Tag Archives: Bonds/Interest Rates

article 3 months old

The Overnight Report: Rates Moving Higher

By Greg Peel

The Dow closed up 112 points or 0.6% while the S&P rose 0.4% to 2159 and the Nasdaq gained 0.5%.

All About Rates

As global central banks look to shift away from ultra-easy monetary policy, the scramble amongst global investors to reallocate portfolios is on in earnest. No more was this in evidence than on the Australian stock market yesterday.

Aside from the direct impact of rising US rates or tapering ECB QE on Australian stocks with offshore exposure, rising global rates also eases the need for the RBA to cut further. That “complication” of a too-strong Aussie will be dealt with.

Already the yield-paying sectors have borne the brunt of portfolio reallocation, as investors move away from safety and guaranteed return into growth and risk. Gold is a beneficiary of low global rates, and thus a loser on the flipside. While yesterday did indeed see carnage amongst Australian gold producing stocks, the materials sector was not the biggest loser on the day.

That privilege was reserved for utilities, which suffered another 2.0% drop. Telcos fell 1.1%. The diverse industrials sector contains many a dividend payer and it fell 1.5%. Despite eight of the top ten biggest down-movers on the ASX yesterday being gold stocks, the materials sector clocked up only a 1.4% fall, as other commodities provided some balance.

On the other side of the ledger, the Australian company most leveraged to US interest rates, QBE Insurance ((QBE)), won the day with a 3.4% gain. In a similar position is registry company Computershare ((CPU)), which rose 2.2% against the tide. These moves helped the financials sector to a 0.4% gain to provide some offset. The Big Four banks saw mixed moves.

This new global paradigm is a tough one for Australian banks. US banks rose on Wall Street last night because banks are beneficiaries of rising rates. A steeper yield curve means a bank can borrow cheap and lend dear. But why is the theory not the same for Australian banks?

Well, it should be. But the problem is the local banks pay high yields, so they are under pressure as yield stocks like any other. They also lend most of their money based on short term rates – mortgage rates are based off the RBA cash rate -- and not off the long term government bond rate as they are, far more logically, in the US. RBA rate cuts have provided the opportunity for the local banks to reprice their mortgage books amidst otherwise tepid growth in general credit demand.

Rising global rates are therefore not great news for Australian banks, albeit not a disaster either.

On a more domestic front, yesterday’s August retail sales number showed a 0.4% jump after being flat in July, beating expectations of 0.2%. This provided some balance to the consumer discretionary sector yesterday, given higher rates, or no further RBA cuts, are a headwind for retailers.

The local service sector PMI was also released yesterday, which showed a jump back to 48.9 in September from 45.0 in August. A positive, no doubt, but as I have said often enough, Australian PMIs are so volatile they are pretty meaningless.

Rates and Oil

Not so meaningless is the US service sector PMI, given the US economy is 70% domestic consumption based. It shot up to 57.1 from 54.1 and thus provided further cause for Wall Street to believe a December Fed rate hike is locked in. Or maybe even a November hike, although that is seen as unlikely. Tomorrow night’s non-farm payrolls number could nevertheless be a determinant.

To that end, the ADP private sector jobs number for September came up short, showing a drop to 154,000 new jobs from 175,000 the month before. But as long as non-farm payrolls come in with something reasonable, Wall Street will still assume a December hike.

And that means banks are the stocks of preference. While fears over Deutsche Bank’s survival have not gone away, they have abated somewhat. This has allowed the US banks to regain some lost ground on the back of rate rise expectations. Last night financials were a primary driver of Wall Street strength.

The other primary driver was the energy sector. Financials and energy are the two biggest sectors in the S&P500. Weekly US oil inventory data showed a drawdown last night when a build was forecast. The WTI price shot up to US$50/bbl at one stage before settling just under that level.

Of course it could all come a cropper if two things don’t happen before year-end – a Fed rate hike and confirmation of an OPEC production freeze. And there’s the US election of course. But the question is: were the Fed to stay on hold, is that good or bad for stocks?

On the one hand there are those believing a rate hike would trigger a sell-off, and on the other those who believe a lack of action from the Fed would have markets turning tail on sheer frustration. The fact that Wall Street rallied last night on, in part, rate rise expectation, is evidence that investors are adjusting to the inevitable rather than running scared.

Hence we see the same ongoing portfolio reallocation pattern as is underway in Australia – sell yield, buy cyclicals. Were the Fed not to hike this would all swing back the other way, but it’s hard to see, given the TINA effect, what would actually send Wall Street crashing. Except maybe Deutsche Bank crashing.

Commodities

West Texas crude is up US$1.10 at US$49.73/bbl.

Base metals were steadier last night other than lead and zinc, which both suffered 1.5% falls.

With China absent, iron ore fell US50c to US$54.50/t.

Gold has managed to steady, dropping slightly to US$1267.10/oz.

The US dollar index is steady at 96.15 and the Aussie is steady at US$0.7621.

