Tag Archives: Bonds/Interest Rates

article 3 months old

The Overnight Report: Bring On Jobs

By Greg Peel

The Dow closed up 44 points or 0.3% while the S&P rose 0.4% to 1993 and the Nasdaq gained 0.1%.

More of the same

The major drivers of Wednesday’s big rally on Bridge Street were the banks, then daylight, then the resource sectors. Having pushed through 5000 for the umpteenth time, the green light is now on for the market to at least take a shot at 5200, if not the 5400 level chartists are flagging.

Yesterday simply saw more of the same. The banks led the charge again with a 1.8% gain, materials backed up with a 2.0% gain, with a little help from a stronger iron ore price (note the banks are now relatively a much bigger cap weight), and energy chimed in with 1.2% as, increasingly, it looks like the oil price might have stabilised.

There was little to speak of happening in other sectors. The banks and resources led us down, so it stands to reason they should lead us back up again.

Oil price stability, if that’s what we’re seeing, is important for LNG exporting. The iron ore price is holding above US$50/t on Chinese restocking but that must soon reach a conclusion. It is important to recognise the lag time between export prices pre-determined for cargoes delivered and spot pricing in relevant markets. Ditto the impact of the falling Aussie. This lag was apparent in yesterday’s January trade data.

Wednesday’s strong December quarter GDP result featured a surge in consumer spending to more than offset weakness in commodities exports. The bad news was a decline in volumes of exports as well as declining prices. Yesterday’s January trade data nevertheless showed a 1.2% increase in exports following the three months of declines over the December quarter. Exports are still reflecting the worst of commodity prices, but the weaker Aussie is starting to have an impact on AUD pricing.

The weaker Aussie is now also having the opposite effect on imports, which fell 1.1% in January. Foreign goods are becoming more expensive. The December quarter GDP was driven by consumer spending. If this now backs off in 2016, due to rising prices, and a predicted slowing in the housing boom, is there enough in non-mining to overcome weakness in mining going forward?

What we can place some hope in is that things do not look like they can get much worse for mining (and energy is included in the “mining” tag here). A rebound in commodity prices would be nice, but even stability of prices would be comforting such that, alongside the benefits of the weaker currency, mining at least stops dragging on the GDP.

The lower Aussie is also having an impact on Australia’s service sector, it would seem. The services PMI flipped back into expansion at 51.8 in February, up from January’s 48.4. Australians are shifting back to domestic services from overseas services (eg travel) due to the price.

The only problem, in the shorter term, is that the Aussie’s currently on a bit of a tear. Following Wednesday’s big jump, the Aussie is up another 0.9% at US$0.7356 thanks to a narrower trade deficit and strength in the services sector. There is no doubt an element of short-covering involved, given everyone was expecting the Aussie to be at 65 by now.

Around the Grounds

China’s service sector continues to expand, but the pace of that expansion continues to slow. Caixin’s independent China services PMI came in at 51.2, down from 52.4, and largely mirroring Beijing’s official number released on Tuesday.

China’s manufacturing sector continues to contract and keeps the world up at night, but the Chinese government is sleeping easy because contraction is the intention. Not so services, which is meant to take the baton. If investors want to worry about China’s economy, they should fret about the slowing pace of service sector growth and ignore manufacturing.

Japan’s services PMI rose to 52.4 from 51.5. The eurozone saw a fall to a 13-month low of 53.3, down from 53.6. The UK saw a fall to a near three-year low at 52.7, down from 55.6.

The US saw a fall to 53.4 from 53.5.

Waiting for Jobs

Wall Street took the services PMI as a good result, given economists had forecast worse. The oil market simply saw a weaker number, and sold off. The sell-off was probably due to some trigger happy day-traders, as oil came right back again to finish the session little changed, probably driven by those who see an improving trend (ie falling production).

The Dow was down 76 points on weak oil and rallied back to a stronger close, with oil. But volumes were low and volatility minimal as Wall Street awaits tonight’s all important non-farm payrolls report, the last jobs number ahead of the March Fed rate meeting.

That aside, last night’s January factory orders release showed a pleasing gain of 1.6% following two months of declines.

Commodities

LME traders noted indications of global base metal production cuts in sending prices higher for yet another session. Aluminium bucked the trend with a 1% fall, but copper, lead and tin were up 1%, zinc 2% and nickel 3%. Price rises were aided by a weaker US dollar, which fell 0.7% on its index to 97.55.

The dollar fell because of the weak US service sector PMI, despite similar weakness in the PMIs of Europe and the UK. The US service sector is far, far bigger than the US manufacturing sector.

If the US data continue to weaken then perhaps the Fed will adopt a more dovish tone at the March meeting. The greenback fall suggests this, and gold is up US$25.50 to US$1264.70/oz.

Iron ore rose US10c to US$51.70/t.

West Texas crude is steady at US$34.62/bbl and Brent is up a tad at US$37.10/bbl.

Today

The SPI Overnight closed up 5 points.

It would make sense that Bridge Street will also have a quieter session today, given two days of strong rallies, it’s Friday, and US jobs numbers are out tonight.

