Tag Archives: Bonds/Interest Rates

article 3 months old

The Overnight Report: The Rising Problem

By Greg Peel

The Dow closed down 174 points or 1.0% while the S&P fell 1.2% to 2041 as the Nasdaq fell 1.5%.

Fail

The ASX200 did not make it back to 5000 yesterday, peaking out at midday at 4984 as momentum stalled. Having already jumped over 3% the day before on a turnaround in the oil price, the energy sector managed only a 1.4% gain despite oil prices being up 3% overnight.

The market appears not yet convinced there is any reason for a push above 5000 at this point. When that’s the case, the only other way is down. Last night Wall Street provided the incentive for a possible lower low to be established today on this most recent down-leg.

While news that Arrium had placed itself into voluntary administration was hardly a shock to the market yesterday, it does highlight the extent of the reversal of fortunes of Australia’s economy from the heady days of the China-driven “super-cycle”. Is the steel industry in Australia set to go the way of the car industry? BlueScope’s hanging in there, but unlike Arrium, BlueScope doesn’t mine iron ore. And it sells Colorbond rooves, not construction girders.

If Arrium goes under so does the town of Whyalla, and that means increased unemployment. Arrium can’t move the market anymore but it can impact on sentiment.

Only the telcos and consumer discretionary finished in the red yesterday. The banks managed a 0.3% gain but that might change today.

Watch the Yen

The Japanese yen is the world’s “safe haven” currency. This might seem strange given the Japanese economy has been in the doldrums for 25 years but it was Japan’s persistent deflation that long ago created the “yen carry trade” that has served to drive the value of risk assets globally ever since.

Given Japan’s ultra-low interest rates, which existed long before the GFC, investors can borrow in yen at next to nothing and invest in the likes of the US, Europe or Australia to receive an “arbitrage” return on the yield differential. This requires selling yen and buying the currency of the target assets. That “arbitrage” only works so long as yen exchange rates remain relatively stable. If global risk begins to increasingly worry carry trade investors, foreign assets are sold and yen loans repaid. The result is a rising yen. The yen thus appears to be a “safe haven” currency because whenever risk increases, the yen rises.

Last night the yen hit its highest level against the US dollar in almost 18 months. The yen’s rise has been exacerbated by weakness in the US dollar since the Fed started backing down on its rate rise plans. Wall Street had not been paying a lot of attention up to now but when last night the Japanese government said they would not intervene in the currency, the world took notice. The last time the yen hit this level the Bank of Japan shocked the world by announcing a massive expansion to its QE program. More recently the BoJ has cut its cash rate into the negative. Last night the BoJ confirmed it will “undertake additional monetary easing measures if necessary”.

Which opens up the prospect of the Japanese cash rate going even further into the negative. The issue here is the “race to the bottom” among central banks, each equally desperate to devalue their currencies so as to maintain export competitiveness. If Japan goes again, then Europe would likely have to follow, and China. The Fed would likely need to hold out on raising for longer.

Hence the US ten-year bond yield fell 6 basis points to 1.69% last night. The German equivalent fell to 0.09%. The German yield curve is negative almost up to ten years. How does a bank make money on loans if rates are negative that far out on the curve?

Well they don’t. Last night European banks came under renewed selling pressure. The German index closed down 1.0%. On Wall Street, the primary driver of last night’s fall was a hammering of the financial sector.

And that, of course, prompted renewed calls of “overdone” and “oversold” when it comes to the US banks. Outspoken JP Morgan CEO Jamie Dimon, for one, described his bank as so well capitalised it is a “fortress” that would remain standing even if every other bank in the country went under.

With oil prices coming off slightly last night after Wednesday night’s big rally, there was no oil correlation support provided to offset weakness in the hefty financials sector. Yet traders are not overly concerned. Most have been expecting a pullback following the sharp rebound rally off the mid-February lows. Some are even salivating at the prospect of cheaper entry prices ahead of the earnings season, which begins next week. Earnings expectations have been marked down so low as to suggest, as has so often been the case in past quarters, that upside surprise is almost inevitable.

Commodities

West Texas crude is down US20c at US$37.53/bbl and Brent is down US22c at US$39.59/bbl.

Constant talk of slowing global growth is not providing any incentive to buy base metals, outside of supply curtailments. Last night copper fell 3%. Zinc fell 2.5%, nickel 2% and aluminium 1%. Only tin bucked the trend.

Iron ore is unchanged at US$53.80/t.

Despite the soaring yen, counter-balancing moves in other currencies sees the US dollar index steady at 94.49. But the “safe haven” shift means gold is up US$18.00 at US$1240.30/oz.

Which developed economy has not recently joined in the “race to the bottom” among central banks, nor even adjusted to account for it? The Aussie is down 1.25% at US$0.9505.

Today

The SPI Overnight closed down 74 points or 1.0%.

Coincidently, Japan will release its February trade data today.

Locally, REITs Dexus Property ((DXS)) and Investa Office ((IOF)) will hold extraordinary shareholder meetings today to discuss the proposed takeover by Dexus of management of Investa’s portfolio.

Rudi will skype-link with Sky Business this morning, around 11.30am, to discuss broker calls.
 

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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: Oil Fights Back

By Greg Peel

The Dow closed up 112 points or 0.6% while the S&P rose 1.1% to 2066 as the Nasdaq jumped 1.7%.