Today

The SPI Overnight closed up 25 points or 0.5%.

While gold stocks should stop falling today, the rate-related theme otherwise remains the same.

Australia’s August trade data are due out today.

Bank of Queensland ((BOQ)) will release its earnings result.

And it’s the turn of the Westpac and NAB CEOs to be hit over the head with a parliamentary wet newspaper.
 

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article 3 months old

The Overnight Report: Gold Capitulates

By Greg Peel

The Dow closed down 85 points or 0.5% while the S&P lost 0.5% to 2050 and the Nasdaq fell 0.2%.

Resilient

The ASX200 moved sharply lower from the open yesterday, down 30 points at its nadir, before grafting steadily back to a flat close. The open did seem somewhat of an overreaction to a mildly weak session on Wall Street.

With much of the country on school holidays, volumes are currently on the light side. Aside from some strength in the resource sectors, much of yesterday’s ultimate action centred on individual stock stories.

Wealth Manager Henderson Group ((HGG)) enjoyed a 12% pop after announcing a merger while mining service company Bradken ((BKN)) leapt 31% on a takeover bid. A strike by Border Force had yield darling Sydney Airport ((SYD)) dropping 2%, ensuring utilities was the worst performing sector on the day.

There was a little bit of a retreat in the index late afternoon following the RBA’s decision to leave its cash rate on hold. No one expected any different but there are always some dreamers. Those hoping Philip Lowe might prove to be a little more dovish than Glenn Stevens would have been disappointed in a statement that pretty much came off Stevens’ Roneo machine. The 1% fall for the utilities sector no doubt reflected this disappointment.

Lowe did give a nod to the flood of new apartments set to hit the eastern cities and to that end we note that building approvals were down by a less than expected 1.8% in August. Apartment approvals were down 3.6%. But net approvals are still up 10% year on year and apartment approvals are up 26%.

Taper Talk

Do you remember that before we spent endless, tedious months debating whether or not the Fed would hike for a second time, we spent endless, tedious months debating whether the Fed would taper QE, when and by how much? Well now we can relive those hazy, crazy days all over again with the ECB.

Having spent years telling us he would do “whatever it takes” to prop up the eurozone economy, it appears Mario Draghi has now begun to wonder whether he’s not part of the problem rather than part of the solution. With Deutsche Bank being only the most prominent of European banks in trouble – Italian banks being race leaders – it is clear keeping rates in the negative will only be a burden on banks and not a boost.

To that end, the ECB suggested last night it may begin to taper its extensive bond buying program (QE) a month earlier than the current March timetable.

Last night also had Richmond Fed president Jeffrey Lacker warning that in order to stay ahead of a sudden spike in inflation, the Fed needs to raise sooner rather than later.

Lacker is not an FOMC member but despite not hiking last month, Fedspeak remains very much to the hawkish side, suggesting a December rate hike may already be booked. In the wake of the BoJ not cutting further into the negative, the Fed seemingly anxious to hike and now ECB taper talk, it would seem major central banks have begun to question whether extraordinary and unprecedented policy measures are really the right way to go.

Which, by implication, means the wrong way to go is gold. Having tenuously held above US$1305/oz support recently, last night a break of that level sent gold into a tailspin. The greenback rose, the euro rose, and caught in the crossfire was the pound, as markets continue to contemplate Brexit implications. Gold has plunged US$44.00 to US$1269.00/oz.

Cleary the impact was felt in the US materials sector last night, and the dividend paying sectors were also hit once more on the threat of tighter global policy. The US ten-year bond yield jumped 6 basis points to 1.68%. But rate rises are good for a financials sector struggling with fresh Lehman talk. So in the wash-up it was a mixed bag for Wall Street last night.

The S&P500 closed right on 2150 support.

Commodities

Oil prices managed to hold up in the face of the stronger greenback, as traders consider the potential impact of Hurricane Matthew on Gulf production. West Texas crude is down US5c at US$48.63/bbl.

Base metals were all weaker nonetheless. Aluminium and copper fell 0.5%, lead and zinc 1% and nickel 2.5%.

Iron ore fell US10c to US$55.00/t.

The US dollar index is up 0.4% at 96.12 but Philip Lowe will be happy to see the Aussie down 0.7% at US$0.7625.

Today

The SPI Overnight closed down 31 points or 0.6%. Prepare for carnage in the overbought gold sector today.

Local August retail sales numbers are due today along with the service sector PMI, and services PMIs are due across the globe tonight as well. Tonight also sees the release of the US private sector jobs report for September.

BHP Billiton ((BHP)) will hold an investor briefing today.
 

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article 3 months old

The Overnight Report: The Fourth Quarter

By Greg Peel

The Dow closed down 53 points or 0.3% while the S&P lost 0.3% to 2161 and the Nasdaq fell 0.2%.

As You Were

The ASX200 recovered the losses posted on Friday in the opening half hour yesterday and in low volume trade, did little more for the rest of the session. With half the country enjoying a public holiday it was always going to be a quiet day.

