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Weekly Highlights

Last week the market witnessed a small retracement in bond yields at the long end of the curve (10+ year) as pressure abated. This is partly due to the European Central Bank President talking down rumors of a tapering of the central bank’s asset-buying program. This means investors in the recent 30Y Australian Government Bond are now ‘in the money’ (current Yield 3.19% vs Issue Yield 3.26%) Credit spreads were broadly flat on the week but remain well bid. This is unlikely to change in the near future with the biggest hurdle being supply side pressure from major bank refinancing requirements over coming months.

A busy reporting calendar kicks off this week with NAB (FY16) on Thursday, Macquarie (1H17) on Friday plus quarterly sales updates from Wesfarmers (Wednesday), Woolworths (Friday) and AGMs scheduled from a REITs (MGR, SGP, DXS) and energy companies. Next week we have full year results from ANZ and Westpac and a quarterly trading update from CBA.

In company news Genworth Australia announced that China Oceanwide Holdings Group has agreed to acquire all of the outstanding shares of Genworth Financial, Inc. (Genworth Australia’s controlling shareholder). While the transactions is subject to shareholder and regulatory approvals it will inevitably have a knock on effect to the Australian subsidiary even if they announce it operates as a standalone subsidiary. We remain cautious of Genworth Australia’s recent decision to distribute capital to shareholders at a sensitive point in the property cycle and expect this decision was pressured by the US entity which has struggled of late. Once more information becomes readily available we will update subscribers.

Last week was another eventful week for Crown Resorts which held its Annual General Meeting and updated the market on initiatives to realise shareholder value. Crown’s board has now endorsed the spin-off of a 49% interest in the Australian hotels and associated retail properties but this remains subject to various approvals, consents, and waivers from third parties. While these initiatives are a response to what has happened over the past few years the new issue (Sales and Marketing Executives being detained in China) could have an impact on the viability of planned projects (including Crown Sydney). While it is too early to jump to any conclusions the share price (and hybrid prices) are reflective of cautious investors. We maintain our recommendations and await more information.

In positive news for hybrid investors, Sir Michael Hintze stated bank hybrids remain an attractive investment primarily because global regulators are unlikely to trigger a bail-in (also known as a non-viability event) of hybrids as this would cause chaos in financial markets. The thesis is that regulators would prefer to avoid these triggers and are likely to introduce further regulatory conditions to ensure they don’t have to take these actions (possibly increasing capital buffers). We have believed in this thesis for some time but are cautious of how slow new regulations are implemented at a time when capital buffers remain relatively small, organic capital generation is non-existent and arguably the asset quality cycle has peaked.