Australian Bond Exchange

ABX weekly 01/05/2019

Market Update  

The S&P 500 closed at record all-time closing highs Friday. This was due to US Q1 GDP coming in strongly @3.2%, well above the previous 4Q18’s GDP growth of 2.2% and market expectations. The Goldilocks range dominates, as corporate earnings do enough to maintain these record stock prices but with modest growth and low interest rate environment remains very supportive for credit spreads. The US earnings season has so far produced no outright shocks and a generally positive atmosphere has been maintained which was reflected in the market’s response as it sustains the record-highs equity indices 


Following the very weak 1Q CPI release here in Australia, the market has re-calibrated its RBA expectations and pushed 3yr rates to new record lows quicker than expected. Market pricing suggests that every RBA meeting is live from now and that will keep 3yr swap rates probing new low levels. With a full 25bps cut fully priced in within the next 3 months supporting the “lower for longer” mentality. The biggest concern will be if the AUD drops to the $60-$65 range where the RBA will be forced to act. 


In China, traders largely shrugged off data showing a rebound in industrial profits in March, which surged 13.9% year-on-year, marking the biggest annual increase since last July and the first expansion in four months. The data point was the most recent indicating China’s economy has likely already bottomed and is in recovery mode. The concern of some traders though is that given the improvement, Beijing authorities might halt supportive monetary and fiscal measures that were being rolled out earlier as China’s economy slowed. 



European Desk 


Once again there was no news from the Brexit saga which gives me the opportunity to talk about some other flash points in Europe. As we may all recall Spain has had their fair share of political turmoil over the past couple of years. There has been an overwhelming desire by the Catalan Region to become autonomous from Spain, which has caused some pain in an otherwise strongly recovering European economy. 


On the weekend the Spanish people had to go to the polls again for the country’s third election in four years and the existing PM Pedro Sánchez’s party polled 29%. They probably will need the help of either left-wing Podemos and regional parties, or the centre right, to form a government but nevertheless it’s a victory for them and a loss of power for the separatist Catalan party. 

What did this mean for the bond yields of the Spanish Government? Not much – business as usual which is good news for the overall European market which seems to be once again in some sort of holding pattern waiting for some sort of crisis to emerge.  The 10- year German Government bond are once again showing a positive yield of 0.012% and the Spanish 10 years bond stand at 1.008%.  

A major indicator I like to monitor is the EUR/Swiss Franc exchange rate as a stress indicator. Lately the Swiss Franc continues to weaken which signals less stress from investors which the market takes as a positive sign.