Tag Archives: Bonds/Interest Rates

article 3 months old

The Overnight Report: Yellen Afterglow

By Greg Peel

The Dow closed up 83 points or 0.5% while the S&P gained 0.4% to 2063 and the Nasdaq rose 0.5%.

Struggling

Well the ASX200 was indeed off to the races yesterday, up 54 points from the opening bell, but very quickly it was not to last. If selling on Tuesday had anything to do with fears Janet Yellen was set to offer up a more hawkish Fed stance in her speech on Tuesday night, yesterday’s open supported that theory. But the sellers nipped everything in the bud.

By midday the index was back to square. Energy led the downside with a 1.5% drop thanks to lower oil prices while on the other side of the coin, healthcare rebounded 1.1% having had a hard time of it on Tuesday. Elsewhere, sectors traded off small moves up and down. The banks at the least managed to hold their ground.

The March quarter ends tomorrow and this must be taken into consideration in gauging market mood, given the pushing and shoving that can go on between traders squaring up and fund managers trying to window-dress returns. But we might also take into consideration that while lower for longer interest rates in the US might be good for the US, subsequent strength in the Aussie dollar acts as a brake on Australia’s export economy.

Earnings Loom

The UK and major European stock markets liked renewed Fed dovishness, as they all rose over 1.5% last night. Wall Street kicked on again from the opening bell to send the Dow up 157 points at its peak. But aside from the usual keeping half an eye on the oil price, momentum appeared to fade.

What will drive Wall Street higher from here?

The March quarter earnings season begins next month. The forecast is for a 6.9% net drop in S&P500 earnings and a 1.0% drop in revenues, which would mark the fourth consecutive quarter of negative earnings growth and fifth for revenues. It makes one wonder why Wall Street managed to run as high as it did ahead of the oil price collapse.

A big factor in that 6.9% is energy losses, with materials also chiming in. The banks have also had a tough quarter. The US dollar has only more recently retreated, so currency impact will be a big feature this season. As to why Wall Street can continue to rally on negative earnings growth, we may look no further than Fed influence.

Access to cheap funding has allowed US companies to borrow to buy back their own stock, thus increasing earnings per share not through increased earnings, but through a reduced number of shares. One day, somewhere down the line, the music will stop and so will the buybacks. But this will require Fed tightening, which in turn will require a more robust US and world economic outlook.

Meanwhile, it is typical for companies to suspend their buyback programs over earnings season. Buyback programs are supposed to be market agnostic, and a company would risk insider trading allegations if it were, for example, to suddenly step up its buying ahead of announcing a Street-beating result. This means that for the next month, Wall Street will lack buyback support.

If earnings results then come in net worse than expected, there is no safety net.

Ahead of earnings we have the March non-farm payrolls numbers tomorrow night. Last night the ADP private sector report showed the addition of 200,000 jobs, just a tick down from February’s 205,000 and in line with expectation. Forecasts for non-farm payrolls are for the addition of 205,000 jobs.

Wall Street will nevertheless not pay as much attention to the actual jobs number, assuming it falls within a reasonable band of expectation, as it will wage growth. This has been the missing link in the labour market story that has helped keep the Fed on hold, despite an unemployment rate considered to be near “full employment”. A jump in wage growth would bring a June Fed rate hike back into the frame.

Commodities

The oils were initially stronger during the session but fell back towards the close. West Texas crude is down US17c at US$38.27/bbl and Brent is own US10c at US$39.26/bbl.

Anticipation of Friday’s data, which includes not only US jobs but manufacturing PMIs from across the globe, and particularly China, is keeping LME traders on the sidelines. Base metals split up and down moves last night, none of them greater than one percent.

Is iron ore beginning to succumb to reality of lower Chinese steel production? It’s down US$1.50 at US$53.20/t.

The more interesting metal, nevertheless, is gold. Gold jumped up on Tuesday night, as one might expect, on increased Fed dovishness. But the US dollar index is down 0.3% to 94.84 overnight, and gold has given back most of Tuesday night’s gain. It’s down US$17.90 to US$1224.70/oz.

A couple of months ago it looked like gold was set to challenge 1300. Ahead of the March Fed statement release, gold sold off as traders took precautionary profits. The statement was dovish, so gold rebounded, but did not manage to return to its high. On Tuesday night Yellen was even more dovish, so gold shot up, but again it did not reach the previous high. Last night, despite dollar support, gold fell back again.

Markets that cannot go up do tend to go down instead.

The Aussie dollar is up 0.4% at US$0.7667.

Today

IT would seem futures traders are determined that if the ASX200 could not push away from the gravitational pull of 5000 yesterday, it can do it today. Despite the S&P500 being up only 0.4%, and oil, iron ore and gold prices being weaker overnight, the SPI Overnight closed up 42 points or 0.8%.

Locally we’ll see private sector credit data today along with new home sales.

