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Weekly Highlights

Over the past two weeks, markets have continued to be influenced by the likely policies President-Elect Donald Trump will implement during his first term. Inflation expectations (a primary driver of long term interest rates) has surged taking both the Australian and US 10-Year government bond yield along for the ride. This has been a direct function of the pro-growth agenda the Trump administration is expected to implement which will likely to result in future rate hikes and larger stockpiles of US government debt. As a result, capital has flowed out of debt markets and into equity markets which has seen global bond prices tumble. The US rate has increased from July 2016 low of 1.3598% to a high of 2.3548% on Friday last week while The Australian rate increased from an August 2016 low of 1.819% to a high of 2.719% over the same period. Given the recent steepening on the domestic yield curve, it is likely domestic lenders will take this opportunity to reprice mortgage products in coming weeks.

US futures markets are pricing almost a 100% probability of a December rate hike while Australian futures markets are pricing almost no chance of a December rate cut. There has clearly been a major shift in interest rate expectations with nobody really knowing where it will go next. However, it is likely the release of the Trump administration’s budget and tax reform plans (expected in February/March 2017) will be the next major catalyst.

Last week, Telstra was the standout in terms of company news. Given the technological arms race that is the telecommunications sector, NBN payments are being allocated to the group’s acquisition strategy while also funding shareholder friendly activities (i.e. dividends and share buybacks). As a result, credit rating agency Standard and Poor’s revised the outlook on Australia’s largest telecommunications company to negative from stable citing management’s corporate strategy and capital allocation review as the primary driver for the decision.

On a lesser note, Crown Resorts continues to be in the media spotlight with early reports this morning that three staff have been formally arrested in China for gambling related charges. This follows an ongoing crackdown into corruption in the Chinese gambling industry where Crown has a significant presence.

In hybrid markets, Insurance Australia Group Limited (IAG) today announced a new transaction (click here for announcement), IAG Capital Notes (Prospective ASX Code “IAGPD”). The purpose of this transaction is to provide regulatory capital for the group but more specifically it will be treated as Additional Tier 1 (AT1) capital for regulatory purposes. These securities are structured as perpetual, unsecured, convertible, redeemable & resalable, subordinated notes. Distributions are discretionary, expected to be fully franked, floating rate, non-cumulative and subject to payment conditions. Distributions will be paid on a quarterly basis based on a calculation equal to 90-Day BBSW plus a margin multiplied by (1 – Current Company Tax Rate). The projected margin range is expected to be 4.70 – 4.90% p.a.

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Click below for Charts

Chart 1: Bloomberg AUSBond Composite Index (Monthly)

Chart 2: Bonds vs Equities 2015/2016 (Monthly)

Chart 3: Term Deposit Review – October