numbers yet nickel was trashed 5%, while all of aluminium, copper, lead and zinc fell around 1.5%.

Iron ore fell US$1.50 to US$59.50/t. The US$60/t mark is considered important psychological support, hence it is feared the breach might open the floodgates to the downside. Mind you, it’s exactly what analysts have been expecting, if that is the case.

The US dollar index is up 0.5% at 93.75. Gold is nevertheless steady at US$1277.60/oz while the Aussie, having already taken a bath this week, is steady at US$0.7465.

Today

The SPI Overnight closed down 47 points or 0.9%.

There will be close attention paid to the RBA’s quarterly Statement on Monetary Policy, due for release today. Of most interest will be just how far the board has wound back its inflation forecasts.

Australia’s construction PMI is out today, while over the weekend Beijing will release China’s April trade numbers.

In between is the US jobs report.

On the local stock front, Macquarie Group ((MQG)) reports full-year earnings today and REA Group ((REA)) issues quarterly numbers.

Rudi will Skype-link with Sky Business, probably around 11.05am, 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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