Tag Archives: Bonds/Interest Rates

article 3 months old

How Many Fed Hikes Now?

December might be baked in but attention now turns to how Fed policy will respond to Trump’s America.


By Greg Peel

The Fed made its first hike to its funds rate post-GFC in December last year. At that time the committee was anticipating four hikes in 2016. In December last year the US ten-year yield was trading at 2.30%.

The big commodity price plunge and European bank scare of early 2016 conspired to take a March hike off the table. The ten-year had fallen to below 2%. There was much anticipation of a June hike, but that didn’t eventuate either. The yield was then at 1.80%.

Along came Brexit, which saw the yield fall to 1.36% and made a September rate hike touch and go despite ongoing strength in US jobs numbers and signs of inflation finally starting to rise. And so it was, September came and went. But US data continued to improve. If it isn’t going to happen in September, it must surely happen in December, the markets assumed.

The chance of a December hike, as priced by the futures market, rose to over 80% before the US election. The yield had returned to 1.85%. If the data weren’t sufficient on their own, the fact the Fed had talked about rate rises all year and done nothing was enough for most in the market to assume the Fed would simply have to raise in December, or risk losing all credibility.

Then Trump was elected. Trump brought the potential for stronger economic growth fuelled by increased government debt, which in turn suggests rising inflation. Each element on its own is reason for a central bank to raise rates. Not only has the market now moved to assuming a 100% chance of a December hike, the ten-year yield has returned to 2.36%, basically where it was in December 2015.

There was no hike in November, but then no one really expected the Fed to move ahead of the election. The minutes of that meeting were released last night, but given Trump has been elected in the meantime, they were dismissed by Wall Street as being yesterday’s news. Either way, they offered no change to the expectation of a December hike.

For much of 2016 Wall Street feared a Fed rate hike. By the second half the mood turned to one of “please just get it over with”. Now, everyone is well and truly ready for a hike.

So the question is: what happens in 2017?

The US ten-year yield has run from a Brexit low of 1.36% to 2.36%. Yet the Fed is only going to raise by 25 basis points, to (presumably) a range of 0.5%-0.75% from the current 0.25-0.50%. If Wall Street is right, and Trump returns the US to solid, rather than tepid, economic growth, such a low rate seems incongruous by historical measures.

But all along, while pledging a rate rise that is yet to eventuate, the Fed has suggested subsequent policy adjustments will be gradual. Prior to election, the market was pricing in only one hike in 2017 and one in 2018. This is despite the Fed “dots” – projections – suggesting two hikes in 2017 and three in 2018.

Janet Yellen also said, before the election, she wants to allow the US economy to “run hot” for a while, implying the Fed was happy for inflation to pick up. But that was before the election.

The market is now pricing in two hikes in 2017 and two in 2018. This is consistent with the view of the economists at Danske Bank, for one. But Danske also notes, just to cloud the picture further, that the natural rotation of Fed members next year will introduce more known doves to the FOMC than hawks. Under dove Janet Yellen, running hot may mean another year of constant rate rise speculation and constant procrastination from the Fed.

We can only wait and see. Trump is yet to take over the reins. Assuming no resignations from the Fed in the meantime – there has been speculation as to whether Yellen might take her bat and ball and go home given sharp criticism from Trump, pre-election – Fed postings from 2018 will be made by the Trump administration, with Congressional ratification.

We can only shudder at the thought. The Tea Party wants to abolish the Fed and let Congress (politicians) set interest rates.
 

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article 3 months old

The Overnight Report: Holiday Spree

By Greg Peel

The Dow closed up 59 points or 0.3% while the S&P gained 0.1% to 2204 and the Nasdaq fell 0.1%.

Let slip the bulls

The SPI Overnight was suggesting only a 7 point gain before the opening bell on the local market yesterday – a fair call despite more records on Wall Street given the ASX200 had rallied 60-odd points the day before. Iron ore had jumped 6% that night but iron ore futures had already rallied during Tuesday so the market was on to it.