Friday’s 0.7% fall for the index was led by a 1% fall in the financials sector due to fears over Deutsch Bank’s survival. Deutsche shares rebounded 15% on Friday night following a rumour the US Department of Justice was prepared to reassess the US$14bn fine it was imposing on Deutsche. Yesterday saw the Australian financial sector rebound 1.2%.

Friday was also the end of the September quarter and such sessions can always be marred by misrepresentative volatility. As yesterday was also a long weekend in NSW and other states, Friday was a good day to square positions. With the new quarter up and running yesterday, most of went down on Friday came back up again.

Improvement in China’s manufacturing and service sector PMIs also provided support to commodity prices and as such, the local resources sectors put in strong performances.

There was also some positive news on Australia’s manufacturing sector, albeit the local PMI is so wild as to be questionable. It rose to 49.8 in September form 47.6 in August – still in contraction but only just.

And Japan enjoyed a turnaround in its manufacturing sector, with the PMI rising back into expansion at 50.4 from 49.5 in August.

Remember Brexit?

Given the Brexit drama back in July proved to be somewhat of a 2016 version of Y2K, global markets have since become complacent and all but forgotten that reality is yet to bite. The UK economy has in the interim proven more than resilient and outside of unrelated bank issues, Europe has not seen any notable effects yet either.

The UK’s September manufacturing PMI rose to 55.4 from 53.4 and the eurozone PMI rose to 52.6 from 51.7.

But last night the British prime minister announced the government intended to pull the Brexit trigger by March, and that the process would then begin for a “hard” Brexit to be achieved by 2019. “Hard” does not mean difficult, but rather a complete and inexorable separation from the EU with no lingering ties.

The announcement prompted a fresh tumble in the pound.

It also caused some angst on Wall Street. But as the US enters the fourth quarter, there is much to consider.

Firstly, the fourth quarter is traditionally positive for stocks and most are expecting tradition to be maintained this time around. First we have to get through October of course, and October is traditionally the month of scary plunges. In 2016, there is concern Deutsche Bank could be the trigger this time.

Irrespective of whether or not the US DoJ reduces Deutsche’s fine, the bank remains in possible need of assistance. The ECB is obliged to provide liquidity back up but liquidity is not the issue for Deutsche, it is capital. On that front, German politicians have been railing against the concept of any government support. Deutsche is not out of the woods just yet.

Then there’s the Fed. The market now expects the Fed to hike in December so if that proves the case, there should be little surprise. We do have a lot of data to flow beforehand nonetheless, so Wall Street will remain on edge. The US manufacturing PMI showed a relieving rebound to 51.5 from August’s surprise plunge into contraction at 49.4. But there is still an element of the market recoiling at positive data.

Then there’s earnings. September earnings reports will begin to flow from next week and once again the market expects a net contraction across S&P500 companies.

And there’s OPEC. Will November bring confirmed production cuts as are now suggested, or not?

Put it all together and while the fourth quarter is expected to once again be positive for US stocks, it’s hard to find a particular reason why it would be. One thing is now pretty certain – the low volatility trade is being replaced by the high volatility trade. With the Fed expected to move in December, investors are switching out of plodding dividend payers and into higher risk cyclicals, particularly technology stocks. Financials are also being favoured given they benefit from rising rates, but then the banking sector clearly has its own threats to deal with at present.

With much to consider, the Dow was down a hundred points early in last night’s session, before grafting back half that loss.

Commodities

The oil price continues its graft higher, with West Texas crude rising US65c to US$48.68/bbl.

Base metals continue to suffer from a return to volatility. Last night saw aluminium up 0.5% and zinc 1%, while copper fell 1%, lead 1.5% and nickel 2.5%.

Iron ore fell US10c to US$55.10/t. There is likely to be little to no movement in the iron ore price for the rest of the week with China closed for Golden Week.

The US dollar index is 0.3% higher on the drop in the pound and gold is down US$2.90 to US$1313.00/oz.

The Aussie is slightly higher at US$0.7675.

Today

The SPI Overnight closed down 22 points or 0.4%, suggesting the to-ing and fro-ing is set to continue as half the country returns from its long weekend.

ANZ will release its local job ads series for September today and building approval numbers are also due. The RBA will meet this afternoon and in Philip Lowe’s first statement he will explain why rates remain on hold.
 

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

Volatility

It was a wild old week for the Australian stock market last week, featuring the two dominating themes of oil and banks coinciding with the end of the quarter. Markets fluctuated on the possibility of an OPEC production freeze on the one hand and cascading capital issues for Deutsche Bank on the other.

Friday ended on a sour note for the ASX200 as gains made on the Thursday, thanks to the OPEC news, were completely reversed by midday on Friday on fears Germany’s largest bank, and one of the world’s largest banks, was in trouble. A withdrawal of capital from the bank by hedge funds sparked fears another Lehman episode was upon us.