We will nevertheless see local January retail sales numbers today.

Medibank Private ((MPL)) is among a handful of stocks going ex-div today, and S&P/ASX will announce quarterly changes to index constituents, which will come in effect in two weeks’ time.

Rudi will appear twice on Sky Business today. First via Skype-link around 11.15am to discuss broker ratings and later, from 7-8pm, as guest on Mark Todd's Your Money, Your Call Fixed Interest.
 

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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: Hanging In There

By Greg Peel

The Dow closed up 34 points or 0.2% while the S&P gained 0.2% to 1981 and the Nasdaq was flat.

Slowdown? What Slowdown?

Relax said the night man, we are programmed to receive. And whaddya know? We’re back at 5000 again.

The local market was already off to a flier from the opening bell yesterday, courtesy of the big rally on Wall Street. The 5000 level for the ASX200 hove into view. But the kicker came with the mid-morning release of the December quarter GDP result.

Quarter on quarter growth of 0.6% clearly beat forecasts of 0.4%. The September quarter result was also revised upward, leaving 3.0% growth for 2015 when 2.7% had been predicted.

Non-mining growth overcame the drag from resource sector contraction, led out by the housing market but specifically surprising on consumer spending. The good news is that the decline in resource sector spending is reaching its nadir, and it appears we may be seeing a bottoming out of commodity prices.

On the bad news side, the question is one of just how much longer support from the housing market can last. Housing has started 2016 with another flurry, but many an analyst is expecting a cooling as the year progresses, following such a bubbly run. Looking at this season’s earnings reports from relevant retail outlets, a lot of consumer spending has been housing-related. If the housing market softens presumably this area of spending will too.

And given a lack of any notable wage growth, consumer spending has been driven by a reduction in household savings. Consumers have recently begun to emerge from behind the couch where they’ve been hiding since 2008, and pulled out their wallets once more. But unless wages pick up, there is a limit to how far into the savings built up since the GFC consumers are prepared to dip.

Strength in employment suggests wages must eventually grow, but can employment remain strong? Retrenchments continue in the resource sectors and are soon to hit peak levels in retail (Dick Smith, Masters), for example. Strength in employment over the past twelve months has surprised everyone from economists to the RBA, and there are those who suggest it’s just a misleading head-fake up to now.

As is suggested by the move in the Aussie dollar over the past 24 hours, an RBA rate cut now looks like a distant hope. Having already spiked up on Tuesday when the RBA offered no fresh hint of a rate cut – and sensibly so it would now seem – the Aussie is up another 1.6% at US$0.7293. Rate cuts are bad for banks, and hey, if the March quarter GDP looks just a strong, we’ll be talking rate hike once more.

The banks were up 3.0% yesterday. There’s the bulk of your hundred points in the index right there. Energy was up 3.8% despite little movement in oil prices overnight, but like the banks, the energy names are among the most beaten-down. A jump in the iron ore price helped materials to a 1.9% gain, and having now gone ex-div, even the telco was back in favour.

It appears investors dipped into utilities to fund their cyclical purchases, while mixed individual stock moves kept the diverse industrials sector at bay. Ex-divs would have had an impact.

Is it happening?

After rallying 350 Dow points on Tuesday night with no real impetus from the oil price, it was not surprising Wall Street opened lower last night. But it was a case of the oil story re-emerging once more.

US weekly crude inventories rose by more than expected last week, it was revealed. Down went WTI, by as much as 2%, and down went the Dow, by a hundred points.

But wait!

The same data release showed US weekly US crude production fell again, as it did last week. The supply is still building ahead of short term demand but if production continues to fall, so, eventually, will excess inventories. WTI spun around and rallied, to be up just slightly on the session.

It looks like we might finally be seeing the impact of low oil prices on the marginal US oil industry. But it is a balancing act. If prices keep rising because production keeps falling, then higher prices may well bring production back on line. Realistically, oil needs to stay around US$30/bbl for as long as possible to ensure US$50/bbl can ever be seen again.

Meanwhile, last night’s ADP private sector jobs report showed 214,000 new jobs added when economists had forecast 185,000. But January’s number was revised down to 193,000 from 205,000, so there was some trade-off.

The Fed’s Beige Book noted activity continued to expand in most districts over January-February but conditions “varied considerably” across those districts. These are not words the Fed has used in recent times. The points of drag are nevertheless obvious – oil production states are hurting and those with a concentration of manufacturing are finding the stronger US dollar a headwind.

Perhaps Janet Yellen should get on the phone to Glenn Stevens for advice about monetary policy management in a “two-speed” economy, or a “multi-speed” economy, as Australia’s has oft been referred to in recent years. Divergent pockets of economic strength and weakness will make the Fed’s one-rate-for-all policy decision even more complex.

Commodities

West Texas crude is up US23c at US$34.63/bbl and Brent is up US10c at US$36.91/bbl.

Base metals, one LME trader remarked last night, are having “a nice little mini-bull run”. Prices kicked on last night after Tuesday night’s gains, with all metals bar nickel rising roughly 1-2%. Nickel managed 0.5%.