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

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article 3 months old

Implications For Rates As Aussie Dollar Heads Higher

-RBA unlikely to respond to higher AUD yet
-Some fundamentals underpin the higher AUD
-AUD appears around fair value
-CBA analysts suggest steady cash rate in 2016
 

By Eva Brocklehurst

Australia's dollar has done an about turn. A weakening trend was foiled with remarkable speed in March, Commonwealth Bank analysts observe. Where to from here? What are the implications for official interest rates?

As of March 1 the Australia dollar was US71c and forecast to go lower. By late March it rebounded to US76c, with forecasts starting to appear suggesting it could hit US80c.

The analysts observe this resilient push by the currency has re-ignited the issue of official interest rates. Those calling for rate reductions are becoming more confident, but should they be?

The analysts describe the current policy approach from the Reserve Bank of Australia as one with a conditional easing bias. The central bank has indicated that inflation is benign and if the domestic economy needs a boost the board can act to lower the cash rate. Whether this will occur depends heavily on the Australian dollar's trajectory, as a stronger currency is a constraint on growth and curbing rates is a means to push it lower.

As the currency has receded somewhat from its highs of the month the analysts do not expect the RBA to act just yet, as any response requires a view on where the currency is going and whether its rally is long lasting. On that note, they observe the Australian dollar has risen more dramatically against the US dollar and assume the RBA would have been disappointed with the dovish tone espoused by the latest US Federal Reserve statement.

The conclusion remains that with US unemployment low and inflation nearing the Fed's target, US interest rates should slowly move higher. The analysts suspect this will occur sooner than the early 2017 time slot priced in by US financial markets.

There is also support for this expectation from the divergence with other central banks, with 2016 likely to witness further negative moves on rates by both the European Central Bank (ECB) and the Bank of Japan (BoJ) as these two expand their quantitative easing policies. This should provide some upside potential for the US dollar.

One thing the analysts are quite certain about is that the RBA will not be implementing quantitative easing. Australian interest rates further along the curve remain attractive to global investors, limiting the central bank's ability to influence the Australian dollar.

One aspect that may be of concern to the RBA in the current economic environment is deflation. Falls in inflation expectations blunt the impact of central bank stimulatory policies. The analysts observe this occurred following the moves by the ECB, BoJ and the Reserve Bank of New Zealand.

On the other hand, wage and price expectations in Australia have remained relatively stable over the past couple of years even with the decline in oil prices. Hence, the analysts believe the need for the RBA to respond in this way is less urgent.

The RBA has increasingly used rhetoric to pressure the currency in recent years, or "jawboning" as it is called in money market circles. Two aspects of this increasing use of jawboning stand out for the analysts: concerns are most prominent when the Australian dollar has diverged from fundamentals and are reduced when the currency moves into a US70-75c band.

Some fundamentals have underpinned the recent move higher. Commodity prices have improved, with the CBA commodity price index up 13% in US dollar terms on levels at the end of 2015. Moreover, central bank actions in Europe and Japan have increased the relative attractiveness of Australia as an investment destination.

The CBA analysts model fair value for the Australian dollar at US76c with the Trade Weighted Index (TWI) at 63. On this basis it appears there is no fundamental reason for the RBA to cut the cash rate. The US70-75c band is considered to be the comfort zone. Lower than this and policy makers will start to worry more about inflation risks than growth support, in the analysts' view.

Another debate is about what level of the currency causes economic pain. There is evidence, the analysts maintain, that this is higher than many would have expected. One piece of evidence is exports. There was a significant spike in the number of companies exporting in 2013/14 and this occurred when the Australian dollar was still high, averaging US92c throughout 2013/14. The drop since then should push the export trend along, the analysts suggest.

Non-resource exports may continue to surprise on the upside in 2016. This lift in exports is an unexpected outcome from an extended period of income weakness which the analysts maintain forced companies to focus on costs, with a risk that capital expenditure and labour hiring would be affected negatively.

One positive aspect, they note, is that the lift in productivity allowed the companies to adjust to the extended period of a strong Australian dollar. They believe restrained labour costs are turning the nominal depreciation in the currency into a real depreciation.

The analysts also observe the RBA was surprised at the rate of economic growth in 2015 and now believes unemployment can fall further. This lifts the hurdle for a rate cut. Moreover, there is debate about whether official rate reductions work now the cash rate is at a very low level. Another concern is that households will consider a reduction to record low rates a sign of an economic downturn.

In sum, the CBA analysts expect the cash rate will remain at 2.0% over 2016.
 

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article 3 months old

The Overnight Report: Gradualism Rules, Eventually

By Greg Peel

The Dow closed up 97 points or 0.6% while the S&P gained 0.9% to 2055 as the Nasdaq jumped 1.7%.

Fed Scare?

Got the feeling you’re on a dark desert highway? Cool wind in your hair? Well, it’s probably because we’re back at 5000. Again.

On Thursday ANZ Bank ((ANZ)) announced a $100m top-up to its earlier guidance of an expected $800m of provisions to be taken against potential bad debts, with the difference specifically relating to resource sector loans. Westpac ((WBC)) chimed in with a $25m top-up against personal loans in the mining states. The market panicked and sent the bank sector down 2.5%.

