Drama continues in Greece where banks have been closed for a fortnight, markets kept watch on China’s stock market and as expected, the RBA left the cash rate unchanged at 2%
Economic Wrap
The Greek drama continued over the weekend, with European Union (EU) leaders giving Greek Prime Minister, Alex Tsipras, three days to pass austerity measures into law or risk a suspension from the euro area. At the emergency summit in Brussels on Sunday, Tsipras was given a list of unmet demands from previous bailouts and a new deadline to legislate the requests. The EU leaders are refusing to engage on more bailout aid before the changes are passed. Greek banks have now been closed for two weeks.
Markets watched Chinese equities last week, with the Shanghai Composite Index experiencing unprecedented volatility. The Index opened the week at 3905 and closed at 3878 - reaching a low of 3383 on Thursday morning. Concern surrounding China’s stock market has been exacerbated by the fact that roughly half of the all publicly listed companies in China voluntarily halted trading of their shares on 8 July, and over 800 others had their stocks automatically halted after reaching their daily drop limit. This is thought to have left just 22% of listed stocks on the Chinese stock market trading the following day.
The price of iron was substantially affected by the Chinese equity market price fluctuations, dropping to a low of US$44.59 per tonne last Wednesday- the lowest price since May 2009. Due to a recent increase in supply coinciding with China’s stock rout, iron ore has had a difficult two weeks, and its immediate future is not looking especially bright, at least until China can restore confidence in its economy.
As expected, the RBA kept its cash rate at 2.0% after releasing its minutes on Tuesday. Additionally, the RBA maintained its implicit easing basis acknowledging the
“fluctuations in markets associated with the respective developments in China and Greece, long term borrowing rates for most sovereigns and creditworthy borrowers remain remarkably low”.
The RBA also noted that employment growth was a bit stronger than expected, with the unemployment rate increasing slightly to 6.0% from 5.9% but outperforming the 6.1% market expectations. However, it did not provide any commentary regarding the positive household spending figures, negative public spending and business capital expenditure figures The RBA maintained its implicit easing bias, with a further rate cut dependent on future domestic economic data.
The FOMC also released its minutes last Thursday, which were more dovish than markets expected. As such, markets believe that the Fed is less inclined to raise interest rates, assigning just a 54% chance to a rate raise by the end of 2015. This provides a stark contrast to the previous week’s odds of 73%. As if to support this, US economic data was soft, with Initial Jobless Claims coming in at 297,000, the highest in four months, underperforming against its 275,000 market expectation. That said claims are below 300,000 and have been for the past 18 weeks which is the longest run below 300,000 since 2000.
The Australian dollar was surprisingly immune to the turbulence affecting global markets, particularly in China and Greece, hovering around 74 cents over the course of the week. The AUD opened the week at 74.9 cents per US dollar and closed at 74.23 cents, fluctuating between those prices throughout the week. With uncertainty surrounding the price of iron and China’s economy, 5 year government yields opened at 2.173% on Monday, dropped to 2.025% on Wednesday and finished the week at 2.2177%. Ten year government yields were less susceptible to change, opening the week at 2.933% and closing at 2.939%, with a low of 2.746% on Wednesday.
Flows
As volatility and uncertainty continued in markets, a distinct ‘flight to quality’ theme emerged with investors favoring short dated and high quality corporate inflation linked bonds. The Royal Women’s Hospital 2017 fixed rate bond was highly sort after, with demand outstripping supply last week. Meanwhile Australian Gas Networks (formerly Envestra) inflation linked bond due in 2025 was popular as a ‘hedge’ in portfolios.
Companies in the mining sector were impacted as the iron ore price fell over the week. The Fortescure Metals USD curve, Ausdrill USD 2019 and Emeco USD 2019 all weakened in price.
Rates accurate as at 13 July 2015 and are subject to change. All prices and yields are a guide only and subject to market availability. FIIG does not make a market in these securities. For more information, please call your FIIG representative or our general line 1800 01 01 81.