Iron ore is on a tear, it would seem. It’s up US$1.20 to US$51.60/t.

The US dollar index has fallen back 0.2% to 98.19, so gold is up US$4.30 at US$1239.20/oz.

Today

The SPI Overnight closed up 25 points or 0.5%. Have we now entered yet another period of attempting to pull away from 5000 to the upside?

It’s service sector PMI day across the globe, including Caixin’s Chinese number.

Australia will also see January trade numbers.

There are only a couple of ex-divs today.

Rudi will appear on Sky Business today, first time under the new programming, and he'll stay from 12.30 till 2.30pm.
 

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

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article 3 months old

The Overnight Report: Forward March

By Greg Peel

The Dow closed up 348 points or 2.1% while the S&P gained 2.4% to 1978 as the Nasdaq surged 2.9%.

Bank on it

It appears there were two particular drivers of yesterday’s rally in the local market which ultimately led the ASX200 to a 0.9% gain: stimulus in China, and no stimulus in Australia.

We can draw this conclusion from looking at yesterday’s sector movements. Commodity prices had a relatively quiet overnight session and yesterday’s local December quarter trade data were nothing to be happy about, ditto the Chinese PMIs, but materials rose 1.9% and energy 1.8%. The banks rose 1.6%, providing the bulk of the index gain.

Moreover, the index rally would have been a lot stronger if not for Telstra going ex-div, sending the telco sector down 4.4%.

It was still a choppy session nonetheless, in which we actually reached the day’s closing level in the morning before twice stumbling back to square ahead of a final rally back again, which took us almost to 4925 resistance.

The PBoC cut its bank reserve ratio requirement by 50 basis points overnight, suggesting Beijing is still ready and willing to provide more stimulus beyond renminbi devaluation. That’s good news for the local resource sectors.

But during the morning we saw the local December quarter current account numbers, including the terms of trade. The trade deficit widened further in the quarter as the value of exports fell. This was not a shock, given the falls in commodity prices over the period. But as commodity prices fell through 2015, it was always notable that the volume of exports of iron ore and coal continued to grow.

Not so in the December quarter. We saw both value and volumes down.

By late morning we saw China’s PMI data. Beijing’s official manufacturing PMI fell to 49.0 in February from 49.4 in January to mark the seventh consecutive month of contraction. Caixin’s independent equivalent measure fell to 48.0 from 48.4. Beijing’s official service sector PMI fell to 52.7 from 53.5.

Both the local export data and the Chinese PMI numbers were enough to cause individual stumbles in trading yesterday on the way to a final rally. It appears prior Chinese stimulus ultimately trumped all.

It was the 1.6% rally in the banks that really drove the index. The market went very quiet at 2.30pm yesterday, and then kicked on to the close. While no one was expecting the RBA to cut its cash rate, there was clearly expectation the language of Glenn Stevens’ statement could well be more dovish, given local data releases over the month (note that building approvals fell 7.5% in January) and a fears of a global recession.

As it was, the March statement was as good as identical to the February statement. The RBA believes the current rate is appropriate, but given low inflation there is scope for more easing if needed. This will likely be determined by the labour market, were recent strength to evaporate.

No cut on the horizon then. Rate cuts are bad for banks, as they squeeze net interest margins, particularly when we’re down at such low numbers. Ergo, no dovishness on the RBA’s part is good news for banks, and for the Aussie, which is up 0.6% at US$0.7176 for the same reason.

Around the Grounds

Incidentally, Australia’s manufacturing PMI showed a healthy gain to 53.5 from 51.5, marking the eight consecutive month of growth. This would be great news were Australia’s manufacturing sector not a mere shadow of its former self.

The Australian result was actually a global stand-out. Beyond China, Japan’s manufacturing PMI fell to 50.1 from 52.3, the eurozone fell to 52.1 from 52.3, and the UK dropped ominously to 50.8 from 52.9. It was left to the US to provide some good news, which it did with a big gain to 49.5 from 48.2. But that’s still contraction.

New Month

I suggested yesterday that the weak session on Wall Street overnight was more about end of month squaring than much else, particularly given it flew in the face of the entrenched oil price correlation. Well last night the Dow jumped 350 points and while WTI crude was stronger, it was only modestly so.

There were, admittedly, some stronger US economic data releases last night. One was the aforementioned manufacturing PMI which, while still indicating contraction, at least indicated a solid slowing in the rate of contraction. There was also a positive reading on construction. The better the data, the more chance of the Fed raising again.

And if the Fed raises rates, that’s good for the banks, as discussed earlier. So last night the US banks led the strong rally on Wall Street.

But wait! Aren’t we meant to be in “good news is bad news’ mode? Well in the case of last night, apparently not. The banks led out all the cyclical sectors with strong gains, while the underperforming sectors were the defensives such as utilities and telcos. Such a spread is emphatically indicative of a “risk-on” rally.

And why, suddenly, should Wall Street be “risk-on”? Well it’s a new month, the bad news is largely baked in – to date – China is stimulating and once the S&P500 breached 1950 to the upside, it was technically on for young and old. A close above 1975 was also going to be technically bullish, and the broad index closed at 1978.