Can’t buy it, can’t sell it

While the ASX200 keeps finding reasons of late not to push up sustainably beyond 5000 – perceived bank woes are a case in point most recently – it just doesn’t like being under 5000 for very long either. While it was a choppy session on Bridge Street yesterday as sellers and buyers battled it out, the buyers won out in the end without any real incentive to do so other than every time the index falls below 5000, it pretty soon recovers.

The energy sector was the exception yesterday, rising 3.2% because the oil price recovered from an initial fall on Tuesday night and closed slightly higher. Traders in oil stocks must by now have very stiff necks from whiplash as they stampede backwards and forwards on every one dollar move in the oil price, only to find themselves forever back where they started.

Beyond energy, there appeared to be some bargain hunting going on in the industrials, healthcare, materials and consumer discretionary stocks yesterday. The banks closed relatively steady, which at the moment is a good day for the banks, while telcos fell, having not fallen on Tuesday, and consumer staples saw minor selling.

Buyers of oil stocks will nevertheless be feeling chuffed this morning following another jump in oil prices overnight. The ASX200 closed 55 points shy of 5000 yesterday and will likely close some of that gap today. The overnight futures are calling 18 points up but then they were calling 18 points down yesterday morning, and we closed up 21. An outside bet on 5000 being recovered today is not a silly one.

Oil Shock

US crude inventories fell by 4.9m barrels last week. Analysts had predicted a 2.9m increase. I don’t ever recall analysts getting the weekly numbers spot on but this is a bit of boilover. For those who get a bit warm and fuzzy over stats, it is the biggest fall in crude inventories for this particular week of the year since 1997.

When WTI futures “closed” early in the afternoon, the benchmark oil price was up over 5%. The market doesn’t actually “close”, it simply switches to electronic trading and carries on non-stop from Monday morning to Saturday morning. A closing price is nevertheless marked for bookkeeping purposes. Since that mark WTI has come off a bit, to be up 3%.

The oil price rally pretty much turned around what had threatened to be a weak session. Wall Street was soggy on the open, in line with European trading which had been soggy for most of the day. After the shock fall in German manufacturing orders revealed on Tuesday night, last night saw German industrial production for February falling 0.5%. This actually wasn’t too bad a result given forecasts were for a 1.8% fall.

The minutes of the March Fed meeting were also scrutinised last night. While Yellen’s speech last week largely rendered these minutes redundant, what was interesting was a debate between FOMC members about whether April should see a rate rise. Those believing April is too soon apparently won out.

Now, Yellen has suggested that April remains “live”, meaning the Fed could still hike if it so decided, but then every meeting has to, by default, be deemed “live” or what’s the point holding it? What we saw in the minutes was a rather unusual discussion about the future rather than the moment, ie whether or not to raise in March, and despite Yellen’s speech implying even June is looking unlikely, the fact April can be taken off the table was at least enough incentive for traders to pile back into “risk” stocks last night.

The epitome of “risk” stocks are the US biotechs, and with risk you get “momentum” traders. So when biotechs began to move up last night, the bandwagon was jumped upon. That’s why the Nasdaq was up 1.7% when the Dow only managed 0.6%. The S&P split the difference.

It could just as easily completely reverse in a session or two. Yellen will speak again tomorrow morning Sydney time, after the close of Wall Street tonight.

So between oil and a “momo” rally, Wall Street had a positive session last night.

Commodities

We recall that producers within and without OPEC are planning to meet in Doha in a couple of weekends to discuss a production freeze. Last night the Kuwaiti oil minister expressed confidence that an agreement would be reached. This clown is probably cracking the champagne as we speak believing he managed to orchestrate a 5% oil price jump when all of OPEC knows a production freeze is complete fantasy.

Only supply curtailment in the US will move oil prices higher. Last night’s weekly US inventory drop is why oil prices are up.

West Texas is up US$1.21 or 3.3% at US$37.73/bbl and Brent is up US$1.47 or 3.8% at US$39.81/bbl.

Yet again there were mixed moves in base metals last night. No move exceeded one percent.

Iron ore fell US20c to US$53.80/t.

The US dollar index is down slightly to 94.50 but gold is also down US$8.90 at US$122.30/oz.

One presumes the 0.8% rally back for the Aussie overnight to US$0.7600 is oil-linked.

Today

The SPI Overnight closed up 18 points or 0.4%.

As noted, Yellen’s speech will begin after Wall Street closes tonight.

Before that, we’ll see the local construction PMI and Bank of Queensland ((BOQ)) will publish its first half result.

Rudi will make his weekly appearance on Sky Business, 12.30pm-2.30pm and re-appear again on Switzer TV between 7-8pm.
 

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(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

RBA Rate Cut On The Cards?

By Greg Peel

The State of Play

Nobody expected the RBA to cut its cash rate yesterday. A record low rate of 2.00% remains in place. But much anticipation preceded yesterday’s RBA policy meeting nonetheless.

There was no expectation of a rate cut given the RBA has, over the past few months, painted a relatively positive picture of the Australian economy. The stronger than expected December quarter GDP result underscored the central bank’s belief the economy is managing to transition away from dependence on mining and energy investment and towards more widespread contribution from non-mining sectors. Growth ahead is likely to be below trend, but not worryingly so. Certainly not enough to require a cut to an even lower record cash rate.