But we closed up another 71 points. The chartists had suggested a breach of 5400 would pave the way for a move to 5500 and there seemed some level of self-fulfilment yesterday. As was the case on Tuesday, the local market did not step-jump up yesterday, it started from zero and tracked a straight line up to the close, without as much as a stumble. Momentum was at work.

It seems as if the local market has been in a daze this past couple of weeks as it tries to come to terms with a Trump presidency. There have been many reports in the media warning of just how bad Trump could prove for Australia. But as each passing day indicates Trump’s policy pledges were all about winning the election and not about how he would actually run the country, those initial fears have begun to be tempered.

If it didn’t happen on Tuesday, it happened yesterday – investors suddenly saw Wall Street breaking records and decided Australia was missing the boat. Get in and buy!

Only the healthcare sector missed out on an otherwise market-wide rally yesterday, thanks to the ongoing fallout from Fisher & Paykal Healthcare’s ((FPH)) earnings result. That stock was down 7% and the healthcare sector closed flat. Otherwise, it was green-on-screen.

The resource sectors were again in the frame – materials up 2.0% and energy up 1.3% -- but the fact industrials were up 2.2%, telcos 2.1% and utilities 1.4% indicated investors were moving back into the likes of bond proxy stocks and previous high-PE names that had been trounced over the past month or more. The banks also made their contribution with a 1.1% gain.

Did anyone notice yesterday’s major data release? It seems not.

Construction work done fell 4.9% in the September quarter to be down 11.1% year on year. It was a much softer result than economists were expecting. Private sector work fell 6.6% to be down 36%. The bulk of that fall reflects the ongoing wind-down of resource sector construction. Engineering fell 3.8% to be down 23.2%.

Last year it was all about building work, particularly residential, striking the balance. Building work in general fell 5.7% to now be only 1.4% higher year on year. Within that, residential fell 3.1%. The decline in resource sector construction will soon reach its nadir, but now we see the beginning of the cooling of the housing market. The Australian economy needs a new hero.

Within those companies most impacted over the last few years by the mining downturn – engineers & contractors – a scramble has been on to diversify into public infrastructure and away from the mining and oil & gas sectors in order to re-establish themselves. In the September quarter, public construction rose by only 1.4% but it is 15.7% higher year on year. Economists estimate the overall construction number for the quarter will shave 0.4 percentage points off GDP. As housing cools, public sector spending will need to take the baton.

Happy Thanksgiving

The healthcare sector was also a drag on Wall Street last night. Test results showed that Eli Lilly’s prospective Alzheimer’s drug failed to deliver. That stock fell 10% and weighed generally on biotechs, sending the Nasdaq down 0.1% following two record-breaking sessions.

It looked for most of the session that the S&P500 would also ease back after its record thirteen-day winning streak, but the broad market index just managed to fall over the line at the death. The Dow, on the other hand, powered on.

The Trump theme continues to underscore for many of the big caps in the Dow Industrials and very much so in the Dow Transports. But there was more to be positive about last night.

Deer & Co shares jumped 11% following that company’s earnings report. Deere is not a Dow stock but peer Caterpillar is. The banks continued on their merry way last night and because of the peculiarities of the arcane price-average, recent addition Goldman Sachs is very influential because it is a US$200-plus per share stock.

US durable goods orders surged 4.8% in October when 3.3% was expected. It mostly came down to lumpy aircraft orders, but ex-transport the result was still a 1% gain.

The minutes of the November Fed meeting were released last night but no one paid any attention, given they are pre-Trump. The indications are nevertheless a rate rise next month is baked in, but everyone knows that.

There would have been no surprise had Wall Street eased off last night as traders squared up ahead of what is effectively a four-day holiday. But that was not the case. We’ll need to see what happens next week after everyone’s had a rest.

Commodities

Iron ore is up another US$1.10 at US$74.90/t. At what point will the Chinese government step in with more dramatic measures to curb speculation?

And not just in the bulks, but in base metals too. Aluminium and lead rose another 1% last night, copper and nickel 2% and zinc 3%.