Confirming the ‘risk-on” play was a 9 basis point jump in the US ten-year bond yield to 1.83%, and a 14% drop in the VIX volatility index to a confident 17.7.

Commodities

West Texas crude is up US65c at US$34.40/bbl and Brent is little changed at US$35.96/bbl.

Chinese stimulus and better US data were good for base metals, and they all rose 0.5-1.5%.

Iron ore jumped US$1.50 to US$50.40/t.

All of the above came despite a 0.2% gain in the US dollar index to 98.39. Gold fell a tad, to US$1234.90/oz.

Today

The SPI Overnight closed up 92 points or 1.9%, so strap in. While there are several stocks going ex-div today, there are no Telstra-style biggies.

It’s GDP day today. We’re looking for 2.6% annual, up from 2.5% in the September quarter.

February private sector jobs numbers are due tonight in the US, and the Fed will release its Beige Book.


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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

The Overnight Report: Month End Blues

By Greg Peel

The Dow closed down 123 points or 0.7% while the S&P lost 0.8% to 1932 and the Nasdaq fell 0.7%.

Flat Finish

It was another choppy session on Bridge Street yesterday as the result season drew to a close. Being the end of month, there was no doubt attempts at window dressing from fund managers, which would explain why we were up 45 points at the peak around midday. That took us to 4925 on the ASX200 which happens to be a technical resistance level.

And it worked. Back down we came for a flat close. All sectors finished mildly positive on the session bar financials and consumer staples, both of which were impacted by stocks going ex-dividend.

Today is a new month.

Yesterday’s January private sector credit data showed assumptions of a slowdown in housing in 2016 are yet to manifest. Certainly in Sydney. The only difference is it is now the owner-occupiers driving the housing market as the investors back off following tighter lending parameters imposed last year.

Housing is particularly important as it is the one true sign of strength in an Australian economy still reeling from the pace of collapse of commodity prices. But for how long can the housing market continue to grow?

The good news in the credit data is that business lending continued to grow a-pace in January. The bad news is that last week’s December quarter private sector capex intentions measure pointed to a significant slowing of expenditure, which would translate to softer demand for credit.

Yesterday’s December quarter data showed corporate profits coming in weaker than expected, dragged down by mining but also disappointing in the non-mining segment. Wages growth remains tepid, which belies apparent strength in the employment numbers.

Soft wages in the face of resilient employment may yet provide the scope the RBA needs to cut its cash rate once more. The board meets today but no change is expected at this stage.

Non-Core Promises

At the G20 finance ministers meeting held over the weekend in Shanghai, the Chinese delegate assured those present China was not about to join in a mutually destructive global war of currency devaluation, otherwise known as “the race to the bottom”. Yesterday the PBoC pegged the renminbi lower for the fifth straight session.

It was in August last year when the PBoC sent the world into a tailspin by suddenly floating the renminbi against a basket of global currencies, amounting to a hefty devaluation no one saw coming. It was all about the renminbi being included in the IMF’s basket of reserve currencies. Having achieved inclusion, the PBoC is back to pegging against the US dollar once more.

Yesterday the PBoC also cut the bank reserve ratio requirement by a further 50 basis points. This is a more typical monetary easing tool China has deployed over past years, alongside occasional interest rate cuts. China may deny any attempt to join the race to the bottom, but it’s in stimulus mode nonetheless.

Being will release February manufacturing and service sector PMIs today, and Caixin will release its independent manufacturing PMI.

Decouple

It must have been the last day of the month. Oil rallied and US stocks indices fell. It’s been a positive month on Wall Street, having bottomed out at 1810 in the S&P500 and rallied all the way back to meet 1950 resistance. Last night’s selling was likely related to end of month profit-taking.

Last night it was Nigeria’s turn to talk up the possibility of an OPEC production freeze. Oil prices dutifully rallied, but one wonders whether much was made of further OPEC rhetoric. Last week’s US rig count showed the tenth straight week of rig declines and this week’s production data will be closely watched. Oil markets also applauded China’s RRR cut in rising a couple of percent.

In US economic news last night, pending home sales fell 2.5% in January, but weakness was partly attributed to the east coast’s Snowzilla blizzard.

Having leapt up solidly in January, the Chicago PMI – a measure of economic activity in the Chicago area – crashed back again into contraction in February, at 47.6. The underlying trend suggests contraction for the past three months.

The Fed remains data dependent, but the data are not painting a very clear picture at present.

Commodities

West Texas crude is up US79c at US$33.75/bbl while Brent is up US66c at US$36.01/bbl.

It was a quiet session on the LME for once, with a 1% gain for lead the only movement worthy of mention among the base metals.

Iron ore fell US10c to US$48.90/t.

The US dollar index is relatively steady at 98.19 but gold is up US$14.50 at US$1238.10/oz.

The Aussie is steady at US$0.7136.

Today

The SPI Overnight closed down 12 points or 0.3%.

The world will release manufacturing PMIs today, including those for Australia and China as noted.

Locally we’ll also see monthly building approval and house price numbers while the December quarter current account will be released, including the terms of trade.

The RBA will meet today.