After a four-day chocolate binge, the sellers were back into the banks again yesterday. In their reports, bank analysts suggested that while neither provision increase represented any material impact on earnings, they both sounded a warning bell, particularly if the commodity price rebound proved to be fleeting. The bank sector was down another 2.0% yesterday.

But was it all just about those provisions again? On Thursday, the fall in the bank sector was a stand-out. Other sectors finished comfortably in the green – healthcare and utilities fared well for example – which suggested sector rotation as bank share funds were redirected. Yesterday, however, the bank sector was merely another face in the crowd, as every sector finished in the red.

Healthcare was actually the biggest loser this time around, with a 2.6% fall. Consumer staples dropped 1.7%. The fall in telcos was more minor by comparison, but it appears more like yesterday was a day to sell Australia, which one does via the large caps resident in the likes of the banks, healthcare, supermarkets and materials (which fell 1.2%). There was no reason why sector-specific bank provisions should trigger selling in companies providing hospital beds and selling Corn Flakes.

So, bank issues aside, one might conclude that a certain level of caution was adopted ahead of last night’s speech from Fed chair Janet Yellen. Since the Fed statement was released earlier in the month and Yellen held her press conference suggesting two Fed rate hikes were now more likely in 2016 rather than the previous four touted, dissention has grown in the FOMC ranks. Even some former policy centrists had begun to push for a rate hike as soon as April.

Which suggested to the market that when Yellen spoke last night, she would likely qualify her previous musings and evoke a more hawkish stance than the Fed’s March statement had implied. Each incremental US rate increase incrementally undermines the carry trade to foreign markets with attractive rates, and the king of available yield is Australia.

So was yesterday just a square-up? Well we may find out today, given Yellen has subsequently confounded and gone completely the other way – further into the dovish corner. Technically, yesterday’s breach of 5050 for the ASX200 is a negative signal that could suggest another dip down towards 4800, but first we have to get through that concrete foundation of 5000. And the futures are up 33 points this morning.

Back in your box

Wall Street was also playing it safe ahead of Yellen’s speech. From the open, the Dow was down a hundred points.  Around half of that ground was recovered before Yellen hit the podium at 12.30pm at which point stock markets spiked, and ultimately the Dow closed up almost a hundred points. The S&P500’s gain was even more significant, pushing the index above 2050 resistance to its highest level so far for 2016.

Gradualism is the word. The Fed had been touting a gradual approach to policy normalisation all through the second half of last year before finally bowing to the market and hiking in December. Reading between the lines, it now appears Yellen wishes the Fed had never moved in December. Back then four 2016 rate hikes were suggested. Two weeks ago, that became two. After last night, it now looks like one.

Is the Fed actually in a tightening cycle, as was suggested in December, or have the chances increased that the next move in rates will actually be down again? Global risks appear to be Yellen’s main concern. And as has been noted, when every other major economy has cut its own interest rates, it is the equivalent of the US hiking anyway. Yellen is preaching caution, and on the local front, she does not believe inflation is a certainty to continue rising in the US.

That would seem to put to bed any notion of a rate rise in April, or even June. The dissenters have been silenced.

Easy policy is good for stocks. Yield stocks particularly, but not for banks. So it was that the 0.9% gain for the S&P last night was led out by the defensive yield plays, and in defiance of selling in the financial sector.

Wall Street is back to believing the only thing that matters is Fed support. This time around it’s not about extended QE but about not raising rates. With commodity prices showing some tentative signs of stabilising at these lower levels, Wall Street has now wiped out the panic of early 2016 and moved upwards once more.

Elsewhere, market moves were consistent with a more dovish Fed. The US dollar index is down 0.9% at 95.15. Gold is up US$22.70 to US$1242.70/oz. The US ten-year bond yield fell 6 basis points to 1.81%.

Only commodities bucked the trend.

Commodities

The LME reopened following the Easter break last night and official closing prices were already being marked for base metals before Janet Yellen hit the podium. The US dollar was higher at that point and trading volumes remained thin. While Yellen turned the greenback around, lacklustre interest ensured most base metals remained weak through to the kerb close.

Copper fell a percent and lead and nickel fell 1.5%. Tin fell 2.5%, while aluminium rose 1% and zinc was flat.

Iron ore fell US50c to US$54.70/t.

The oils copped 2.5% falls, which seems somewhat incongruous in the face of less chance of a Fed rate hike (which would impact on energy sector credit costs) and a weaker greenback. Oil fell because of preliminary weekly US data which showed another significant build in inventories. West Texas is down US97c to US$38.44/bbl and Brent is down US91c to US$39.36/bbl.

So much for the oil-US stock market correlation.

Today

The SPI Overnight closed up 33 points or 0.7%.

Will we spin around today, assuming yesterday’s cautious call has proven incorrect? A more dovish Fed does increase the possibility of the RBA having to resort to a rate cut. That would be good for the local market, and particularly those yield stocks, except for the banks.

In the meantime, the Aussie is up 1.2% at US$76.35, which is not good for healthcare and other sectors with high proportions of offshore earnings. Glenn Stevens is still expecting the Aussie to fall without prompting. Is he still so sure today?