The index managed to bottom out around midday and slowly crept back to the close, to end the day down 0.7%. While most sectors finished in the red, the dominating move was in the banks, which closed down 1%.

On Friday night however, that which had bank investors bailing on global nervousness reversed course once more.

Not Lehman

Markets tend to panic first and ask questions later. On Friday night bank analysts in the US were hastily publishing research notes to point out that Deutsche Bank is not Lehman Bros.

Firstly, Lehman was an investment bank and not a commercial, deposit-collecting bank and as such did not have the Fed as an obligatory backstop. The Fed chose to let Lehman go under. Deutsche Bank is an investment and commercial bank and as such is ultimately supported by the ECB.

Secondly, Lehman traded on a tight liquidity position, holding just enough cash to get it through each day. Deutsche Bank’s cash position is, by contrast, not in question given it’s considered substantial. Lehman went down because it couldn’t cover its counterparty obligations – a liquidity issue.

Deutsche’s issue is one of plenty of liquidity but dwindling capital, due to a combination of not having built up an excess capital position post GFC as, for example, US and Australian banks have, being hit on loans to the energy sector when the oil price collapsed, being hit on loans to emerging markets due to both oil and a slowing of the Chinese economy, and in general seeing its share price halved over the course of the year.

When once a US$14bn fine from the US Department of Justice would have been lunch money for Deutsche, pre-GFC, in 2016 the reality is one of being able to pay. There is little doubt that while asset sales and other measures would help, Deutsche would have to go to the market to raise new equity. Given the sentiment surrounding Deutsche at present, such a raising would prove highly dilutive to existing shareholders.

But the obvious question is: is it in the interest of the US government to bring Germany’s largest bank to its knees and potentially trigger another global banking crisis? All for the sake of US$14bn? Of course not.

On Friday night it was rumoured the DoJ was prepared to reduce Deutsche’s fine. Numbers around US$5bn were being suggested. It may only be a rumour but it does make logical sense. Whatever the case, the market bought the story, and subsequently bought Deutsche Bank shares back up 15%.

And as such Wall Street rallied back again on Friday night, recovering Thursday night’s losses, with the banking sector leading the indices down and back up. The Dow closed up 164 points or 0.9%, the S&P rose 0.8% to 2168, and the Nasdaq gained 0.8%.

Commodities

West Texas crude rose US29c to US$48.03/bbl.

Lead jumped 3% on the LME to continue its recent volatility while nickel and zinc added 1% and copper 0.5%.

Iron ore fell US90c to US$55.20/t ahead of the week-long Chinese public holiday.

The US dollar index dipped slightly to 95.42 and gold is down US$4.00 at US$1315.90/oz. The Aussie is up 0.4% at US$0.7664.

And after Friday’s bank-related fall for the ASX200, the SPI Overnight closed up 30 points or 0.5% on Saturday morning, no doubt in anticipation of a reversal.

China

On Friday, Caixin released its independent measure of China’s manufacturing PMI for September which came in at 50.1, up from 50.0 in August.

On Saturday, Beijing released official PMI data for September showing manufacturing stable at 50.4, and services up to 53.7 from 53.5.

The Week Ahead

It’s Golden Week in China and markets will be closed all week.

The rest of the world will release manufacturing PMIs today and services PMIs on Wednesday.

It’s jobs week in the US. The ADP Private sector report is due on Wednesday and non-farm payrolls on Friday. Tonight it's construction spending and vehicle sales, Wednesday factory orders and the trade balance, Thursday chain store sales, and Friday consumer credit.

In Australia we’ll see the manufacturing PMI today, services on Wednesday and construction on Friday. Today also brings house prices and tomorrow it's building approvals and the ANZ job ads series. Wednesday it’s retail sales and Thursday the trade balance.

The RBA will meet tomorrow and leave the cash rate unchanged.

On the local stock front, the ex-divs are now beginning to dwindle. BHP Billiton ((BHP)) will hold an investor briefing on Wednesday and Bank of Queensland ((BOQ)) will report earnings on Thursday.

The public holiday in NSW today is not nation-wide and does not close the ASX. However most broking houses will be on holiday and little to no research will be published. FNArena will return to normal service tomorrow.

Also a reminder that as of tomorrow morning, the NYSE closes at 7am Sydney time.

Rudi will not make any appearances on Sky Business this week due to a well overdue breather. He'll be back next week.

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.)

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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: The Ghost Of Crisis Past

By Greg Peel

The Dow closed down 195 points or 1.1% while the S&P lost 0.9% to 2151 and the Nasdaq fell 0.9%.

Energised

One doesn’t have to look very far to see why the ASX200 was up 1.1% yesterday. On the supposed agreement reached by OPEC to instigate a production freeze/cut, the local energy sector was up 6.3%.

The materials sector chimed in with 2.8%, bearing in mind that aside from stronger base metal prices overnight, BHP Billiton ((BHP)) is an oil crossover.