There’s another sizeable round of ex-divs today, including AMP ((AMP)), Bendigo & Adelaide Bank ((BEN)), and the mother of all dividends, Telstra ((TLS)).

Rudi will make a brief appearance on Sky Business today at around 11.15am through Skype-link to discuss broker ratings.
 

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

The Wow Factor

It was another choppy session on Friday to wrap what was the last big day of the local result season, notwithstanding a handful of latecomers reports due today. When the dust settled it was another flat close featuring a mix of red and green among sectors.

The resource sectors were always in for a bad day given overnight falls in the oil and iron ore prices, and the fact the big names have now all published their disastrous results and ended speculation over dividend policies. But there was one big name to report on Friday, and its influence was clear.

It was the first loss in decades for Woolworths ((WOW)), thanks to the Masters write-off, although the underlying result was nothing to smile about either. The size of the loss sent Woolies shares crashing a further 6% on release, but the key here is the word “further”.

Woolies’ share price has been falling through 2016 on a combination of food price deflation, a failure to make a dent in rival Coles, and ultimately the decision to bail out of the train crash that was the Masters foray. Woolies shares were even dragged down further still last week when Wesfarmers ((WES)) posted a disappointing result, even though that was all about coal and not about Coles. So in a classic case of “sell the rumour, buy the fact”, Woolies shares bounced immediately and powered back through the day to a 2% gain.

The ASX200 chart shows a pretty well correlated picture.

Consumer staples finished up on the day but not so consumer discretionary, which suffered due to a poorly received result from Harvey Norman ((HVN)). The banks were off a little but falls in the resource sectors were balanced out by a rare strong day for Telstra ((TLS)), a mega-cap that has been much maligned of late.

Aside from the aforementioned handful of companies to report today, attention in the local market now turns to the economy. Before a backdrop of what has been a disappointingly directionless debate over tax reform, this week will see an RBA policy meeting ahead of Wednesday’s December quarter GDP result. Economists are predicting annualised 2.6% growth, up from the September quarter’s 2.5%.

Fed Follies

Meanwhile, the equivalent US GDP result was revised for the second time on Friday night. Economists had expected a downgrade to a mere 0.5% growth from the previous 0.7% revision, so there was some shock when the number came in at 1.0%.

Suddenly fears were rekindled of a Fed rate hike. However the disparity between the result and forecasts came down to an inventory build. Inventory builds are two-edged swords – in a strong economy they can reflect a deliberate attempt to get on top of growing demand, but in a weak economy they can reflect a misreading of weak demand, and herald possible discounting ahead.

Economists have suggested the latter in this case. The US economy grew 2.4% in 2015, as it did in 2014, again failing to reach the 3% average rate. There is nothing here to suddenly spark the Fed into action.

Inflation might be a different matter. I noted last week that while a rise in the US CPI was another reason Fed fears had again become rekindled, it is well known the FOMC prefers to ignore price inflation and use the personal consumption & expenditure measure as a more realistic gauge of overall inflation. Well, January’s PCE reading of 1.3% was a big jump on December’s 0.7%.

It’s still a long way from the Fed’s 2% target, but the FOMC itself has suggested that while it may yet take a while to get to 2%, if the trend is rising then inflation becomes a risk if monetary policy does not respond in anticipation. Is this enough to secure a March Fed rate hike? Probably not in isolation. The Fed remains “data dependent”, which is code for “no idea at this stage”, and most data readings have been on the weak side of late, particularly the PMIs.

This week sees a raft of US data releases, including the PMIs, and culminating with the February jobs report on Friday night.

Whether or not the PCE reading had much of an impact on Wall Street on Friday is unclear, as at the end of the day the Dow basically tracked the oil price yet again. Oil popped early on another weekly reduction in the rig count, but fell away as the session progressed. Ditto the Dow, which closed down 57 points or 0.3%. The S&P500 fell 0.2% to 1948, splitting the difference on a 0.2% gain for the Nasdaq.

Commodities

West Texas crude was down US10c at US$32.96/bbl on Saturday morning and Brent was up US15c at US$35.35.

Iron ore fell US20c to US$49.00/t.

The flip-flopping base metal market decided on a flip on Friday night, largely due to the better than expected US GDP result and the fact oil was up during the LME session and fell back after the exchange had closed. Copper jumped 2%, lead 3%, zinc 1.5% and nickel 0.5%.

Prices rose despite the offset of the implications of a stronger US GDP result being the US dollar, which rose 0.8% on its index to 98.08. The PCE number would also have been an influence.

Greenback strength meant gold fell US$12.50 to US$1223.50/oz.

And there was some relief for the Aussie on US dollar strength. It suddenly dropped 1.5% to US$0.7131, suggesting there might have been a build-up of long positions heading into this week’s RBA meeting and local GDP release.

The SPI Overnight closed up 7 points on Saturday morning.

The Week Ahead

It is the last day of the month today – Happy Birthday to all those who look 60 but are really only 15 – which can always bring some book squaring argy-bargy. The last few straggler earnings reports will include Slater & Gordon ((SGH)), which is not set to be pretty.

