Donald Trump is sworn in as US President on Friday US time, and Theresa May speaks on Tuesday on how Britain will operate outside of the European Union
Economic Wrap
On Friday, at midday US EST, (4 am AEST) Donald Trump and Mike Pence will become the President and Vice President of the USA. Trump is the 45th President. Trump has recently suggested he is open to altering sanctions on Russia and possibly the agreement with China on the status of Taiwan. These macro geopolitical events will be closely watched and have the potential to see continuing USD strength. Further, the USD would benefit by changes in US corporate taxes, incentives for firms to repatriate offshore earning and capital to the US, and recent remarks encouraging multinational firms to avoid opening lower cost manufacturing plants in Mexico and similar countries if they wish to ship those products to the US.
British PM Theresa May speaks Tuesday on Brexit and the likely journey towards it, including comments on the UK’s access to the EU’s single market, and the potential for immigration curbs by the UK. The UK is still waiting for a ruling from the Supreme Court on whether Parliament needs to ratify the referendum result. Separately, European parliament members (MEPs) vote Tuesday for a new President, with the outgoing Martin Schulz leaving to run in German elections as a Social Democrat.
Australian unemployment data is released Thursday with a 5.7% unchanged rate expected. Jobs are forecast to rise 10k and the participation rate to be 64.6% according to Bloomberg. Next week on Wednesday, Australia releases CPI data for the Q4 2016.
US government 10 year bonds are currently trading at a 2.40% yield. These have ranged between 2.30% and 2.60% since the beginning of December 2016 and are 1.00% higher than the lows of mid 2016. The same pattern is true for the other major economy government yields, although the rebound higher from the lows has been less extreme. Current 10 year Japanese government bonds are trading at a 0.06% yield, 10 year German bunds are trading at 0.34% and 10 year UK government bonds (gilts) are trading at 1.365%.
Other news:
- Stocks were generally higher on Friday. In Europe, the Eurostoxx was up 1.15% and the FTSE 100 was up 0.62%%. In the US, the Dow Jones was down 0.03% and the S&P500 was up 0.18%
- The GBP is at recent lows at 1.2030 versus the USD and 0.6215 versus the AUD, as further Brexit concerns surface. Additionally, some inflationary concerns are surfacing in Britain with the headline rate to be announced Tuesday (and expected to be 1.4% for December versus 1.2% in November). The Bank of England warned households that inflation could double to 3.00% in 2018
- US data was mixed on Friday with PPI rising 0.3% as expected and retail sales rising 0.6% for December versus expectations of 0.7%
- Oil prices fell last week on concerns OPEC supply deals may not last and with deteriorating China exports numbers. China exports fell 6.1% in December compared to expectations of a 3.5% percent drop
Credit indices spreads are higher over the last week, with the US Investment Grade Index (IG) finishing Friday up 2.0 basis points (bps) at 66 bps, whilst the US High Yield Index (HY) rose 8 bps on the week to finish Friday at 351.0 bps.
Domestically, the 10 year Australian government bonds last traded at 2.70%, 8.0 bps lower on the week. The Australian iTraxx is at 98.25 bps (or 0.9825% for this index of 25 Australian Investment Grade names), unchanged over the week.
The Aussie dollar is trading at 0.7480 today, which is 1.30 US cents up from last week. The recent low was 0.7176 on 23 December 2016.
Flows
A host of new USD DirectBonds were added to the menu over the last few weeks, and together with volatility in the AUD:USD cross, trading has focused in these names. A synopsis of the new offerings follows, with all currently in good supply. Please contact your dealer for further details.
McDermott International provides engineering and construction of oil and gas projects. The senior ranking fixed coupon bond, maturing in 2021 is available at a mid 6% indicative yield to maturity.
US communications provider CenturyLink added two lines to the USD DirectBonds list. Both are senior fixed coupon bonds, one yielding in the high 5% area for the 2025 maturity, while the longer option yields in the low 8% area for the 2039 maturity date.
As higher yielding options, two USD lines were also added from the smaller competitor to CenturyLink, Frontier Communications. The 2023 and 2025 senior fixed coupon bonds are indicatively offered in the mid 8% and 10% areas respectively on a yield to maturity basis.
In AUD trading, the main focus has been on the reinvestment of proceeds from the early redemption of 360 Capital. As a result, we are well bid across most FIIG originated transactions, but are seeing some flows into AUD financial subordinated debt, as well as our new USD names.