These moves came, yet again, despite a stronger greenback. After one little dip, the US dollar index is back up 0.6% at 101.64.

Alas, the death knell sounded for gold. It fell US$24.60 to US$1187.10/oz, accelerating once the 1200 mark was breached.

The oils were little moved last night.

The Aussie is down 0.2% at US$0.7386. On a combination of US dollar strength and the weakness in yesterday’s Australian data, we might expect a bigger drop. But look at those commodity prices.

Today

The SPI Overnight closed down one point.

There’s no holiday in Australia tomorrow, but with Wall Street closed, it may be a case of looking to square up a bit downunder, particularly after a 130 point rally over two sessions.

Today brings September quarter capital expenditure numbers.

It is also a very big day on the AGM calendar, with highlights including South32 ((S32)) and Woolworths ((WOW)).
 

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article 3 months old

The Overnight Report: Dow 19,000

By Greg Peel

The Dow closed up 67 points or 0.4% at 19,023 while the S&P rose 0.2% to 2202 and the Nasdaq gained 0.3%.

Buy Everything

Surging commodity prices were the major trigger but new all-time highs on Wall Street also seemed to spur investors into diving back into the Australian stock market as a whole yesterday, given no sector finished in the red in a 1.2% rally for the ASX200. Rotation of any sort was not apparent, although not every sector performed equally.

Materials (up 2.8%) and energy (up 2.6%) led the charge on stronger base metal and oil prices, despite a weak overnight session for iron ore, and helped by little counter-movement in gold. Iron ore futures went the other way and traded “limit up” in the session, negating that offset. In contrast to trading over the past couple of months, the next best sector was utilities, up 2.1%.

It has been typical in recent times for resources and other cyclicals to trade inversely to yield stocks and defensives. Yesterday was different; seemingly more of a case of buying anything that looked sufficiently cheap. Not joining the party were the banks and telcos, up only 0.3% each.

Telstra ((TLS)) has been a volatile stock of late – not what you’d normally associate with a supposedly defensive telco. It seems talk of an NBN-related “earnings gap” ahead has investors thinking twice. And the lingering possibility of the banks having to raise new capital to meet new regulations, or at the least cut their dividends, may also have investors shying away from that sector.

Yesterday’s rally was not a step-jump but a classic case of moving steadily upward as the day progressed. This suggests “real” buying. In sights was the technical level of 5400 for the index which was surpassed late morning, sparking some brief profit-taking, but once the rally resumed it fed on itself.

If the index holds over 5400, chartists suggest then 5500 is in play.

Blue Sky

Donald Trump must be starting to think he’s a bit of a hero, if he didn’t already. The S&P500 has now posted a thirteen-day winning streak since Trump’s victory speech, to the tune of almost 3%. Nixon managed to spark a similar response, but Trump is still well behind Republican pin-up boy Ronny Ray Guns, whose election was worth over 8% in the same period.

The Dow has closed over 19,000 for the first time in history. The S&P has closed over 2200 for the first time in history. The Nasdaq and Russell small cap indices also hit new all-time highs last night, marking the second consecutive session of all four doing so – a feat not seen since 1998. The thirteen-day day winning streak for the S&P is the first since 1996.

Across Wall Street all talk is of just how far this rally can run on election promises (that are already being broken – “lock her up” is now off the table) which will take time to implement. Surely the honeymoon must fade at some point.  Tonight in the US is all about trains, planes and automobiles. A mass exodus will begin from lunch time. A good day to take profits ahead of the Thanksgiving holiday?

Commodities

Recent volatility in bulks and base metal prices has had a lot to do with the Chinese government increasing margin requirements to curb rampant speculation, offsetting Trump euphoria. We’ve seen some sharp dips in iron ore and coal prices lately as a result. But is Beijing winning?

Iron ore is up US$4.00 or 5.7% at US$73.80/t. Thermal coal is up 6.2%.

There were some very big moves up for base metals on Monday night, with aluminium a smaller mover. Last night aluminium jumped 2% while copper, lead and nickel all added a further 1% and nickel fell 1%, having jumped over 5% in the prior session.