Tonight in the US sees the March private sector jobs report, a precursor to Friday's non-farm payrolls release.
 

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

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

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article 3 months old

The Monday Report (On Tuesday)

By Greg Peel

Thursday

Weakness in metals prices sent the local materials sector south by 1.7% on Thursday, while energy managed to hold up despite a fall in the oil price. While oil continues to fluctuate, it has pretty much been jogging on the spot for the last couple of weeks.

Only one other sector fell on Thursday, but a 2.5% plunge in the banks represents a big hit to the ASX200. Reality has bitten, with ANZ Bank ((ANZ)) announcing it would take an additional $100m provision against potential bad loans to the energy sector, while Westpac is setting aside $25m to cover personal loans in the stressed mining states of Queensland and WA.

No doubt investors saw parallels with European banks, which have suffered significant share price falls this year due to exposure to energy as well as emerging markets. Throughout the year, analysts have assured their clients Australia’s banks are not onerously exposed to the resource sector, and nor are the US banks in terms of proportion of all loans. Were they wrong?

No. Panic may have emerged on Thursday but these provisions represent small numbers in the scheme of things. A provision of $25m would about cover Westpac’s board room lunch bill for the year, and even $100m for ANZ is still nothing major compared to the banks’ capital positions. All banks were nevertheless sold down on Thursday on suspicion. Provisions do, of course, reduce the earnings pool from which dividends are paid out on a ratio basis.

The sell-down for the index on Thursday was all about the banks and not a market-wide event. Sector rotation was evident, with the defensive sectors of healthcare and utilities among apparent recipients of liquidated bank shares.

Thursday Night

On Thursday night the Dow closed up 13 points while the S&P was flat at 2035 and the Nasdaq rose 0.1%.

Oil prices fell again early in the US session following Wednesday night’s data suggesting ever more increasing inventories, but relief was found in the weekly rig count, which posted another fall. The Dow was down 100 point at one stage and the US banks, too, suffered from energy market-related selling, but when oil turned, Wall Street returned to a flat close.

The S&P500 nevertheless closed down for the week after a five-week winning streak.

Adding to early weakness was an announced 2.8% fall in US new durable goods orders in February – the third decline in four months. While this was not actually as bad as the 2.9% decline economists had forecast, the breakdown of the data showed weakness in every major industrial sector except autos.

Having enjoyed a revival of sorts post-GFC, US manufacturing has more recently been battling against a stronger greenback, a slowing global economy and the fallout from the energy sector rout.

All of which is another reason to assume the Fed will not be raising its cash rate in April.

The US dollar index was flat at 96.11 on Thursday night and the Aussie was also little changed at US$0.7531.

West Texas crude closed down US24c at US$39.60/bbl and Brent was little changed at US$40.49/bbl.

Zinc has recently taken the mantle as the most volatile of base metals on the LME and it dropped 2.5%, while the pre-Easter session saw all other metals not much trouble the scorer.

Gold fell US$4.20 to US$1216.70/oz.

The SPI Overnight closed down 12 points or -0.2% on Friday morning.

Monday Night

Wall Street was open on Easter Monday but for many it is still a holiday period, coinciding with Spring Break. Europe was closed and trading on US exchanges was very quiet. US stocks indices meandered mildly higher during the session before a shooting incident at the Capitol building in Washington put a brief scare through the market an hour ahead of the close.

The Dow retreated to the flat line once more but as the incident was quickly contained, a modestly higher close was achieved. The Dow closed up 19 points or 0.1% while the S&P closed two points higher at 2037 and the Nasdaq lost 0.1%.

Fed chair Janet Yellen will be speaking tonight, which was another reason Wall Street was not interested in getting carried away last night. To that end, last night’s US data releases included consumer spending and inflation numbers.

Incomes rose 0.2% in February having risen 0.5% in January, while spending rose 0.1% having risen by 0.1% in January. The January spending figure was revised down from a 0.5% increase published a month ago. The personal consumption & expenditure (PCE) index fell to 1.0% year on year from 1.2% in January.

The core PCE, which is the Fed’s preferred inflation indicator, remained unchanged at 1.7% year on year, stubbornly below the Fed’s 2% target.

There is nothing in those numbers to suggest the push from a cohort of FOMC members to hike in April will gain any traction. The March jobs data are due out this Friday. When Yellen speaks tonight, Wall Street will be looking for some clarification on whether the Fed chair remains the head of the US central bank, or whether she now considers herself head of the World central bank.

In other words, there is much debate in US markets as to whether it is the Fed’s role to set policy based on the state of the world economy rather than just the US economy, as is the mandate.

Other data released last night included February pending home sales, which rose 3.5%.

Oil prices are only slightly weaker last night from Thursday night with West Texas down US19c at US$39.41/bbl and Brent down US22c at US$40.27/bbl.

The London Metals Exchange was closed last night.

Over two sessions since Thursday, the spot iron ore price is down US$2.10 to US$55.20/t.

The US dollar index is slightly lower at 95.99 and the Aussie is slightly higher at US$0.7544. Gold is up US$3.20 at US$1219.90/oz.

