Australian Bond Exchange Weekly Newsletter 22 July 2022
“Trying to understand is like straining through muddy water. Have the patience to wait! Be still and allow the mud to settle.”
– Lao Tzu
- WBC-Melbourne Leading Index weaker
- European economies under pressure
- Chinese developers struggling to pay bondholders
The increasing interest rates are slowly showing their impact. This week, WBC released its Melbourne Institute Leading Index which indicates the likely pace of economic activity relative to the trend slowed to 0.40% in June from 0.56% in May. The June Index is capturing the very early impact of the RBA increase in interest rates.
Clearly, the RBA has to do some more work with the market expectations of another 50bps increase in early August which would lift rates to 1.85%. This brings the official RBA cash rate somewhat closer to the market rates, with the 3-month Bank Bill Swap rate currently already standing at 2.2%.
The news out of Europe in the meantime is going from bad to worse with the heatwave causing widespread fires all over the continent. Skill shortages are causing all sorts of issues and in particular, the travel sector is in the spotlight as we approach the peak summer holiday season. Stories of airports with big queues are appearing on a daily basis and Heathrow has imposed a 2-month cap on daily passenger traffic. In addition, fear of gas and electricity shortages causing further stress, and clearly Europe is bracing itself for an extremely difficult winter ahead of them.
This puts the European Central Bank in a very awkward spot as inflation reached multi-decade highs all over Europe. It finally joined the rest of the world by increasing the ECB benchmark deposit rate by 50bps to 0%. ECB policymakers also agreed to provide extra help for the more indebted nations (of course Italy is always the big worry!) with a new bond purchase scheme to control the rise in their borrowing costs.
in the meantime, China is still struggling with the impact of its COVID slowdown with stories of queues of angry Chinese savers appearing in front of banks anxiously trying to get their hard-earned savings back. Cracks are also appearing in the property sector with news of a Chinese developer partially owned by state entities seeking bondholder consent to amend its $1.6 billion Bond to extend the maturity date giving them more time to reorganise their affairs. China South City Holdings Ltd., whose securities have dropped to distressed levels after trading near par as recently as just two months ago, said in a Hong Kong stock exchange filing the proposed changes would also include paying principal in installments and aligning the interest rates of the notes. The firm, which focuses on commercial projects in sectors like logistics, has five outstanding dollar bonds with coupons ranging from 7.25% to 11.95%.
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