Today’s local economic releases include December quarter company profits and inventories and monthly private sector credit. Tomorrow is manufacturing PMI day across the globe and Beijing will additionally release the official Chinese service sector PMI. Australia will see the December quarter current account, including the all-important terms of trade.

Wednesday it’s the GDP result, and it’s service sector day across the globe, other than the official Chinese result. Australia’s January trade balance is due, followed by retail sales on Friday.

The RBA will meet tomorrow but no change is expected. It will all come down to the language of the statement.

The US will see the Chicago PMI and pending home sales tonight, the manufacturing PMI, construction spending and vehicle sales on Tuesday, and private sector jobs along with the Fed Beige Book on Wednesday.

Thursday it’s the services PMI, chain store sales and factory orders, and Friday it’s non-farm payrolls.

It will be the last US jobs report the Fed will see before its March 16 meeting.

Note that the local market is entering a period in which a number of companies go ex-dividend, dragging on the index. There are quite a few today.

Rudi will appear on Sky Business on Thursday afternoon under the revised program formula & scheduling.

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

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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

Australian corporate reporting seasons typically end on the last day of the month but most companies like to to get their results out by the final Friday. Thus beyond a couple of stragglers next Monday, today is as good as the last day of the season.

Now can all get some sleep.

But attention will quickly turn to the economy, which has been taking a bit of a background role this month.

Next week sees December quarter readings for company profits and inventories and the current account, including the all-important terms of trade, ahead of the ultimate GDP result on Wednesday.

In monthly terms we’ll see the manufacturing and service sector PMIs, building approvals, trade numbers and retail sales. The RBA will meet on Tuesday and while no change is expected, rate cut pressure is quietly building.

Tuesday is manufacturing PMI day across the globe and in the case of China, official service sector PMI day as well. Everyone else will release services PMIs on Thursday.

It’s jobs week in the US, which is always a lark for Fed-watchers. Ahead of Friday’s non-farm payrolls release the US will also see numbers for pending home sales, vehicle and chain store sales, the Chicago PMI, construction spending, private sector jobs, factory orders, trade and the PMIs. The Fed Beige Book is out on Wednesday.

Note that while the local results season may be wrapping up, we’ve already morphed into the subsequent ex-dividend season and they’ll start coming thicker and faster from here, acting as a drag on the index.


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Everything Changes At Zero

By Tim Price, PFP Wealth Management

 Everything changes at zero

“Then said Jesus, “Father, forgive them; for they know not what they do.””

- Luke 23:34.

For the benefit of non-subscribers, there are two versions of the Financial Times newspaper. One of them is the hard copy edition, still printed on pink paper, an exact digital replica of which is available on the paper’s website to subscribers. The second is the website itself, at www.ft.com. The difference between the two is subtle, but crucial. In the formal, hard copy edition, ‘reader response’ is strictly edited and controlled. Occasionally a despatch critical of one of the paper’s columnists (normally and deservedly Martin Wolf) will make its way through enemy lines, but as the ‘edition of record’, hostility to and criticism of the newspaper’s editorial staff is, as you might expect, strictly rationed.

On the website, however, the gloves come off.

Last week the FT published an article, ‘Central banks: negative thinking’, co-authored by Robin Wigglesworth, Leo Lewis and Dan McCrum, that was atypically sceptical of the received wisdom on QE (i.e., that it works). The article began, as is probably compulsory these days, in Japan:

“Forums have seen a flood of commentary from Japan’s retirees decrying negative rates and the “torture” that the BoJ’s policy is already inflicting...

“The Japanese can be conservative at the best of times, and few think these are the best of times.”

But as the authors rightly point out, Japan is not the only country affected by negative interest rates, a policy that John Stepek, the editor of MoneyWeek, has nicely called

“the weaponisation of compound interest”.

As Messrs Wigglesworth, Lewis and McCrum rightly observe,

“With quantitative easing seemingly losing its power to dazzle markets, and many governments either unable or unwilling to countenance raising spending, central banks have felt compelled to try new tools.”

What is alarming is that central banks are brandishing these new tools without any viable evidence or theory that they will even work. This itself presupposes that central banks have any idea of what “work” might even mean in this brave new context. It is as if the central bankers of the world have all been given hammers, and they have been sent out into the world to hit all the nails therein. But we don’t distribute hammers as a matter of course to babies, for obvious reasons.

The financial world is growing increasingly crazy-looking. 10 year bonds issued by the government of Japan – the developed world government that comes closest, by any objective measure, to being deemed ‘insolvent’ – now offer a yield below zero. Come again ? According to JP Morgan, there is now more than $5 trillion of sovereign debt offering a yield below zero. ‘Risk-free rate’ ?

As the authors fairly point out,

“..some investors and analysts say the most insidious aspect of negative interest rates is what it signals: that central banks are at their wits’ end over how to invigorate growth and dispel the spectre of deflation. The concern is that the US is poised to join in.”

That seems ever more plausible, if grotesque. The analyst and financial historian Russell Napier, in a recent interview, concurred:

“So [with negative rates] there are business models that don't make any sense. Elsewhere, the more the rate on deposits comes to negative, the more risk there is that people start asking for bank notes...that's a bank run if we ever get to that stage, but even with negative rates where they are it's destroying the returns for banks.