The SPI Overnight was closed last night, leaving Thursday night’s 12 point fall as the starting point this morning.

The Week Ahead

Not a lot is expected from markets across the globe until Janet Yellen makes her speech tonight. Thursday is the end of the quarter, so there may be some pushing and shoving going on this week ahead of books close.

Books close also comes ahead of the all-important US non-farm payrolls report due on Friday, being the first of the new month. That also means manufacturing PMI numbers from around the globe and both the manufacturing and services PMIs from China.

Other US data releases during the week include Case-Shiller house prices and the Conference Board’s monthly consumer confidence measure tonight, the ADP private sector jobs report tomorrow, Chicago PMI on Thursday and construction spending, vehicle sales and Michigan Uni’s fortnightly consumer sentiment measure on Friday, along with jobs and the manufacturing PMI.

Besides the manufacturing PMI release on Friday, Australia will see private sector credit data on Thursday along with new home sales, and house prices on Friday.

There are just a few more stocks going ex-dividend this week, across Wednesday and Thursday.

Rudi will appear on Sky Business  on Thursday (12.30-2.30pm) and again on Friday around 11.05am through Skype-link to discuss broker calls.
 

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

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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: April Fools?

By Greg Peel

The Dow closed down 79 points or 0.5% while the S&P lost 0.6% to 2036 and the Nasdaq fell 1.1%.

Square Up

Talk of an April rate hike from the Fed actually emerged on Tuesday night but at the time seemed a little fanciful. It nevertheless appears such chatter has put some pressure on the Aussie dollar which over the past 24 hours has steadily declined a full 1.2% to US$0.7528 this morning. We might argue that having set itself short previously, the forex market has more recently set itself long.

There has been much talk of late that the rebound we’ve experienced in commodity prices has been overdone and has no ongoing substance, which no doubt has led to nervousness. And I have noted this past week that in the wake of last week’s central bank action, and/or lack thereof, and ahead of the US earnings season beginning next month, there has seemed little reason for stock markets to go up.

And when they can’t go up, they go down instead. Indeed, despite a slightly positive lead from the overnight futures, the ASX200 plunged 42 points pretty much from the open yesterday. All sectors were in the red and there were no particular stand-outs, suggesting market-wide selling. Possibly a Brussels reaction? Volumes are light heading into the Easter break and so there was a bit of a vacuum, but the buying interest that subsequently emerged seemed fairly half-hearted.

By the closing bell it was the resource sectors which had taken the biggest hit while the banks and healthcare suffered mild weakness. A balance was struck with some buying in consumer staples.

Expectations of a sideways drift into Easter on declining volumes can probably now be put aside. There is always an incentive to square up ahead of a four day break and the resource sectors have been the best performers these past couple of weeks. On last night’s commodity price moves, resource stocks will be looking vulnerable today.

The Inflation Argument

One Fedhead has posited that instead of holding off on a rate hike because inflation is still low, a rate hike should be implemented in order to drive inflation. It’s an upside down theory from an economics perspective, but then as they say, the first law of economists is that for every economist there is an equal and opposite economist, and the second law is that they’re both wrong.

It now appears as many as five FOMC members are agitating for an April rate hike. Janet Yellen did suggest at her press conference last week that April is still “live”, but that’s the standard line. On the strength of the Fed statement and the press conference, the bulk of the market shifted expectation to September as being the next rate hike meeting, away from June. But does the market seriously believe there could be a rate hike next month?

Well it’s better to be safe than sorry, and as I’ve noted, nervousness had crept into commodity markets over the sustainability of recent price rebounds. The US dollar index rose 0.4% last night and Wall Street started dumping resource sector stocks.

The selling was exacerbated by the release of the weekly US oil inventory data. It showed a crude stockpile addition three times larger than analysts had forecast, and the sixth straight week of stockpile increases. Gasoline stockpiles came in lower than forecast, which is positive from the demand side ahead of the US summer driving season, but on the supply side, there appears no sign of relief.

Oil probably didn’t need too much of an excuse to fall anyway. West Texas dropped 4% and US energy stocks went tumbling alongside US material stocks, which themselves were looking at hefty falls in base and precious metals prices.

So between Fed confusion, a possible peak in the commodity price rebound, a long weekend, next week’s quarter-end, and a lull before US earnings reports start to flow, Wall Street sold down last night. It was “risk-off”, as supported by the 1.1% fall in the Nasdaq, although a 79 point drop for the Dow is hardly dramatic in today’s context.

“Risk off” was also evident in the US bond market, where the ten-year bond yield fell 6 basis points to 1.88%. But hang on, if Wall Street really does believe there could be an April rate hike, the bonds have gone the wrong way.

Which probably sums up the true likelihood of an April rate hike.

Commodities

West Texas crude is down US$1.60 to US$39.84 and Brent is down US$1.31 at US$40.53/bbl.

In thin pre-Easter trade, all base metals fell 1.5-2%. Copper led out with a 2% fall and dropped through the psychological US$5000/t level.

Iron ore fell US60c to US$57.30/t.