And we should recall that RBA governor Glenn Stevens has not so long ago questioned the value of further rate cuts to so low a base rate. While a 25 basis point cut from 2.00% to 1.75% represents a far greater percentage drop than a cut from say 7.25% to 7.00%, if businesses and households aren’t rushing out to borrow at 2.00%, why would 1.75% make the difference?

Nevertheless, the RBA remains in an easing bias. While talking up the Australian economy in the past several months’ policy statements, Stevens has ended each statement with an assurance that current low inflation does provide scope for another cut and that the central bank will monitor the situation.

The major source of the RBA’s upbeat assessment is the labour market. Despite dire warnings from many an economist over the past twelve months, Australia’s unemployment rate has not shot up to 6.5% or higher. Those predictions were largely based on expected mass job cuts across the resource sector. What they did not anticipate was a sufficient counter-balance to date of jobs growth in other industries, such as retail and health.

Yet Stevens, like many others, appears to have been left scratching his head. An unemployment rate under 6% is heartening, but curiously surprising. It is for that reason the last couple of RBA policy statements have suggested that the RBA board would keep an eye on new information to decide whether inflation will remain low and whether “the improvement in labour market conditions evident last year is continuing”.

Current low inflation provides the RBA with scope to cut rates further. A strong labour market suggests the potential for wage growth, which would flow into higher inflation in the usual higher wages equals more spending power equation. Take away labour market strength and the low inflation issue almost ensures another rate cut.

That’s the domestic picture. The other factor is the global picture, which is crystallised in the form of the exchange rate. The “Aussie dollar”, meaning AUDUSD, is the benchmark exchange rate but even as this threatened to drop below US70c last year, Stevens pointed out the AUDEUR, AUDJPY and other cross rates were going the other way and the US is not Australia’s only trading partner. And far from its biggest.

When the Aussie dollar was trading above parity not so long ago, the RBA called it “overvalued”. The world was seeking yield and Australia was offering a solution, thus forcing up the exchange rate above and beyond what the usual commodity price relationship would suggest. So when the resource sector turned south, the RBA went into cutting mode. Finally last year we saw an Aussie more in line with what value would suggest.

But we’ve since seen a bounce. Just when economists were forecasting an exchange rate of US65c, we shot back up over US75c. Just when many non-mining industries in the Australian economy were starting to see the benefits of a weaker Aussie after years of crippling currency headwinds (think tourism for example), the breeze stiffened once more.

The Complication

Yesterday when the RBA statement released confirming no rate cut, the Aussie shot up about half a cent. This seems strange given no one was expecting a rate cut, but what was expected was some so-called “jawboning” from the RBA governor, meaning a suggestion that the Aussie was “overvalued”.

Currencies move in anticipation of rate changes. They do not wait for confirmation. So if a central bank suggests currency overvaluation, the implication is “and if it stays that way we’ll have to cut”.  The currency thus falls anyway, and the desired outcome is already achieved.

Glenn Stevens did not “jawbone” down the Aussie yesterday with a typical “overvaluation” call as the forex market clearly assumed. What he said was:

“The Australian dollar has appreciated somewhat recently. In part, this reflects some increase in commodity prices, but monetary developments elsewhere in the world have also played a role. Under present circumstances, an appreciating exchange rate could complicate the adjustment under way in the economy.”

Stevens has broken down the Aussie’s rebound into two parts. One is the rebound in commodity prices which, if sustained, is welcomed, in which case a stronger Aussie is counter-balanced by greater resource sector earnings. The other, however, refers to the simple relativity of exchange rates. In Japan the cash rate has moved into the negative. In the eurozone it's now zero, although most individual European banks have now set negative rates. China’s rates remain positive but the central bank continues to ease by other means.

Even New Zealand saw a cash rate cut at the last RBNZ meeting.

It is clear that central bank easing across the major economies of the world is the primary reason why the US Federal Reserve is not going to pursue a quarter by quarter tightening policy as was assumed in December last year. By default, if everybody else cuts, you have raised on a relative basis. Thus it follows that while the domestic scenario in Australia is not yet one that warrants a rate cut in isolation, the strength in the Aussie implies we’ve effectively had a rate rise in relative terms.

And that could “complicate” the issue.

The Debate

Having leapt half a cent on the RBA statement release yesterday, the Aussie dollar promptly fell a cent. Glenn Stevens did not call the Aussie “overvalued” as he has done so often in the past, he simply suggested the matter is “complicated”. Central bankers are not known for being blunt. But it is not a stretch to assume Stevens is preparing the market for a macro “excuse” to override the domestic picture and cut the cash rate.

Or is he?

“On our reading, it is now quite clear that the RBA is close to acting on its easing bias,” say the Macquarie economists. “The RBA has reached a point of discomfort around the A$”.

Macquarie makes note that strength in the labour market has prevented a rate cut up to now, from a domestic perspective, despite low inflation. But recent employment data have actually been weaker. The ANZ job ads series has topped out, it appears, and Macquarie points out that were it not for a fall in the participation rate in February (job seekers giving up hope), the unemployment rate would have been 6.2%, not 5.8%.

Macquarie is forecasting a 25 basis point cut at the May meeting.