“When you've built over hundreds of years a system that runs on positive nominal rates and you suddenly deliver negative nominal rates, then you are creating lots of problems for lots of existing business models and it's going to cause havoc and I think it is causing havoc...

“Can [negative rates] come to the United States? ..the answer is probably yes. Once again, it really depends on how quickly the politicians get in gear. Central banks I think are crying out for help from the politicians in terms of getting some form of reflation going...so I would forecast that America probably will get to negative nominal rates.

“I do think that what's going on in the world with European banks and in the high yield market in the United States and the potential defaults in the emerging markets, I do think that's negative for US economic activity; I do think inflation will continue to come down in the US; I do think the US will report deflation, so probably the United States has to go the same place as most other places have gone to.

“The most important thing that your listeners need to remember is that just because central banking has played out doesn't mean to say that the [political] authorities have played out. So they'll be back with some sort of political machinations to try and produce this higher level of nominal GDP growth...and eventually they'll succeed but, crucially, it needs a crisis to galvanize the political process…"

FT readers growing increasingly concerned at the absurdity of current monetary policy occasionally get a polite hearing in the Letters page, like a demented elderly relative who is reluctantly granted an audience out of pity. But on the less heavily intermediated website, they give it all with both barrels.

Here, for example, are some of the reader responses to ‘Central banks: negative thinking’:

“If all depreciate their currency with this latest coordinated gimmick, none does, as matters remain as they were before. So that excuse for this nonsense (negative rates) is invalid”;

“It's rather odd how, when QE is intended (or so they say) to stimulate demand, they give the money to a relative handful of people with plenty of it already”;

“NIRP is supposed to make us spend the money that we carefully saved for future needs. This madness will bankrupt us all - in old age (if not sooner). The 2008 crisis taught us: Never. Trust. Banks. The years since then have taught us: Never. Trust. Central. Banks. Either”;

“There is no way on God's earth that a free market would ever result in negative interest rates. If anyone had asked you ten years ago if you'd stand for this - you'd have said 'no'. The fact that this seems almost normal to many people is an indication of just how insidious these moronic policies are. We are like frogs in a pot being boiled alive one degree at a time. Time to get out of the pot before we're all too drowsy to notice”;

“Central banks will also need to explain just how they think that taking money from savers with low rates - lower than inflation - is going to give governments more taxes or businesses more customers. All it does is reduce private consumption and lower prices i.e. what they claim to be trying to stop”;

“Economists rather than face reality, come up with new solutions such as negative interest rates rather than face the fact that their theories were plain wrong. At the heart of the problem is that a small group of academics or anyone for that matter can forecast the economic future better than a marketplace. In fact they are worse, market participants know they can be wrong so act more cautiously ( unless of course they know they will be bailed out ) hedging, spreading risk, using futures if you produce commodities etc.

“Central Banks, by falsifying interest rates, herd markets in a direction determined by the Central Bank. From day one these ideas were implemented, they were doomed for failure. Central Bankers do not believe in the business cycle which if left to run their course, and too much leverage employed, are normal and healthy. But for an economist that means their profession loses influence; they won't let that happen”;

“NIRP is madness. The only possible positive objective may be to weaken the currency, which in itself is a self-defeating move, leading to currency wars. Switzerland adopted NIRP for this purpose. BOJ followed suit, for lack of any other alternative, and is failing miserably. The only winners of NIRP are governments and borrowers. Credit demand remains strong only with risky borrowers, including governments. Well financed borrowers borrow to buy back shares or engage in M&A not to expand the economy, but to retrench. All others are losers of NIRP, including financial institutions, all investors and household. NIRP is not a zero-sum game, but a minus-sum game. One does not have to be very bright to understand this equation, including myself.”

“The FT appears to be finally seeing some chinks in the armour of the QE policies it advocates with such enthusiasm”;

“What is it that central bankers and economists do not see?

“For any human being making economic decisions, everything changes at 0%. The decision making for savers, consumers, SMEs, etc. grinds to a standstill. If you are prudent and don't want to speculate on buying various financial assets, 0% kills any reason you may have had to take any positive action. If all you can expect to get from your efforts is to still have the same as when you started, why bother? We as humans need a positive "Narrative" to get out of bed in the morning, work, take risk, etc. Risk free interest at 0% translates into a clear statement that there is no future to discount cash flows over or to believe in. If an individual cannot imagine a positive result from his/her actions, he/she prefers to do nothing. Prolonged periods of 0% rates and no positive (inflation) price movement will lead to reduced economic activity. Not exactly the stated purpose of the QE experiment. QE will go to the history books as one of the greatest mistakes in history.”

This is only a snapshot. At the time of writing, there were 175 comments from readers. There will doubtless be more, unless the FT decides to close down the conversation.

Faced with a terrible threat, we can do nothing, or we can do something. One logical response is to agitate for greater public awareness of the threat. Writing as a fiduciary investor, another is to try and identify defensive investment choices that will go some way to putting capital to productive work without incurring entirely unacceptable levels of risk.