Gold is down US$25.90 at US$1225.90/oz. I would wager that the gold bugs had expected more from the Fed’s supposedly increased dovishness last week, and have now bottled.

Today

The SPI Overnight closed down 34 points or 0.7%.

Back in the day, the ASX used to close at lunchtime on the Thursday before Easter. While that is no longer the case, no one ever told the financial community, so don’t expect anyone much to be around this afternoon.

Westpac ((WBC)) will provide a strategy update today.

Tonight in the US its’s durable goods orders. Note that while the ASX is not open on Monday, Wall Street is. Next week’s regular Monday Report will thus cover two Wall Street sessions, and will be published on Tuesday.

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.)

Rudi will make his weekly Thursday appearance on Sky Business from 12.20-2.30pm and re-appear tonight on Switzer TV between 7-8pm.

(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: Where To Now?

By Greg Peel

The Dow closed up 21 points or 0.1% while the S&P gained 0.1% to 2051 and the Nasdaq rose 0.3%.

Bring It On

There is likely a level of fiscal nervousness creeping into the Australian stock market now that the government has pulled the double dissolution trigger and brought forward the budget release to allow for an early election. We have Easter this weekend and then we head into April – so often a peak month for the market ahead of the old “Sell in May” period.

The healthcare sector has been suffering from fiscal nervousness for some time given the number of government reviews underway of various elements of the country’s healthcare system. But at this stage of the game, the government’s May budget is still a bit of a mystery. Tax reform looms as a potential issue for the superannuation industry. Thereafter, well, we just don’t know yet.

Commodity prices have stabilised for now and we are still in the vacuum left behind from the February results season. Market news and research is very thin on the ground. Glenn Stevens is set to speak today and the market will be very interested to hear what he has to say, summed up by the one question: Is an interest rate cut now likely in response to global developments?” Just suggesting the Aussie is “too high” probably ain’t gonna cut it.

The overnight futures market signalled another strong day for the local market yesterday but it never happened. Energy was down a percent on a lower oil price but otherwise most sectors appeared to be hit with a bit of profit-taking, with one exception being healthcare, having suffered enough of late.

There is no doubt also some nervousness with regard Wall Street, which as of last night has posted its longest winning streak since December 2014, marking seven consecutive up-days and a 13% rally from the February low for the S&P500. What will drive it higher from here?

Hanging On

That will probably come down to US earnings reports, which will begin to flow next month. Meanwhile, there’s Easter and then end-of-quarter and plenty of profits to be locked in following the 13% run. Stock markets do not keep going up forever and hence there must be a pullback around the corner.

The oil correlation appears to have faded for now given consolidation in the oil price, but that’s not to say Wall Street wouldn’t tumble in a heartbeat if oil were to suffer another dip. Many believe it will, although there are tentative signs emerging of US production finally responding to low oil prices.

There are always more economic data releases to consider of course. Last night it was revealed US existing home sales plunged 7.1% in February, more than economists expected. But then economists did not forecast December’s record jump in sales and incorrectly suggested January would see some give-back. Existing home sales numbers can be volatile.

The Chicago Fed national activity index fell to minus 2.9 in February from plus 0.41 in January. January was actually a surprise blip. The index has fallen five months out of six.

WTI crude did close a little higher last night but given it was the expiry of the April delivery contract, there’s not much to be read into it. More interesting is that after surging all the way up to 2050 at the quadruple witching expiry on Friday night, last night the S&P500 held on for a 2051 close when no one would have been surprised by a pullback.

Volumes were nevertheless minimal last night following the biggest numbers for the year on Friday’s expiry/rebalance day. There were a couple of merger announcements to excite the market, but not much else.

Of course the problem with markets that can no longer find a reason to go up is that they inevitably go down instead.

Commodities

West Texas crude is up US58c at US$39.91/bbl and Brent is up US16c at US$41.62/bbl.

Base metal markets have found themselves in a similar position to stock markets, and with a four-day break coming up for the LME there’s likely to be some squaring. With the US dollar index ticking back further overnight with 0.4% gain to 95.37, metal prices were mixed. Copper was steady, aluminium and tin fell 0.5% and lead, nickel and zinc rose 1%.

The fun and games continued in iron ore nonetheless. Analysts have been scratching their heads as to exactly why iron ore has found such renewed strength, outside of seasonal restocking, and thus the warning stands that strength will likely be fleeting.

Last week it looked as if we might have begun the pullback but no – iron ore has turned around again and last night rose US$1.70 to US$58.00/t.

While the slight recovery for the US dollar following its Fed-related plunge last week is not having a lot of impact on consumable commodities, last night gold fell US$12.10 to US$1243.00/oz.

The Aussie is down 0.3% at US$0.7580.

Today

The SPI Overnight closed up 11 points or 0.2%.

All ears will be on the RBA governor when he speaks today.

Kathmandu ((KMD)) and TPG Telecom ((TPM)) post earnings results today.

Rudi will Skype-link up with Sky Business today at around 11.15am to talk broker calls and tonight from 8-9.30pm he will host Your Money, Your Call Equities. Nigel has not been invited.
 