We then drop a long way down to industrials, which rose 1.2% because that’s where oil sector service companies reside. Beyond that, sector moves where insubstantial. Of yesterday’s Top Ten movers to the upside, positions one through seven were all oil & gas or oil & gas services companies.

Oil & gas producer BHP rose 4.7% yesterday, which is unsurprising, but iron ore rival Rio Tinto ((RIO)) rose 3.7% despite being an oil consumer, not producer. Overnight in London, BHP is up 6.5% and Rio 4.5%.

The potential OPEC freeze is as much symbolic as it is fundamental. It underscores a groundswell of belief that has been building this past month or two, that February 2016 marked the bottom of the commodity price cycle.

Oil has stabilised in the 40s when earlier there were warnings of it heading towards the 20s. Iron ore has stabilised in the 50s when analysts were assuming a fall back through the 40s. The world had all but written off coal as a commodity but thermal coal has rallied back strongly and met coal has gone through the roof. Mine closures are driving nickel higher. Even copper has finally found a bit of strength.

The OPEC deal is, symbolically, almost a sign of confirmation. The early movers have already been switching out of first half 2016 plays – yield stocks, which had become overvalued – and back into cyclical plays. The biggest cyclical play of them all is commodities.

Another sector that has seen money withdrawn in favour of such switching is financials. Today is going to be a different day on Bridge Street.

Too Many Memories

Wall Street was bugling along doing very little last night up until around midday. The European stock markets were closed when Bloomberg reported ten hedge funds had withdrawn their capital positions with the Deutsche Bank prime brokerage. Hedge funds lodge capital with their prime broker, and in many cases a number of brokers, as a slush fund from which trades can be made and/or as collateral against risk positions in derivatives and other instruments.

The withdrawals suggest the hedge funds have reduced, or eliminated, their counterparty risk with Deutsche. The bottom line is, were Deutsche to go under, that capital would never be seen again. The volume and price of Deutsche credit default swaps is also rising, either as an outright trade or as a hedge against collateral held. As soon as “CDS” creeps back into the discussion, minds are jolted back to 2008.

If one were to do a word-count of everything uttered on business television this morning, both in the US and locally, the most used word would be “Lehman”.

Which poses a problem in itself. The world would probably be less concerned over the state of Deutsche’s capital and liquidity positions if 2008 had never happened. But it did, and investors are starting to play it safe lest the September of US election year 2016 starts to look like the September of US election year 2008. And next week it’s October.

Deutsche Bank shares fell 7% on the NYSE last night. Angela Merkel has said it will not provide the bank with any assistance in paying the US$14bn fine owed to the US Department of Justice. However, the German government cannot stand back and watch Deutsche go under. In Germany, Deutsche is Australia’s Big Four all wrapped into one. In the world, Deutsche is the biggest holder of financial derivatives.

Deutsche Bank cannot, nevertheless, be bailed out with taxpayer money under rules introduced by the ECB since the GFC. It can only be “bailed in”, meaning first the shareholders lose their money, then the bondholders lose their money, then depositors lose their money above the government guarantee level. We saw this in Cyprus in 2013.

That is not to say Deutsche is Lehman and 2016 is indeed 2008. Commentators have been quick to point out much is different. But if hedge funds start pulling their capital, it can’t be long before shareholders really start to head for the exits. If that happens, depositors won’t be far behind.

Wall Street did not close on its lows last night but it wasn’t far off. It was all about the banks.

Meanwhile, the US June quarter GDP result was revised to 1.4% growth last night, up from 1.2%. No one much noticed.

Commodities

West Texas crude gained another 1.2% in rising US58c to US$47.74/bbl.

Lead leapt 3.4% on the LME last night while ever volatile nickel fell 2.5%. Zinc rose 1.5% and copper and aluminium rose 0.5%.

Iron ore rose US20c to US$56.10/t.

The US dollar index is up slightly at 95.49 and gold is down slightly at US$1319.90/oz. One might expect a rush into the safe haven of gold if the word “Lehman” is being bandied about, whether justifiably or not, but 2008 reminds us that when stocks are plummeting and margins are being called, investors have to throw their gold overboard.

The Aussie jumped up the night before on the strong oil price and last night came right back down, falling 0.7% to US$0.7634.

Today

The SPI Overnight closed down 34 points or 0.6%.

It will be an interesting day on the local bourse. On the one hand we have building strength in the resource sector, underscored by last night’s big moves up for BHP and Rio, and on the other we have the banks, which are no doubt the thinking behind weakness in the futures this morning.

There’s one helluva long list of local and global economic releases on the calendar today.

In Australia we see private sector credit and new homes sales.

Japan will provide a monthly data dump of inflation, production and unemployment numbers.

Caixin will jump in early with its China manufacturing PMI for September because next week in China is Golden Week. The country will shut down this evening and not reopen until October 10. Beijing will release its official September manufacturing and service sector PMIs tomorrow.

The US will see the Chicago PMI tonight along with consumer sentiment and personal income & spending, including the all-important PCE measure of inflation.