Goldman Sachs had already pencilled in a May rate cut, so yesterday’s statement only serves to underscore that forecast. The “complication” is one reason, but a terms of trade which remains “much lower than in recent years,” as noted in the statement, is the other.

Goldman concurs with Macquarie’s assessment of the labour market, and further points to declining private capital expenditure expectations in 2016 as well as “clear trend declines” for retail sales and building approvals.

Morgan Stanley concurs with Goldman’s assessment of a weakening Australian economy. Morgan Stanley’s economists had already pencilled in rate cuts in both the September and December quarters, down to 1.50%, and they have not changed their view.

UBS does not believe yesterday’s statement signal’s an “imminent” rate cut. The UBS economists cite ongoing moderate growth in the global economy, Australia’s 2015 growth pick-up, better global financial market sentiment (than earlier this year, presumably), and the commodity price rebound, part of which reflects recent improved data out of China, as reason the RBA would be in no rush.

The rebound in the Aussie dollar does “lower the hurdle,” but despite believing that if Australia’s cash rate goes anywhere this year it’s down, UBS still believes the RBA is likely to remain on hold in 2016.

If you laid every economist in the world end to end, they say, you still wouldn’t reach a conclusion. All the economists quoted above see the “complication” factor as suggesting the RBA either will or has more scope to cut sometime soon. But ANZ Bank’s economists see “complicated” as suggesting the RBA “is unlikely to react in a mechanical fashion to the stronger dollar,” even if it does make the board uncomfortable.

The St George Bank economists are of a similar mind:

“There was little to suggest that the RBA has changed its stance in monetary policy. We continue to expect that the RBA will leave rates on hold throughout 2016.  We do not believe that the RBA would cut the cash rate simply to target the AUD but a rise in the AUD without a corresponding rise in commodity prices would give them pause for thought.”

So, how do we interpret the word “complicate”?

Is it a “complication” that global central bank easing has driven the Aussie higher and hence this “outside” factor can only be corrected with a rate cut? Or is it a “complication” because the RBA, charged with a mandate of managing Australia’s economy, would never cut the cash rate because of what the rest of the world is up to?

Perhaps we can take comfort in the first and second laws of economists. The first law is that for every economist there is an equal and opposite economist, and the second law is that both of them are wrong.


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article 3 months old

The Overnight Report: Be On Your Lagarde

By Greg Peel

The Dow closed down 133 points or 0.8% while the S&P lost 1.0% to 2045 and the Nasdaq fell 1.0%.

Market Worries

“The Australian dollar has appreciated somewhat recently. In part, this reflects some increase in commodity prices, but monetary developments elsewhere in the world have also played a role. Under present circumstances, an appreciating exchange rate could complicate the adjustment under way in the economy.”

This is the critical paragraph from yesterday’s RBA monetary policy statement, with the rest of the statement remaining little changed from previous months. Glenn Stevens has acknowledged that while stronger commodity prices are a welcome driver of a stronger currency, the “race to the bottom” among Australia’s trading partners has left the local currency sitting out like a shag on a rock through no fault of its own.

A weaker Aussie is important to aiding the transition away from dependence on mining investment in the Australian economy, hence recent strength is “complicating” the issue. This could be the first signal the RBA is prepared to act from an exogenous perspective, simply to bring Australia into line with the rest of the world. We note that even New Zealand has bowed.

The Aussie initially rallied on yesterday’s statement release because there was no rate cut – not that anyone was expecting one. Only then did the forex cowboys actually read the statement, and in so doing realise it was actually dovish. The Aussie is down 0.8% over 24 hours at US$0.7541 despite the US dollar being steady.

Yesterday was not a day, nevertheless, in which any hope of an imminent rate cut was going to make any difference to sentiment. The writing was on the wall at the close on Monday, when an attempt to rally above the 5000 mark failed. Markets that fail to go up tend to go down instead. And we’ve seen this movie all too often now – once we fall through 5000, we pretty quickly get down to 4900 or 4800, before returning.

Consumer discretionary is one sector that does not like a weaker currency, which may go some way to explaining that sector’s 2.1% fall yesterday. Although I’d suggest there was a delayed response to Monday’s weak retail sales data in play as well.

The banks don’t like lower rates, but there’s a lot more going on in the banking world at present than this concern alone. A 3.3% fall in the energy sector yesterday reflected a lower oil price, and for the banks this means an increased threat of default on energy sector loans. But we also had APRA releasing its discussion paper on Net Stable Funding Ratios on Monday, which by yesterday had bank analysts suggesting the majors will need to raise billions more in debt funding in order to comply. Throw in APRA’s warning that the current lending scene is beginning to look a lot like 2007, and there’s plenty of reason the banks were down 1.4% yesterday.

Including ASIC’s accusation Westpac has been rigging the bank bill swap rate settlement.

Despite an unchanged iron ore price overnight and mixed metal price movements, the materials sector fell 1.5% yesterday. Perhaps the ongoing insistence of analysts that the recent commodity price rally has no substance on a supply-demand basis is weighing. Or perhaps yesterday was just another day to sell everything. Only the telcos came out almost unscathed.

Not helping the mood was the release of Australia’s service sector PMI. It fell into contraction in March at 49.5, down from 51.8 in February. The service sector is the Australian economy’s underlying growth engine. The services PMI result is in stark contrast to the manufacturing PMI which is showing frenetic expansion, but the service sector is many multiples larger than the manufacturing sector in this country.