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 Monday Report

By Greg Peel

Consolidation

The ASX200 surged almost 50 points early in the session on Friday but eased back by lunchtime ahead of a quiet afternoon. Stronger commodities prices again supported the resources sectors but the banks were flat, and we’re beginning to see evidence of the damage caused by a suddenly much stronger Aussie.

Materials closed up 1.7% and energy 0.8% but healthcare fell 1.1% as offshore exposure and ongoing fears surrounding the upcoming federal budget continue to weigh.

It's Easter this weekend providing for short weeks this week and next, plus next week also sees the end of the March quarter before we then shift into a school holiday period in April. As excitement over the Fed’s more measured policy stance dies down, we should now see a period of consolidation following the solid bounce up to 5200 from 4800 for the index.

The subject du jour is of course commodity prices, and whether they can hold up at these rebound levels. The banks have returned from what were considered oversold levels and as yet there is no expectation of a rate cut from the RBA anytime soon.

That might possibly change tomorrow when Glenn Stevens makes a speech and takes a Q&A, given all that has transpired in central bank and currency land since the March RBA meeting.

Start Again

Wall Street posted its fifth straight week of gains last week and the Dow rallied six sessions in a row for the first time since October. After Friday’s rally, which was really just more of the same from Thursday post-Fed, both the Dow and S&P500 are in positive territory for the year.

The Dow closed up 120 points or 0.7% while the S&P gained 0.4% to 2049 and the Nasdaq added 0.4%.

The major driver of the stock index rebound has been the commodity price rebound and the weaker US dollar, driven by abating Fed hike fears. The lower greenback also feeds into stronger commodity prices. Commodity prices may be back where they began the year but there has not been any change to the outlook for the Chinese economy, which supposedly was one of the scare factors that took Wall Street down in the first place.

That puts the focus squarely back on central bank policy as the provider of stock market stimulus.

Michigan Uni reported on Friday night that its fortnightly US consumer sentiment gauge had fallen to a five-month low 90.0 from 91.7. US consumers are apparently now worried that the US economy is not going to grow as fast as early assumed and that on the rebound in the oil price, gasoline prices will begin to rise ahead of the summer driving season.

The WTI price fell 2% on Friday night because for the first time in 13 weeks, the domestic rig count rose. The bounce was in the order of…drum roll…one rig, but no doubt it had the market wondering whether reductions have now reached their limit.

Nevertheless, the total rig count, which includes Gulf oil that has recently taken a back seat to domestic shale oil, fell by four rigs to 476 last week to a new record low. Since a year ago, 593 rigs have ceased operation. One would think that such a massive shutdown of supply would have to suggest oil prices have seen their lows and should go higher form here but the problem is one of a self-defeating feedback loop. Modern shale oil rigs can be switched back on again in a heartbeat and if oil prices remain supported, many probably will.

And that’s likely why the addition of one lonely domestic rig tipped oil prices over.

It’s also interesting to note, once more, that the correlation between the oil price and Wall Street was negative on Friday night.

It was actually the biggest volume day of 2016, but that’s understandable given the March quarter quadruple witching expiry and the closing bell rebalancing of S&P500 weightings. Given the S&P closed just a tad under 2050, one presumes this strike price was influential in Wall Street’s move on Friday night.

So we’ll see what happens tonight.

Commodities

West Texas crude fell US79c to US$39.33/bbl and Brent rose US12c to US$41.46/bbl.

After falling solidly in the wake of the Fed meeting, the US dollar index rebounded slightly on Friday night, up 0.3% to 95.01. This was a sufficient trigger to spark some profit-taking in base metals prices that have been enjoying the benefits of the weaker greenback up to now. Aluminium and copper fell 0.5%, lead and tin fell 1%, nickel fell 2.5% and zinc was steady.

Iron ore rose US90c to US$56.30/t.

The bounce in the greenback helped the Aussie down 0.5% to US$0.7604 on Saturday morning but gold held its ground, steady at US$1255.10/oz.

The SPI Overnight closed up 29 points or 0.6% on Saturday morning.

The Week Ahead

US data releases this week include the Chicago Fed national activity index and existing home sales tonight, FHFA house prices and the Richmond Fed index on Tuesday, and new home sales on Wednesday. Thursday it’s durable goods, and Friday another revision of December quarter GDP.

Which reminds us the Good Friday is not actually a national public holiday in the US despite markets being closed. And Wall Street opens on Easter Monday. Markets are closed on Friday in Australia, New Zealand, the UK and Europe.

Thursday also sees a flash estimate of March manufacturing PMI in the US, as well as in Japan and the eurozone. The eurozone also sees the release of both the ZEW investor sentiment and IFO German business sentiment indices on Tuesday night.

Australia is devoid of major economic data this week, although as noted, Glenn Stevens’ speech tomorrow will be a must-see event.

On the local stock front, there are still a handful of stocks left to go ex-div this week while out of cycle earnings reports will be forthcoming from Kathmandu ((KMD)) and TPG Telecom ((TPM)) tomorrow and Brickworks ((BKW)) and Nufarm ((NUF)) on Wednesday. Westpac ((WBC)) will provide a strategy update on Thursday.