Monday is a public holiday in NSW, the ACT, Queensland and South Australia. The ASX is open, but few banks and brokers will be. There will be no research to speak of. FNArena will thus publish a Monday Report but that will be all we can provide.

On Sunday night summer time begins in relevant states in Australia. This means come Tuesday morning, the NYSE will close at 7am Sydney time.

Rudi will link up with Sky Business this morning, through Skype, to discuss broker calls around 11.05am. Later he will appear in the studio for Your Money, Your Call Fixed Interest, 7-8pm.
 

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

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

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

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article 3 months old

The Overnight Report: Clinton Confidence

By Greg Peel

The Dow closed up 133 points or 0.7% while the S&P gained 0.6% to 2159 and the Nasdaq rose 0.9%.

Ebb and Flow

The ASX200 plunged 60 points on the opening rotation last night, as the computers went wild on the possibility of a European bank going to the wall. As is so often the case in today’s trading environment, humans then stepped in to steady the ship. But there was not a lot of enthusiasm to start buying ahead of what was arguably the most anticipated presidential candidate debate in history.

The debate kicked off at 11am Sydney time and immediately the ASX200 began to rally. The index then flattened through the course of the one and a half hour ordeal (can you imagine having to sit through Turnbull/Shorten for a full 90 minutes?) and thereafter rallied in a second wave. The opinion is Clinton emerged a victor, or more realistically, an under-prepared Trump was a clear loser.

The rally back did not so much represent the opinion of Australian investors on the matter but rather what was going on in offshore markets at the time. The Dow futures rallied, suggesting a stronger session for Wall Street last night. The Mexican peso soared, suggesting forex traders had clearly given the debate to Trump.

What we can conclude from last night’s action is that global financial markets want a Clinton victory. By default, market capitalists are typically Republican supporters. But The Donald is not your average Republican and even if his fiscal policies are more appealing to Wall Street, the thought of Trump holding the launch codes is just too frightening. Hillary Clinton has very few fans on Wall Street, but it’s better the devil you know.

So yesterday afternoon the European banking crisis was put aside. The local financials sector ultimately closed down 0.8% nonetheless to provide the biggest market cap influence in the final 0.5% market loss. What we didn’t see was an offset from the energy sector which we might have assumed given the oil price had rebounded. But again, our own time zone came into play.

With the OPEC meeting yet to be held, Iran declared it had no interest in freezing production. Hardly a surprise, given Iran has said all along it will only consider a freeze once it has returned to pre-sanction production levels. So the meeting will again be a dud, but there is scope for an agreement to be reached at the regular OPEC meeting at the end of the year, assuming that by then Iranian production will have reached the target.

Oil futures fell on the news and as a result, the local energy sector closed down 0.8%. All sectors finished in the red yesterday bar healthcare, which jumped 1.3% thanks to ever popular CSL.

Status Quo

As all commentators are noting, there are two more presidential debates yet to be held and a vice presidential debate to boot before America goes to the polls. History suggests many an undecided American voter makes up their mind after the first debate, but history also shows winners of the first debate do not always become president.

Few on Wall Street like Obamacare, Dodd-Frank or the TPP but The Donald is just too much of an unknown factor and the greatest enemy of markets is uncertainty. A Democrat victory implies maintenance of the status quo, and while not encouraging, it’s better than the alternative. So sayeth the market.

Realistically, last night’s rally on Wall Street occurred before the market opened. The Dow futures had rallied 0.6% on the debate and the Dow closed up 0.7%. There was a bit of a stumble early given the drop in the oil price, also already in place thanks to electronic trading. But oil did manage to come back from a fall closer to 3% to this morning be down only 1.5%.

Wall Street also saw data early in the session that showed the Conference Board’s monthly consumer confidence index had risen to 104.1 to represent the highest level of confidence since August 2007, just before the world started to fall apart. This news had a double impact.

Firstly, strong consumer confidence is very good news for an economy 70% reliant on domestic consumption. Secondly, history shows that strong consumer confidence numbers heading into an election typically signal a return of the incumbent party. This makes logical sense.

The morning session was still affected by lingering bank fears nonetheless, until a US Department of Justice official came out to say Deutsche Bank could have its US$14bn mortgage-related fine reduced if it is prepared to cooperate with the authorities. Deutsche Bank shares didn’t exactly rebound on the news but they did steady, allowing Wall Street to focus more specifically on domestic politics.

The US ten-year bond yield nevertheless continued to slide, down 3 basis point to 1.56% last night, in line with ongoing weakness in the German equivalent as this latest bank crisis plays out.

Commodities

The Donald, it appears, is a risk factor. Aside from US bond yields which are playing a different game, last night saw Wall Street up, the US dollar up, the Aussie dollar (perceived as a risk currency) up, and gold, the main sovereign risk indicator, down. In other words, it was ‘risk off” all round last night on Clinton’s perceived victory.