West Texas crude has now rolled into the January delivery contract and last night it fell US17c to US$48.07/bbl after Monday night’s big move.

The US dollar didn’t much come into play last night, ticking up less than 0.1% to 101.07.

Gold is flat at US$1211.70/oz.

The Aussie is up 0.5% at US$0.7399 despite the steady greenback, driven by commodity prices strength and, presumably, all this sudden talk of the next move in Australian interest rates being up. There are plenty of economists holding the opposite view.

Today

The SPI Overnight closed up 9 points.

Locally we’ll see September quarter construction work done numbers today.

Japanese markets are closed.

Wall Street will see a big dump of data tonight, including the minutes of the November Fed meeting, before the evacuation begins.

Programmed Maintenance ((PRG)) will release its earnings report today while the centres of attention in another round of AGMs will likely be Estia Health ((EHE)), following its torrid few months, and one of the most volatile stocks on the market at present, lithium producer Orocobre ((ORE)).

Rudi will appear on Sky Business today, 12.30-2.30pm, instead of his usual Thursday appearance.
 

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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: Commodity Price Surge

By Greg Peel

The Dow closed up 88 points or 0.5% while the S&P gained 0.8% to 2198 and the Nasdaq rose 0.9%.

Confused

It was a quiet session on the local bourse yesterday. Volume was weak as the ASX200 meandered its way in a minimal range to a soggy close. But again the lack of movement in the index belies what was going on underneath amongst the sectors.

It would seem investors are simply not sure how they should be positioned going into year-end. I have highlighted in the previous couple of sessions that it appeared the long sell-off of yield stocks and defensives was finding a bottom and the abrupt run-up in resource stocks was tipping over. But yesterday, we went back the other way once more.

On a tick-up in the oil price, energy was the best performer on the day with a 1.7% gain. It would seem traders were heartened by the WTI price rising back through the US$45/bbl mark on cautious confidence of an OPEC agreement being reached, rather than tanking down through 40. That buying will prove rather prescient today.

Materials chimed in with a 0.3% gain but other than a flat day for the banks, all other sectors finished in the red. Notably, consumer staples and healthcare each fell 1.3%, telcos fell 0.9% and utilities fell 0.5%. The theme of the previous couple of sessions was reversed. Perhaps the seemingly relentless rise of US bond yields is just too much.

The US bond yield stalled last night and the US dollar index dipped for the first time in several sessions. The door was opened for commodities to take centre stage.

Commodities

APEC meetings are not what we’d normally think of as market movers but aside from the attention being drawn by it being President Obama’s final outing, the attendance in Peru of Vladimir Putin and Xi Jinping has provided us with some headlines.

The Russian president sees “a high probability” of an agreement being reached in Vienna on November 30, when OPEC tries to implement a production freeze. Russia will cooperate, Putin suggested, as a production freeze “is not an issue for us”.

Those comments were worth 4.2% for the West Texas crude price, which rose US$1.92 to US$47.49/bbl.

What is good for oil is seen as good for other commodities. Meanwhile, the Chinese president used his speech in Peru to confirm China’s support for a free trade area in the Asia-Pacific. The Chinese government is pushing for a Regional Comprehensive Economic Partnership of 16 countries. The now dead-in-the-water TPP was to involve 12 countries, including the big one, the US. We might presume China sees an opportunity to further step-up its global strength as the trade wall goes up around the United States.

Free trade offers up the possibility of increased Chinese imports of raw materials, including lead, up 1% on the LME last night, aluminium and zinc, up 1.5%, copper, up 2.5%, and nickel, up 5%.

Xi Jinping did not, however, manage to light a flame under the bulks, which few disagree have run too far, too fast. The thermal coal price was steady last night and iron ore plunged US$2.80 to US$69.80/t.

The 0.3% dip in the US dollar index to 100.97 provided a green light for those commodities that did rally to do so, and also allowed gold to tick back US$3.30 to US$1211.90/oz.