Around the Grounds

Which is not the case in Germany. If it wasn’t bad enough last night that the eurozone’s services PMI disappointingly fell to 53.1 from 53.3, data showing a 1.2% fall in German manufacturing orders when a 0.2% gain was expected caused ripples across the continent.  The German stock index fell 2.6% last night, while France chimed in with a 2.2% fall and the UK 1.1%.

The UK services PMI showed a gain to 53.7 from 52.7 while Japan again disappointed with a drop to 50.0 from 51.2. The winner on the night was the US, which posted a welcome return to expansion with a rise to 51.8 from 49.5.

IMF chief Christine Lagarde last night warned that global growth was slowing. The IMF has a habit of telling everyone what they already knew some six months after they originally knew it. Lagarde also suggested that while fiscal policy needs to play its part, negative interest rates represent “net positives” for the global economy. This is not an opinion held by the majority of the market.

The impact of Lagarde’s comments was a fall in the German ten-year bond rate to 0.10%, dragging the US equivalent down 5 basis points to 1.73%. There is  now talk of the German rate going to zero or lower, and the US rate thus testing GFC lows of 1.3%.

Healthy Pullback?

Oil prices opened lower last night, which, combined with the weak data out of Germany and Lagarde’s warning ensured a weak open on Wall Street. Tax policy was also in play, with Pfizer pulling out of a multi-billion dollar bid for global peer Allergen now the US government has clamped down on the practice of tax “inversion” – acquiring an offshore based company in a lower company tax regime and shifting headquarters.

Wall Street now anticipates more such takeover bids will be abandoned and takeover premiums will evaporate. Interestingly it was another session in which Wall Street ultimately ignored the oil price. WTI had already begun to bottom out and turn around when news came through of an explosion at an Iraqi oil well. Oil prices closed higher on the session but the selling in US stocks accelerated towards the bell.

The stronger service sector PMI was lost in the wash. Like Australia, the US service sector is much bigger than the manufacturing sector.

Last night’s weakness did not seem to bother too many traders, however, a lot of whom have been expecting a pullback following the sharp rebound from the February lows. Arguably Wall Street is consolidated back to a more measured platform from which to assess earnings results, which start to flow next week.

Commodities

West Texas crude is up US$1.06 or 3% at US$36.52/bbl while Brent is up US83c or 2.2% at US$38.34.

Yet another mixed night of trading on the LME saw copper and lead steady, aluminium down 1%, tin down 1.5% and zinc down 2%, while nickel rose 1%. If these ongoing ups and downs were consistent across the base metals then fair enough, but the reality is each metal is more often going up one night and down the next.

Iron ore remains unchanged at US$54.00/t.

Gold has jumped US$15.90 to US$1231.20/oz. It’s nothing to do with the US dollar index, which is steady at 94.63. It no doubt has a lot to do with the head of the IMF being keen on negative cash rates.

Today

The local energy sector should in theory find support today from a bounce in the oil price. Otherwise the SPI Overnight closed down 18 points or 0.4%.

Caixin will publish its China service sector PMI today, not yesterday as I erroneously assumed, because of the holiday in China on Monday. Renewed focus on the strength or lack thereof of the European economy will centre on German industrial production numbers.

The minutes of the last Fed meeting will be published tonight but they have already been superseded by the Fed chair herself, and Yellen will speak again tomorrow night.
 

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: Marking Time

By Greg Peel

The Dow closed down 55 points or 0.3% while the S&P lost 0.3% to 2066 and the Nasdaq fell 0.5%.

Devil in the data

The graph of yesterday’s trade in the ASX200 shows a near perfect arc, rising steadily to a peak of 47 points up around mid-session and then falling equally as steadily to a flat close. Once again it’s as if escape velocity was unable to be reached at the peak and the gravitational pull of 5000 was just too strong.

The stand-out sector move yesterday was in energy, which closed down 2.9% on a 4% overnight fall in oil prices. Despite a tick-up for iron ore and mixed base metal prices, materials closed down 0.8%. The only other sector to finish notably in the red was consumer discretionary, down 0.3%, which goes some way to explaining why early momentum was lost. The day’s economic data releases were not so flash.

Morning releases included February retail sales, which were flat on January despite forecasts of 0.4% growth. It appears economists underestimated a drop-off in demand in the mining states of WA and Queensland. Over the three months to February, sales rose 0.7%, compared to 1.0% in the previous three months. Over twelve months to February, sales rose 3.3%, down from 3.5% a year ago and below the 4.5% decade average.

Retail spending constitutes around 30% of household spending and around 17% of GDP, CBA’s economists note. The data thus provide a significant indicator of the health of the Australian economy. It is perhaps no surprise retail spending has cooled as housing growth has cooled.

Building approvals data released yesterday showed residential approval growth of 3.1% in February, down 9% over twelve months. Detached housing approvals fell 1% to be down 5.6%, so the balance came from apartment approvals which rose 7.7%.

That’s a decent clip for apartments, although approvals are down 12% year on year. We recall from last week’s data that investor loan growth is down 11% from its peak mid last year and apartment sales fell 11% in February. So one might say, good luck to those developers increasing apartment approvals by 7.7% in February. Let’s hope they’ve sold off the plan.

