Commodity prices continued to fall last week with worries about Glencore contributing to a $55 billion ASX sell-off. The AUD followed, falling below 70 US cents last Tuesday. The Integrated Packaging Group (IPG) new issue began trading in the secondary market
Economic wrap
The market’s fragility was on show again last week after an analyst’s note on commodity company Glencore sparked a $55 billion ASX sell-off amid debt concerns. On Monday the Investec Securities analyst in London issued a research note, arguing Glencore’s equity value could be wiped out if metal prices remain at current levels. Panic followed with the stock plummeting 29% the same day on the London Stock Exchange and a sell-off in wider equity markets also occurred. BHP Billiton and Rio Tinto tanked 6% and 4.8% respectively. Glencore’s 4.5% September 2019 fixed rate Australian dollar bond was also caught up in the rout, falling 1.75% on Tuesday, pushing the yield up to 5.41%, up from the prior week’s close of 4.87%. The bond sell-off came after investors feared the plunging commodity prices could result in Glencore losing its investment grade credit rating. CEO Ivan Glasenberg soothed investor concerns and issued staff with a notice reassuring them of the company’s viability. The share price recovered with two days of gains, largely erasing the record losses from earlier in the week.
Nerves were further frayed during the week with China’s Industrial Enterprises total profit year-on-year down 8.8%, the heaviest fall in four years, triggering a commodities sell-off. This index tracks the business activities of firms, providing a summary of their financial condition. In response, commodities and mining stocks felt the brunt of the weakness, with brent crude down 2.6% and copper slipping 1.2%. Surprisingly, iron ore held up relatively well, dipping only 0.4%.
As commodity prices dropped, the Australian dollar was under pressure and also declined to a low of 69.85 US cents. It has since bounced back, closing the week at 70.45 US cents.
Credit spreads were wider at the end of the week, with the iTraxx around 5bps higher at 136.50bps. There was a general risk-off theme stemming from weak data in China and for commodities, sending yields 10bps lower.
US employment data was released Friday night, with an increase in payrolls of 142,000 in September, below forecasts of 200,000. The unemployment rate remained unchanged at 5.1%, in line with expectations. The weak US jobs data has further decreased the chances of a rate hike for the month, with only 8% of economists surveyed by Bloomberg expecting an increase. The probability of a rate hike in December jumps to 30%, and increases over 40% for 2016.
Flows
The recently issued Integrated Packaging Group (IPG) September 2019 fixed rate bond started trading on the secondary market last week. This was one of the smaller issues FIIG has originated and the bookbuild closed a day after opening. As such when released on the secondary market demand was strong and currently there is limited supply available.
With the increased volatility last week, there was a risk-off mentality. There was demand for the Royal Women’s Hospital March 2017 fixed rate bond - an investment grade bond at an indicative yield to maturity of 6.05% p.a.
Additionally we had interest in the recently issued Apple iBonds, a highly rated investment grade credit, issued by the largest publicly traded corporation by market capitalisation. Both the August 2022 fixed rate bond and August 2019 floating rate bonds were purchased over the week.
In non-AUD trading, BlueScope continued to be popular, with a sell-off in commodities creating some buying opportunities at lower prices. Usually a bond traded overnight in US time zone; clients last week were able to take advantage of an institutional offer exclusively available for FIIG and in local time.
Please contact your FIIG representative for more information.