And the Aussie to tick back 0.3% to US$0.7361.

Quadruple Watching

The energy sector duly led Wall Street higher last night with materials trailing in its wake. But otherwise the positive mood was market-wide. The Dow, S&P and Nasdaq all simultaneously hit new all-time highs, for the first time since August. Back in August, US small caps were underperforming. Last night the Russell 2000 index also hit a new all-time high, marking a rare quadrella.

What’s good for M&M Enterprises is good for the country. Except in this case Milo Minderbinder is Donald Trump and no one can yet identify the Catch-22.

Outside of the commodity story there was no real new news to drive Wall Street higher last night. Only the dip in the greenback after a long run higher could be seen as any particular incentive. And the ten-year bond rate stalling.

Donald Trump continues to interview prospective cabinet members but there has been no new news on that front either. Either way, US business television currently features commentator after commentator suggesting a Trump presidency cannot be anything other than positive for the stock market. They just can’t see any other scenario.

The previous couple of sessions showed signs the Trump euphoria rally might be losing steam. Not so last night.

Today

Fresh all-time highs on Wall Street and surging commodity prices. How will this affect the Australian market today? Forget iron ore, the SPI Overnight has closed up 40 points or 0.8%.

Earnings results are due out today from CYBG ((CYB)), Fisher & Paykel Healthcare ((FPH)) and Technology One ((TNE)). There is another round of AGMs to digest including another prominent Kiwi, The A2 Milk Company ((A2M)).
 

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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

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

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

Fed Rate Hike Back On

By Kathleen Brooks, Research Director, City Index [writing prior to the close of Wall Street last night]

The Fed rate hike is back on, even with Trump in the White House

Reaction to Trump’s shock win in the US election continues to be relatively muted as we move to the final stretch of the London session. Equity markets are generally lower, however, losses are not of such a magnitude that they suggest market panic, in contrast, the markets appear to be sanguine about a Trump Presidency, which dramatically increases global economic uncertainty. Perhaps Trump’s conciliatory tone in his victory speech has eased concerns about his Presidency, or perhaps markets have no idea how to price in his victory as we have no precedent for someone like Trump. Either way, a mere 24 hours ago no one would have predicted such a calm market reaction on the back of this result.

Trump not an obstacle to a Fed rate hike?

In the lead up to the election result we looked at market expectations of a Fed rate hike to see if it reflected the election polls. On reflection perhaps we were naïve to think higher expectations of a Fed rate hike signalled a win for Clinton, rather than for Trump. The Fed Funds futures market is a reliable indicator of market expectations for interest rates. Prior to the polls closing, expectations for a Fed rate hike in December were above 85%, during the results expectations fell below 50%, and at the time of writing they are now above 80%.

So a Trump Presidency does not appear to be an obstacle for a rate hike from the Fed. This could be for two reasons: 1, Trump’s softer approach in his victory speech may suggest that he will leave the Fed alone, and allow them to get on with their job, which includes hiking interest rates. 2, Considering the win for Trump hasn’t been America’s Brexit, the Fed does not need to refrain from hiking interest rates to suppress market volatility and protect from stock market declines. Interestingly, expectations for more than one hike next year have also risen on Wednesday.

Bond yields a major mover on Wednesday

This is significant for bond yields, which have risen strongly today. The 10-year Treasury yield is back at its highest level since March, above 1.90%, which is 20 basis points higher on the day. For now we think that higher yields represent optimism for the US’s economic outlook, possibly because the Republicans have control of the Senate, which could boost growth. But, if yields continue to rise at this pace then concern may grow that bonds are selling off due to fears of America’s creditworthiness under a President Trump, who said that he may default on some of America’s debt burden.

A Trump boost for the dollar

Rising bond yields are also significant for the USD, as they have been the building blocks of this dollar rally. After selling off sharply late on Tuesday, the dollar has been in recovery mode ever since Trump looked like a winner. At the time of writing the dollar index is virtually back to where it was prior to the close of polls on Tuesday.

What our clients are doing?