In an environment of heightened financial repression and the growing likelihood of the imposition of negative nominal interest rates, we think those investment choices should include objectively creditworthy debt; high quality and unconstrained equities offering an explicit margin of safety; uncorrelated systematic trend-following funds, and hard assets, notably gold.

It used to be said, ‘Don’t fight the Fed’. Now as investors, if we want to protect our capital, we are all obligated to fight the Fed, and its international cousins, with whatever we have.
 

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

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

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

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

Technical limitations

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The Overnight Report: Flying Pigs

By Greg Peel

The Dow closed up 212 points or 1.3% while the S&P gained 0.8% with the Nasdaq up 0.4%.

Choppy

Alas poor Dick, I knew him well.

The ASX200 headed south again from the open yesterday, with Wednesday’s trashed names coming in for further selling, including the banks. But once the opening rotation was complete, buyers emerged to begin a choppy, bungling ride back towards square by lunchtime.

As the index fell into the low 4800s it’s possible technical buying was in play, and let’s face it – every time we get down this far we eventually end up back at 5000. But when the Shanghai index started sliding in the afternoon, we went with it. Around 2.30pm, someone placed a big buy order and we quickly shot back to a small gain on the session.

The Chinese stock market is a circus best viewed from the bleachers, offering little in the way of correlation to the Chinese economy. While China’s collapsing market was giving everyone a scare in August, by now it’s been largely dismissed as a joke and not something to lose too much sleep over.

The Australian government may nevertheless lose some sleep over yesterday’s December quarter private sector capex numbers.

The good news is capex actually rose 0.8% in the quarter when economists had forecast a decline. There was enough spending outside of mining and manufacturing to overcome ongoing falls in those sectors. The bad news is, capex intentions over 2016-17 dropped by 19.5% from a quarter ago. This implies that “non-mining” will not have sufficient firepower to overcome ongoing spending cuts in mining (and energy), thus providing a negative influence on the GDP.

And the housing construction boom is expected to end, or at least ease, in 2016. This has been the main offset to declining resource sector capex these past couple of years.

But is the bad news good news? Yesterday’s numbers provide more fodder for an RBA rate cut.

When the dust settled on Bridge Street yesterday, the banks had squared up, higher oil sent the energy sector up, and a mixed bag of earnings reports saw industrials up a percent. The big loser on the day was once again consumer staples, as the selling continued in Wesfarmers ((WES)) and impacted on Woolworths ((WOW)).

Woolies reports today.

Seriously?

In Wednesday night’s trade, oil fell from the open in the wake of the Saudi oil minister’s dismissal of any thought of production cuts. It then bounced into positive territory when it was revealed US production might actually be starting to fall.

Last night saw oil fall again from the open, and once again bounce back into positive territory. And while the US stock markets didn’t have much of a chance to follow oil down before it was dutifully following it up, the reason why oil rebounded is a case of back to the same old pie in the sky.

Venezuela has announced plans to meet with Russia, Saudi Arabia and Qatar next month to talk production cuts.

I wonder if the OPEC members have decided to take turns. Each time oil looks like slipping dangerously below US$30/bbl, someone comes out and talks “meeting” and the oil price rebounds, temporarily. Last night must have been Venezuela’s turn. Each time commentators scoff and suggest it’s all just brinkmanship, or at the very least a bet to nothing. But each time the oil price has a Pavlovian rebound. As does Wall Street.

Traders are just too worried that this time, maybe it might actually be true. Better to be safe than sorry. Particularly if you’re short oil.

Last night’s major US data release was January new durable goods orders, which posted their biggest gain in ten months. But take out lumpy aircraft and auto orders, and the gain was much more modest. Zero in on core capital goods – the component considered the true indicator of business investment – and orders are down 3% year on year.

Nothing there to ensure a Fed rate hike in March.

Commodities

West Texas crude is up US88c at US$33.06/bbl and Brent is up US74c at US$35.20/bbl.

Is iron ore’s little run now over? Iron ore fell US$1.00 to US$49.20/t.

Base metal prices continue to chop around and traders admit there’s no real direction evident at this point. Daily movements have been volatile but metal prices have basically been stuck in clear ranges. Last night aluminium, copper and lead all fell around a percent while nickel and zinc fell close to 3%.

The US dollar index is 0.2% lower at 97.30 and gold is US$6.80 higher at US$1235.80/oz.

The Aussie is 0.4% higher at US$0.7238.

Today

The SPI Overnight closed up 32 points or 0.7% -- about the same as it did yesterday. Yesterday the ASX200 fell 30 points from the open.

US personal income and spending data will be closely watched in the US tonight as these included the Fed’s preferred measure of inflation, the PCE. The US December quarter GDP result will be revised once more.

On the local stock front, it is with unimaginable pleasure I can announce that effectively, today is the last day of the results season. There are a few reports to come on Monday, being the last day of the month, but the avalanche ends today.

Today’s highlights include Harvey Norman ((HVN)), Super Retail ((SUL)), Tatts Group ((TTS)) and – brace yourselves – Woolies.
 

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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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