ANZ revealed yesterday job ads series grew by only 0.2% in March and have remained broadly unchanged in number since November last year. In trend terms, ads fell 0.2% in March, representing the first fall since October 2013.

It does not surprise ANZ’s economists given such a strong run last year, but jobs growth is clearly cooling.

Headline inflation was flat in March after falling 0.2% in February, according to the Melbourne Institute gauge. (Did we lose TD Securities somewhere along the way? I wasn’t told.) Annual inflation is running at 1.7%. Take out food and energy, and core inflation rose by only 0.8% in the March quarter.

Put all of the above together, and throw in an Aussie dollar at US$0.7605 (which is actually down a percent over 24 hours given those data), and it will be interesting to read what excuse Glenn Stevens comes up with today not to cut the cash rate when all about are cutting theirs, or in the Fed’s case, not raising.

Lacklustre

Oil prices were down another 3% overnight, which should be enough to explain weakness on Wall Street. That correlation is not as strong as it was previously but it’s still a factor.

We also had the Boston Fed president and FOMC member coming out last night to say that the Fed will probably raise its cash rate “sooner than the market expects”, which did appear to bump the indices down at the time, but given half the market is not even expecting a rate rise this year it’s hardly a significant statement.

US factory orders fell 1.7% in February. A lot of the fall was to do with a drop in lumpy aircraft orders but a 20% fall in oil and mining related equipment is more indicative of the current state of play.

Beyond that, it was a fairly light volume session on Wall Street last night showing no real conviction either way. Alcoa will report quarterly earnings next Monday night, unofficially kicking off the earnings season. Wall Street is now in a bit of a holding pattern.

Estimates have net earnings per share for the S&P500 falling 7% in the March quarter. A lot of that relates to the energy sector, where falls in excess of 100% (ie falling from profit into loss) are forecast. The focus will very much be on just how the non-energy industries fared.

Commodities

West Texas crude is down US$1.22 or 3.3% at US$35.46/bbl and Brent is down US$1.17 or 3.0% at US$37.51/bbl.

It was another mixed session on the LME last night. Zinc fell 0.5%, copper 1% and lead 2% while nickel rose 1%.

China was closed yesterday, thus iron ore is unchanged at US$54.00/t.

The US dollar index is flat at 94.57 but gold is down US$6.60 at US$1215.30/oz.

Today

The SPI Overnight closed up 2 points.

It’s service sector PMI day across the globe today, including in Australia. Caixin will represent China.

We will also see the local February trade numbers today ahead of this afternoon’s RBA rate decision, or lack thereof.

Rudi shall hook-up into Sky Business via Skype 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

The Monday Report

By Greg Peel

Manipulation

It looked like a worrying start to the June quarter for the local market on Friday but really it was a reversal of the solid end to the March quarter on Thursday. On Thursday, fund managers bought up the market in general to fool you into thinking they’d actually generated better returns when in fact they were clueless. On Friday they simply sold back those trades.

So for all intents and purposes, the June quarter starts today. And where from? Well, 5000 of course. Prisoners of our own device.

Economic data were never going to matter on Friday. On any other day, news that China’s official manufacturing PMI swung back into expansion in March for the first time in eight months would have been met with cheers. Beijing’s index rose to 50.2 from 49.0 in February. Caixin’s independent measure did not quite make expansion but a move up to 49.7 from 48.0 at least corroborates the trend.

More important than China’s manufacturing sector is its services sector, which Beijing is supporting in favour of over-capacitated manufacturing. The government’s services PMI rose to 53.8 from 52.7, which also reversed the weak trend of the last couple of months.

And for the record, what’s left of Australia’s own manufacturing industry posted a PMI increase to a breakneck 58.1, up from 53.8. That’s the fastest pace of expansion since April 2004.

March is often a vacuum month for Australian corporates coming, as it does, in the wake of the February results season. Quite often not a lot happens to generate any market news and this year has been no exception. April features school holidays, which we’ve already had in Victoria and Queensland and are about to have in NSW, just to increase the potential for quieter markets.

But we do see the corporate news begin to ramp back up again in April, beginning with resource sector quarterly production reports and then moving on the ever increasing number of quarterly reports provided by the rest of the market. We are ever so quietly moving towards a US-style quarterly reporting calendar. If only we could adopt the US practice of providing homogenous EPS results for clear comparison rather than Australia’s antiquated obsession with this thing called “profit”, which is often misleading.

Around the Grounds

There may not be much left of Australia’s manufacturing industry but in Japan, manufacturing is the economy’s primary driver. It will thus be concerning for the Abe government that Japan’s manufacturing PMI fell to 49.0 from 50.2, representing the first move into contraction in eleven months.

It was steady as she goes on the other side of the world, with the eurozone’s PMI inching up to 51.6 from 51.2 and the UK similarly to 51.0 from 50.8.

Wall Street was relieved to see the US manufacturing PMI flip back into expansion at a better than expected 51.8, up from 49.5.

And suddenly, no one cared

The US added 215,000 jobs in March, although you’d have been hard-pressed to find that out on Saturday morning. The unemployment rate ticked back up to 5.0% from 4.9% but that was because the participation rate reached its highest level in two years.