It is worth noting that our clients are also buying into this recovery in the dollar. Of our clients that trade USD/JPY 58% are long, while clients that trade EUR/USD, 62% are short. USD/MXN IS 62% sold, suggesting that our clients could be squaring up short peso positions, potentially because they think that the Trump news is now priced in after USD/MXN reached a record high on Tuesday night/ Wednesday morning. Although our clients are net short of the S&P 500 and FTSE 100 on Wednesday, it is not as large a percentage of sellers as you might think on the back of such a large political shock, 65% of those trading the S&P 500 are short, with the same amount for the FTSE 100. Thus, our clients, like the markets, seem to be having a restrained reaction to the Trump news.

Wrap Up

This price action definitely feels strange, and was not what we had expected. We still think that there are considerable risks to a Trump Presidency, and risk sentiment could remain fragile in the coming weeks and months. It is difficult to determine if the rise in Treasury yields is a sustainable trend, we are beginning to think it is since it is backed up with soaring expectations of a Fed rate hike for next month. For now, this is likely to sustain a rally in the dollar, particularly against the EUR, JPY and GBP, which could see further declines against the greenback in the next day or so.
 

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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.

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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

The local AGM season takes a bit of a breather until later in the week next week but from Thursday they start to come thick and fast once more.

There are still some straggler production reports to get through from the resource sectors and quarterly updates from the likes of Qantas ((QAN)) and REA Group ((REA)). There are also a further handful of earnings results.

CSR ((CSR)), Orica ((ORI)), BT Investment Management ((BTT)) and Xero ((XRO)) are all in the frame next week but the biggie in ANZ Bank ((ANZ)) on Thursday.

There are no corporate events on Tuesday that do not involve lunch and empty afternoon offices, being Cup Day. Victoria is of course shut, in case anyone doesn’t notice. The all-important Rate That Stops The Nation will still go ahead as usual, but all the money is on the favourite, No Cut.

It’s a relatively busy week for economic data with private sector credit, building approvals, the trade balance and manufacturing and services PMIs all due. After the meeting on Tuesday, the RBA will release its quarterly Statement on Monetary Policy on Friday.

As Tuesday is the first on the month, manufacturing PMIs will be published across the globe and services on Thursday, except for China’s official number which both land on the Tuesday.

Tonight’s US GDP release will be important in determining whether the odds of a December Fed rate hike will shift from a current 70% and so too will be Monday’s release of the personal consumption expenditure measure of inflation. In case anyone doesn’t realise, the Fed actually meets on Tuesday night, but few expect a pre-election rate hike (17%).

Other US data releases across the week include the Chicago PMI, personal income & spending, construction spending, vehicle sales, chain store sales, factory orders, trade and September quarter productivity. And being the first week of the month, the private sector jobs report is out on Wednesday and non-farm payrolls on Friday.

The Bank of Japan also holds a policy meeting on Tuesday. The Bank of England will wait until Thursday.

The eurozone’s September quarter GDP result is out on Monday.
 

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The Overnight Report: Bonds On The Move

By Greg Peel

The Dow closed down 29 points or 0.2% while the S&P lost 0.3% to 2133 and the Nasdaq fell 0.7%.

Sell Australia

It seemed as if we had found a bottom in the ASX200 at 5350 technical support yesterday as the index spent the morning holding its ground, following Wednesday’s surprisingly severe sell-off. But 5350 prove only a pivot point as there seemed no great desire to drive a rebound.

And sure enough, another wave of selling hit at midday, and down we went again. Reports suggest the selling has been futures-led, implying a large fund manager or fund managers have decided to “Sell Australia”. It only takes a small reallocation of a giant global portfolio to send little old Australia spiralling.

The quickest way to achieve a wholesale “Sell Australia” is to first sell the SPI futures on the ASX200. This locks in the exit, and fund managers can at a later date, when the dust settles, sell actual stock positions and buy back the futures at a lower level. When the futures are sold, those on the buy-side have the unenviable task of trying to cover by selling stocks into a falling market.