The US dollar index is up 0.2% at 95.47, the Aussie is up 0.4% at US$0.7667, and gold is down US$10.90 at US$1327.00/oz.

West Texas crude is down US69c at US$44.94/bbl.

It was another mixed bag for base metals, with nickel, lead and zinc all up 1% and copper and aluminium down 1%.

Iron ore fell US20c to US$56.20/t.

Today

The SPI Overnight closed down 6 points. We can interpret the mild weakness as a suggestion Wall Street’s debate-related rally last night was already reflected in yesterday’s comeback for the ASX200 from opening lows, and that oil price weakness had already been assumed.

OPEC will meet tonight but nothing is expected.

Janet Yellen will make a bi-annual testimony before the House financial committee tonight, and US durable goods orders numbers will be released.

AGL Energy ((AGL)) and ASX ((ASX)) will hold AGMs today and there are a handful of ex-divs, including Myer ((MYR)).

Rudi has swapped his usual Thursday appearance on Sky Business and thus will make his appearance today, 12.30-2.30pm.
 

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

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

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

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article 3 months old

The Monday Report

By Greg Peel

Sea of Green

It was a text book rally on the local market on Friday as the index tracked a 45 degree straight line from the bottom left of the chart to the top right, closing on its highs. The ASX200 pushed solidly past the 5400 resistance level and for the first time in a while, every sector finished in the green.

The resource sectors were the underperformers, posting only small gains, but they had had their moment in the sun on Thursday following the Fed meeting. Notably, telcos won the day with a 2% gain while the other yield sectors of utilities, banks and staples all pushed up over 1% in an otherwise consistent market-wide run.

Things are looking a little different this morning following a sharp drop in the oil price on Friday night which saw the US energy sector leading Wall Street lower. The same will no doubt be repeated today locally but mostly confined to the energy sector rather than across the market.

Wolf!

The unofficial OPEC meeting planned for the end of the the oil conference in Algeria this week started out as simply a good opportunity to have a chat while everyone’s present, then became a formal meeting at which a production freeze would be discussed and possibly agreed upon, and now is back to merely a “consultation”, according to the Saudis, after which it is unlikely any agreement will be reached.

What a shock.

WTI was down 4% at one stage on Friday night before settling back to close down 3% on Saturday morning.

While Saudi Arabia has offered to lower its production from record levels as part of an agreement, as long as everyone’s on board, Iran is still in the process of ramping up its production post the lifting of sanctions. It would not be too much of a burden on the Saudis to freeze at a near record production level but Iran is not interested in being stuck, after all its time in the wilderness, at a level representing under-capacity.

Perhaps when full capacity is reached Iran might come to the table, but until such time there’s really no point in contemplating any sort of OPEC freeze. Yet still the market prices one in each time, only to be disappointed, each time.

In other news that no one should be too surprised about, iPhone7 sales have not been as flash as expected in the opening weekend. We recall that on better than expected iPhone7 pre-sales, Apple shares ran up 12% recently.

On Friday night they fell 1.5%, which is not a lot under the circumstances but America’s biggest company need only blink to shift all the indices by a margin. Between oil and Apple, the Dow closed down 131 points or 0.7%, the S&P down 0.6% to 2164, and the Nasdaq down 0.6%.

Apple had said all along that following the step-up in technology that was the iPhone6, the iPhone7 would only be incrementally different. The next step-up will come with next year’s iPhone8. So the fact sales of the 7 have apparently fallen short of comparative sales of the 6 is no real surprise.

With central bank shenanigans not over in the near term, Wall Street’s attention now turns once again to earnings results, with September quarter numbers being reported from next week. US stock markets remain near all-time highs but forecasts are yet again for a net earnings decline, albeit only 2% for the S&P500 this time rather than numbers around the 6% mark or worse that have preceded the last few quarters.

Commodities

West Texas crude fell US$1.41 or 3.1% to US$44.69/bbl.

After a solid Fed-related run the night before, base metals returned to being mixed on smaller moves on Friday night. Lead fell 1.5%.

Iron ore rose US20c to US$56.50/t.

Gold is barely changed at US$1337.10/oz.

The US dollar index is 0.2% higher at 95.51 and the Aussie is 0.3% lower at US$0.7618.

The SPI Overnight closed down 24 points or 0.4% on Saturday morning, thanks to oil.

The Week Ahead

The oil conference in Algeria begins tonight and the OPEC “consultation” is set for Wednesday night.

The US will see new home sales tonight, Case-Shiller house prices, Conference Board consumer confidence, the Richmond Fed activity index and a flash estimate of September services PMI on Tuesday, and durable goods on Wednesday.

On Thursday it’s pending home sales, the trade balance, and the “final” revision of September quarter GDP. An upgrade to 1.3% from 1.1% is expected. Friday it’s personal income & spending, Michigan Uni fortnightly consumer sentiment and the Chicago PMI.

Japan will see retail sales numbers, industrial production, unemployment and inflation late in the week.

