Weekly Highlights

Last week the spotlight was on the Federal Reserve’s December meeting. As expected, the US central bank increased the base rate by 0.25% but what wasn’t anticipated was possibility of further hikes in 2017. Due to slightly more optimistic economic projections, consensus from the FOMC meeting suggests there will be three more rate hikes in 2017 instead of two. Unsurprisingly, US bond markets sold off in response to the policy statement with the US-10 Year treasury yield reaching a 2016 high of 2.6394% on Wednesday.

In stark contrast, the Australian Federal Government today released its Mid-Year Economic and Fiscal Outlook (MYEFO) which revealed the budget deficit has increased by $4.4 billion to $41.5 billion. GDP growth estimates for 2016-17 have been revised downwards from 2.5% to 2%. The worsening of Australia’s budget deficit is a backwards step in the eyes of the credit rating agencies and a subsequent credit rating downgrade may occur. However, this is old news and we expect this is already largely priced in to markets. The credit rating agencies remain pessimistic about the government’s ability to close existing budget deficits and return a balanced budget by the 2021. Overall, weaker wage growth and slow economic growth continue to weigh on the Australian economy but is being cancelled out by the recent rally in commodity prices which is arguably unsustainable.

In July, we have outlined the implications a credit rating downgrade would have for Australian banks. Click here to see the original article.

In company news, the story of the week was Crown Resorts announcement not to proceed with its proposed international demerger. Instead, the group has decided to further sell down its share in Melco Crown Entertainment Limited by 16.2% to 11.2% with ~$800 million of the funds used to reduce net debt and the remainder being returned back to shareholders. The announcement also provided a trading update which revealed company revenue across all assets has declined ~12% on the year (primarily driven by reduced VIP program play revenue). The proposed spin-off of a 49% interest in some of its Australian hotels and associated retail property (Crown REIT IPO) is still being considered which gives Crown another capital lever if required. While these developments are mixed, we think the update is a credit positive. Crown has improved its balance sheet markedly by reducing gross debt by 54% this year.

Click below for Charts

Chart 1: Bloomberg AUSBond Composite Index (Monthly)

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

Chart 3: Term Deposit Review – November