As late as last year the US monthly non-farm payrolls report releases drew audience numbers exceeded only by the World Series and Super Bowl, but now the data have become relatively consistent across past months and Janet Yellen has emphatically set a dovish policy agenda, it really wasn’t going to matter what the jobs outcome was on Friday night.

If anything, a June Fed rate hike cannot be ruled out, but that does not represent a change in market view. The most important number within the data suite – wage growth – showed a better than expected 0.3% increase following a disappointing 0.1% drop in February. This is the inflation indicator Fed-watchers are targeting, but the flip-over hints at statistical noise.

On the strength of both better than expected jobs numbers and manufacturing numbers, Wall Street rallied on Friday. The Dow closed up 107 points or 0.6% while the S&P gained 0.6% to 2072 and the Nasdaq rose 0.9%.

The most interesting point to note about the rally is that it came in direct defiance of a fall in the oil price.

Oil fell 4% on Friday night and as a result, the Dow opened down over a hundred points. But traders who made the assumption the near perfect correlation still stands were in for a rude shock. Oil fell because Saudi Arabia suggested that Doha meeting or not, if Iran does not agree to a production freeze then Saudi Arabia will not agree to a production freeze.

If the near 50% rebound in the WTI price from its February low is all about hopes of co-operation between OPEC and non-OPEC producers in a concerted effort to reduce supply and support prices, then either oil traders are very stupid or the rally actually has nothing to do with such speculation. The rally is all about a market that became very oversold on panic and a subsequent short-covering scramble.

Throw in some early signs of falling US production, despite still rising inventories, lower US rig counts and a growing number of marginal producers falling by the wayside and we have sufficient reason for a rebound in oil. We can also cite a lack of major financial disaster in the US banking industry stemming from oil producer defaults and bankruptcies, as was at one point feared, as easing concerns.

The oil price had stabilised over March, but with nothing new going on, and short-covering now exhausted, it is of no surprise oil should fall back again. Perhaps Saudi Arabia was an excuse rather than a source of great angst but either way, oil is not going back to US$50/bbl until the trends noted above become more entrenched.

The fact Wall Street turned around and closed on a high note on Friday is testament to waning fear of another plunge in the WTI price to an even lower low.

Commodities

West Texas crude was down US$1.48 or 3.9% at US$36.68/bbl on Saturday morning and Brent was down US$1.65 or 4.1% at US$38.68/bbl.

Normally we would see positive results for both Chinese and US manufacturing provide a boost to base metal prices but the LME appears to be suffering from a bout of schizophrenia of late, suggesting price moves are more about metal-specific production and inventory levels than they are about the macro-economic picture.

On Friday night, with the US dollar index as good as steady at 94.58, tin rose 0.5%, aluminium 1%, lead 2% and zinc 3% while copper fell 1% and nickel fell 2%.

Iron ore rose US80c to US$54.00/t.

The solid US data helped gold down US$9.20 to US$1221.90/oz.

The Aussie rose 0.3% to US$0.7684.

With the Thursday-Friday shenanigans out of the way, the SPI Overnight closed up 23 points or 0.5%.

The Week Ahead

That Aussie will no doubt be a focus of attention when the RBA meets tomorrow. A rate cut is not expected but the market will be looking for hints the board might be prepared to act, or at least talk down the currency.

Ahead of the meeting we see local retail sales and building approvals numbers today along with ANZ job ads and the TD Securities inflation gauge. Tomorrow brings the trade numbers and the services PMI and on Thursday it’s the construction PMI.

Service sector PMIs will be posted across the globe on Tuesday, including Caixin’s China number.

In the US it’s factory orders tonight, trade on Tuesday along with the PMI, and chain store sales on Thursday. The minutes of the March Fed meeting will be published on Wednesday but they have already been trumped by Yellen’s speech last week. Yellen speaks again this week, on Thursday.

There’s a late trickle of ex-divs in the local market this week and Bank of Queensland ((BOQ)) will report earnings on Thursday. On Friday, both Dexus Group ((DXS)) and Investa Office ((IOF)) will hold EGMs to vote on the proposed portfolio management takeover.

Rudi will appear on Sky Business on Tuesday, via Skype-link, 11.15am and again twice on Thursday (Trading Day 12.30-2.30pm & Switzer TV between 7-8pm), and via Skype-link at around 11.10am on Friday.
 

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

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article 3 months old

Next Week At A Glance

For a more comprehensive preview of next week's events, please refer to "The Monday Report", published each Monday morning. For all economic data release dates, ex-div dates and times and other relevant information, please refer to the FNArena Calendar.


By Greg Peel

The US non-farm payrolls report for March is due tonight. Given the shift to a more dovish stance from the Fed following first the March policy statement, and more emphatically, this week’s speech from Janet Yellen, the level of vital importance of US jobs reports has waned since, say, this time a year ago.

Beijing will release both China’s March manufacturing and service sector PMIs today. Again, with Beijing expected to step up monetary and/or fiscal stimulus if data continue to be weak, the potential for volatility that once accompanied these releases had faded somewhat.

Australia, Japan, the eurozone, UK and US will release manufacturing PMIs and Caixin will release its independent China manufacturing PMI today.

Next Tuesday sees the same round again for service sector PMIs.