And it is unenviable at present because the local market is in a panicky mood anyway, sparked by a run of bad news coming out of AGMs and other matters. We can see the market-wide confirmation in the fact all sectors, bar one, fell in unison yesterday and the hardest hit were those where the large caps mostly reside. The top 20 will give you about an 80% or more replication of the whole 200 in market cap terms. Only info tech finished in the green, dominated by Computershare ((CPU)) which is being supported by rising US rates.

There were only a couple of notable up-movers bucking the trend otherwise – one being Ardent Leisure ((AAD)), which saw some bargain hunting despite a rather poor AGM performance. Challenger ((CGF)) has gone from strength to strength lately on the popularity of annuities, and it jumped another 4% after its AGM.

On the other side of the ledger, the biggest percentage moves down were reserved for resource sector stocks. Outside of an 11% drop for APN News & Media ((APN)) on capital raising dilution, eight of the other nine top ten down-movers were miners – the same miners who have been enjoying stellar runs lately on improved commodity prices (eg South32, Whitehaven) or futuristic over-exuberance (eg Orocobre, Syrah).

Clearly those investors having dined out lately on the outperformance of their mining-weighted portfolios were in a desperate race to lock in profits yesterday before the sky fell in.

The other big news was of course National Bank’s ((NAB)) decision not to cut its dividend, yet. NAB thus managed to fight back against solid bank selling.

Ticking Up

US monthly data flow of late has been fair to reasonable, positive but not shooting the lights out. Either way, not bad enough for the market to assume the Fed won’t hike in December. Tonight sees the more substantive first estimate of September quarter GDP, so any shock there might change the mood. But these days both the Atlanta and NY Feds publish continuous GDP run rates, thus expectations of around 2.5% growth have fairly solid evidence behind them.

As we move closer to December, the US ten-year yield is again starting to tick up. Last night it rose 5 basis points to 1.84%. We recall that 1.85% was the pre-Brexit vote high, hence traders assume that a break of 1.85% could mean a rush back to 2%. And it’s not just US Treasuries. Bunds, gilts, JGBs and others are all quietly on the move.

It’s not good news for bond-proxy stocks, hence an early one hundred point fall in the Dow last night was largely driven by telcos, utilities, REITs and the like. Yet as we have seen so often in past sessions, the early drop was met by a choppy recovery.

Choppiness can be put down to individual earnings results, which continue to be mixed but net positive, while fourth quarter guidance remains an area of concern. Among the Dow stocks, last night saw a miss from Ford and a 1% drop and a miss from Colgate-Palmolive and a 1% drop, while outside the Dow, ConocoPhillips was a winner and jumped 5%.

This morning’s major after-the-bell reports see Amazon down 5% and Dow component Alphabet (Google) up 1%.

The other big market influence at present is of course oil, and it found some support last night after Saudi Arabia actually came out with a number – a 4% production cut from those who can cop it. While the official meeting is not until the end of November, this weekend sees another gathering to further nut out possibilities.

Could it be that this time there really is a wolf?

Commodities

West Texas crude is up US49c at US$49.60/bbl.

Base metal prices all rose around about 1%, except lead, which rose modestly.

Iron ore finally retreated, down US40c to US$62.30/oz.

The US dollar index is up 0.3% at 98.91 and gold is relatively steady at US$1269.00/oz.

The Aussie is down 0.7% at US$0.7588. This may give weight to the assumption stock market selling is coming from offshore.

Today

The SPI Overnight is rather boldly up 28 points or 0.5%. This would suggest that maybe the selling has now been completed, or at least the market hopes it has. There should be some bargains on offer.

Locally we see the September quarter PPI and September new homes sales numbers today. Tonight the US GDP will be in focus.

Woolworths ((WOW)) will report September quarter sales today. Having seen what happened to its rival, they would want to be good.

Macquarie Group ((MQG)) releases first half earnings.

And there’s another handful of AGMs.

Rudi will connect with Sky Business today, via Skype, to discuss broker calls for about ten minutes, starting around 11.05am.
 

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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)

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