There’s an awful lot of central bank chatter set for this week, including from the BoJ governor (twice), the ECB president and no less than ten different speeches from Fedheads across the week, the last being from Janet Yellen.

It’s a quiet economic week for Australia until Friday, when private sector credit and new home sale numbers are due.

On the local stock front there’s another handful of ex-divs to work through.

Rudi will appear on Sky Business on Thursday, 12.30-2.30pm and again on Friday, via Skype link around 11.05am to discuss broker calls. Later on the Friday he'll participate in Your Money, Your Call Fixed Interest, 7-8pm.
 

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

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

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: Afterglow

By Greg Peel

The Dow closed up 98 points or 0.5% while the S&P gained 0.7% to 2177 and the Nasdaq rose 0.8%.

Well Resourced

In the footsteps of the BoJ, the Fed was next to give the Australian market cause to recover yesterday. But buying was by no means evenly spread.

Finally we did see the beaten down junior telcos catch a bid, sending that sector up 1.0%, but while yield stocks had been the biggest victim of Fed rate rise fears leading into the September meeting, they did not recover any ground yesterday. The banks and consumer staples were both flat, and utilities fell 0.7%.

While industrials and healthcare put in decent performances, it was left to the resource sectors to drive the index higher. Energy rose 2.1% and materials 2.6%.

If yield stocks and resources were sold down ahead a Fed meeting that might have brought a rate hike, why have only resources recovered on no rate hike? Perhaps it’s because yield stocks were being called overvalued two weeks ago and resource stocks were not.

The odds of a December Fed rate hike have now firmed to over 60%. Is it worth pushing the PEs of yield stocks back up again over the next three months just to go through the same Fed hike sell-off? What we’ve likely seen is a rebasing to more realistic valuations.

Resource stocks were never called overvalued, rather there was only concern among analysts that rallies in the prices of iron ore, coal and oil would not prove sustainable. But those analysts have quietly begun to change their tune. There may yet be some price pullback, but more and more commentators have decided the trough in commodity prices is now in place, and the outlook for resource companies is much brighter following cost cuts and debt reductions. Cash is flowing in abundance.

A stronger US dollar is still the enemy of commodity prices, and a Fed rate hike would push the greenback higher, but at the end of the day demand and supply rule the commodity space.

That said, I noted yesterday that we’d have to wait until this morning to see how base metal prices responded to the no Fed rate hike given the LME was closed when the action started on Wall Street. Well, base metal prices all soared last night.

Gold has stalled following Wednesday night’s rally while oil is higher again and iron ore is up. It should be another good day for the resource stocks on the local bourse, with the futures suggesting up 27.

That would take the ASX200 up to 5400 once more.

Now What?

Suddenly there was a vacuum of anticipation, debate and argument last night on Wall Street given the central bank race has now been run and, as far as equity markets are concerned, won. So it’s back to TINA.

Given more than half of the market now believes a December Fed rate hike is inevitable, and that it will have to happen either way for the Fed to avoid losing whatever skerrick of credibility it has left, that reality is not much of a threat. One 25 basis point hike over the space of twelve months, with the prospect of another one not being for yet another twelve months, is little impediment to buying into the one market offering any sort of return.

It’s dangerous of course – buying stocks simply because there is no alternative, and at some point overvaluation calls must begin to strengthen if Wall Street just keeps on keeping on. Each move up in the Nasdaq at the moment is a new all-time high, but there are some themes running behind the scenes that are actually based on reality.

The aforementioned call of a trough in commodity prices is one. The undeniable advance of technology is another.

There’s a lot of data out in the US next week but we have three months to worry about any trends (no one believes the Fed would hike in November ahead of one of the most critical presidential elections in memory). The greatest focus will be on the OPEC meeting next week, which apparently has now been declared “formal” rather than “informal” as previously suggested.

Why? Is there a big announcement coming?

Next week will be the last in the historically worst trading month of the year, before we enter the historically scariest trading month of the year – October.

Commodities

There was no mucking around on the LME, and maybe a few short positions ahead of the Fed meeting. Lead rose 1%, zinc 1.5%, copper 2% and aluminium and nickel 3%.

Iron ore is up US90c at US$56.30/t.

West Texas crude is up US48c at US$46.10/bbl.

After its twenty dollar jump on Wednesday night, gold is just a tad higher at US$1336.70/oz.

The US dollar index is another 0.1% lower at 95.37 and the Aussie is 0.1% higher at US$0.7643.

Today

The SPI Overnight closed up 27 points or 0.5%.

Japan, the eurozone and US will all see flash estimates of September manufacturing PMIs today/night.

The calendar for Australian stocks is blank today. Not even an ex-div (among broker-covered stocks).

Rudi will link up with Sky Business through Skype at around 11.05am to discuss broker calls.
 

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

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

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

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article 3 months old

Australian Corporate Bond Price Tables

PDF file attached.

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

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

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

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

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

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

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

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

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

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

FNArena disclaimer

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