The Fed will be back in the frame next week with the release of the minutes of the March FOMC meeting. The only real point of interest, nevertheless, will be the level of dissention among voting members. Janet Yellen has since superseded the March statement with her speech this week. Yellen will also speak again next Thursday.

US data release next week include factory orders, chain store sales and trade numbers in what is a quieter week economically.

Australia will see ANZ job ads, the TD Securities inflation gauge, building approvals and retail sales numbers on Monday. The RBA will hold a policy meeting on Tuesday. While Glenn Stevens’ recent speech suggests no likelihood of a rate cut, his statement will be interesting in the wake of the reduced possibility of a Fed rate hike anytime soon and the impact that is having on the Aussie dollar.

The round of ex-dividends in the local market all but comes to a close next week. Bank of Queensland ((BOQ)) will report earnings on Thursday.
 

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article 3 months old

The Overnight Report: Wild Quarter

By Greg Peel

The Dow closed down 31 points or 0.2% while the S&P lost 0.2% to 2059 and the Nasdaq was flat.

Delayed Reaction

Yesterday’s rally on Bridge Street was basically what I thought we might see on Wednesday in the wake of the Fed chair’s dovish speech. The ASX200 sold down by a similar percentage on Tuesday, possibly in fear of a more hawkish stance from Janet Yellen, so when the opposite proved true, it made sense that the index would recover.

The index tried to rally hard from the open on Wednesday but was immediately slapped down for a flat close. Nothing changed in the meantime, but yesterday we saw a rally equivalent to Tuesday’s plunge – not only in percentage move but in breath of sectors. Yesterday all sectors finished in the green by fairly similar amounts.

Buy Australia.

As to why the extra day was required is unclear. One can only assume end of quarter shenanigans played a part. Despite the benefits of a continually supportive Fed, the Aussie remains unsettlingly high. There was also some interesting local data out yesterday, but it doesn’t appear the market was going to pay much attention.

Australia’s housing market is cooling. Overall private sector credit rose 0.6% in February to provide a stable 6.6% annual growth rate. Housing credit rose by 0.5% for a 7.3% rate, down from 7.5% in late 2015. Investor housing credit rose by 0.6% for 7.6%, down from 11.0% in mid-2015.

New home sales plunged 5.3% in February. Analysts have been warning for some time of a bubble in apartment construction. Detached house sales fell 3.9% while apartment sales fell 10.9%. Oversupply in apartments is meeting tighter APRA lending rules and repriced bank mortgage rates.

Housing growth has been the major combatant against the plunge in resource sector investment over the past couple of years. While no one is expecting a housing crash, Australia’s economy will require the decline in mining investment to bottom out and commodity prices to stabilise if housing is not going to provide the same counterbalance it has to date. The good news is business credit rose 0.7% in February to a solid rate of 6.5% annual growth. As the CBA economists put it yesterday, “Firmer growth in non-resources related investment is the missing ingredient to broader-based growth outcomes”.

What a Quarter

The US indices may have closed with a whimper at the end of the March quarter last night but investors will be relieved to see the back of it. The S&P500 closed up 1.1% for the quarter which seems pretty ho-hum, until one notes that it had to rally almost 13% from the mid-February low to get there. March alone saw a 6.8% gain.

What drove that rally? Well we need look no further than the 17% gain for the energy sector and 20% gain for materials off their late January lows as commodity prices bottomed and short-covering rallies ensued. Assisting both commodity prices and the US export economy in general was a topping out of the US dollar, and further weakness from mid-March following the dovish Fed policy statement.

Did you know that US dollar gold posted its best quarter since …wait for it…1986?

Gold’s rally is indicative of what we might conclude really drove the rebound in world stock markets over the quarter. The BoJ moved to negative rates, the ECB pumped up its QE to shock & awe levels, the PBoC provided further stimulus and the Fed has now hinted that in retrospect, the December rate hike was not a good idea and there won’t be another one any time soon.

Central banks rule!

Commodities

Oil prices were little moved last night but at US$38.16/bbl, West Texas crude is trading 46% above its February low. Brent is up slightly overnight at US$39.60/bbl.

Over the course of the wild quarter, base metal prices have struggled to settle into any sort of pattern. The same was true again last night as nickel rose 0.5%, zinc 1% and aluminium 1.5%, while copper fell 0.5%, lead 1% and tin 1.5%.

With the US dollar index down 0.2% at 94.63, gold is up US$6.40 at US$1231.10/oz.

The Aussie is steady at US$0.7663.

Today

After yesterday’s surge, the SPI Overnight closed down 20 points or 0.4%.

Tonight sees the March US jobs report. While this monthly release has often been the source of much angst in recent years, Wall Street is now becoming increasingly ambivalent. The jobs number will come in around 200,000 and the unemployment rate – which no one believes – will come in at or under 5%. Yeah, yeah. The wage growth number will be scrutinised but Janet Yellen has already set the policy agenda, so inflation implications will also be met with disinterest.

There may also be a lack of volatility forthcoming from today’s Chinese PMIs. If they’re bad, the world will assume stepped-up stimulus from Beijing. If they’re good, well that’s good.

Australia, Japan, the eurozone, UK and US will also release manufacturing PMIs today/night.

Note that relevant Australian states go off summer time this weekend, so as of Tuesday morning, the NYSE will close at 6am Sydney time.

Rudi will skype-link with Sky Business today, 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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