Rudi will appear on Sky Business on Tuesday morning (11.15am) via Skype-link, then later on Tuesday he'll host Your Money, Your Call (8-9.30pm). On Thursday Rudi re-appears at noon and again between 7-8pm for the Switzer Report.
 

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: The Day After

By Greg Peel

The Dow closed up 155 points or 0.9% while the S&P gained 0.7% to 2040 as the Nasdaq rose 0.2%.

Odd Jobs

Congratulations to the three hundred Australians who managed to find a job last month. Commiserations to the far greater number who abandoned hope of finding a job in Australia’s currently difficult economy.

The market saw a fall in Australia’s unemployment rate to 5.8% from 6.0% as reason to believe there is no way the RBA can cut its cash rate further. The Aussie had already spiked overnight as the US dollar fell on the Fed’s policy pullback, and kicked again yesterday on that 5.8% number. It’s kicked even further overnight on ongoing greenback weakness to be up 1.1% over 24 hours at US$76.43, up around two cents from pre-Fed.

Yet economists had forecast an addition of 13,500 jobs in February and the result was a mere 300. Not that economist forecasts ever get anywhere near the complete lottery that is the monthly ABS jobs data. The fall in the unemployment rate was due to a sharp fall in the participation rate. In September, October and November, Australia added a net 124,700 jobs. In December, January and February, Australia has lost a net 6,600 jobs.

It is not unusual for jobs growth to ease back after such a spurt, but we are reminded that in his March monetary policy statement, the RBA governor suggested, in relation to policy setting, “Over the period ahead, new information should allow the Board to judge whether the improvement in labour market conditions is continuing”. Well, it’s not.

But along with the currency, the Australian stock market kicked higher on the release of the unemployment number. Just prior, the opening Wall Street-inspired rally had begun to fade. There was a sharp jump up to 50 points higher on the session for the ASX200, and that’s pretty much where we stayed for the rest of the day.

The rally was led out by energy (+2.8%) and materials (+2.3%) which is understandable given the jump in commodity prices provided by the weaker US dollar. But the real clout came from a 1.1% gain for the banks. I noted yesterday that US bank stocks had fallen in defiance of the rest of the market post-Fed on Wednesday night because banks need higher rates, and subsequently suggested the local banks might come under pressure yesterday if the Fed had opened the door for an RBA cut. But 5.8% unemployment! No cut, the market has decided.

The RBA’s April statement is going to make for interesting reading.

All is forgiven

I note every time there is a Fed meeting that the smart money tends to let the headless chooks run around for the couple of hours post-release and instead take a night to think about it before making a more studied investment decision the next day. Wall Street did rally post-Fed, but the more thoughtful investors decided to push on with it more emphatically last night.

The two main drivers were a US dollar which has fallen another 0.9% overnight to 94.77 on its index and the WTI crude price, which has retaken US$40/bbl. WTI fell through 40 last December and began its rapid slide down to 26 in February, sending global stock markets into a spiral, not the least Wall Street. Well with oil now back at 40, the Dow last night turned positive for the year. The S&P traded positive for the year but eased a little toward the close.

The indices were led out by the energy and materials sectors once more, but the weaker greenback also provided support for the significant number of multinational industrials. Stocks like Dow component Caterpillar, which is not only tied to commodity prices but derives more than half of its revenue offshore, are making a comeback.

Meanwhile, the star performer in the broader market last night was FedEx, which shot up 10% on its earnings result release. FedEx is a direct beneficiary of the rapidly growing on-line shopping business, but it is also a company for which lower oil (and while we may be back at 40 that’s still a long way from 100) means lower costs.

It would appear that if the US economy can find a sweet spot of balance between an oil price that is low enough to force supply curtailment and provide a boost to oil consuming companies and households, but not so low as to threaten economic meltdown, there is cause for optimism. And the Fed is being supportive by keeping a lid on the US dollar.

Commodities

West Texas crude is up US$1.61 or 4.2% at US$40.12/bbl and Brent is up US$1.05 or 2.6% at US$41.34/bbl.

The LME had its first chance to respond to the Fed last night having closed on Wednesday night just before the statement release. The US dollar index is down 2% in that time, so no surprise that copper is up 1.5%, lead and tin up 2%, nickel up 2.5% and zinc up 4%. Only aluminium struggled, up a mere 0.3%.

Iron ore rose US$2.90 to US$55.40/t.

Gold, on the other hand, has not been able to push to new 2016 highs despite another 1% fall in the greenback overnight. It’s down US$4.90 at US$1256.40/oz.

Today

Yesterday was expiry day for the SPI and the new June front month contract closed up 24 points or 0.5% overnight.

Today will see the changes to the components of the ASX/S&P indices announced two weeks ago become effective.

Tonight will see an equivalent rebalancing of the S&P500 in the US, along with the quarterly quadrupled witching expiry of equity derivatives. There could thus be some heightened volatility, particularly at the close.

Premier Investments ((PMV)) will release its earnings report today.

Rudi will link up with Sky Business through 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)

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.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

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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