ABX Weekly 18/09/2019

Market Update  

 The weekend bombing of the Saudi oil infrastructure and the jump in oil prices have dominated the headlines over the past couple of days. Clearly the biggest risk is that the situation is further escalating and a further spike in the oil price would strongly undermining the global efforts by Central Bankers to stimulate growth. 

This said, we have seen a strong rebound in yields globally over the past two weeks with the US 10y benchmark treasury bonds moving from a low of 1.45% in early September to 1.90% a couple of days ago. 

In the meantime, the decision by the European Central bank to once again switch on the money printing machines and the world is waiting once again for the Fed to make the next move with market expectation growing daily for the next cut in the US rates. 

The fallout from yesterday’s European Central Bank decision continues, with the stimulus package dividing governing council members along the old core versus periphery lines. While the package of measures announced was broad, President Mario Draghi strongly emphasized the need for fiscal policy to do its share to spur the region’s recovery. The introduction of tiered deposit rates, where some excess reserves will not be hit with the -0.5% rate, will benefit Deutsche Bank AG the most, according to JPMorgan Chase & Co. analysts. The Euro Stoxx Bank Index is more than 2% higher this morning. 

Here in Australia, legendary market commentator, Westpac chief economist Bill Evans once again is calling for more cuts and according to him this month’s RBA minutes have added fuel to the case for a further cut in the cash rate. Term Deposit investors are well aware that the return for cash is melting away like an ice cream in the sun and the biggest risk for investors is to start chasing high risk investments and remain very disciplined in particular in this late stage of the investment cycle. 

Our bond rates have followed the global rates with the Australian 10y Government bonds moving from a low of 0.84% in late August to 1.23% a couple of days ago. We also have seen the key 90 BBSW benchmark moving back over 1% again after hitting a low of 0.95% a couple of weeks ago. 

An editor of a state-run Chinese newspaper has said that authorities would encourage the country’s firms to buy U.S. farm products and China would add soybeans and pork to the list of items exempted from the tariff list. The move comes after U.S. administration officials discussed offering an interim trade deal to the Asian nation, according to people familiar with the matter, something which President Donald Trump said he would “consider.” 

 

European Desk 

 My Swiss colleagues are telling me that despite all the bad news out of Europe things are still moving along well and The Swiss stock market index – SMI has hit recently an new all-time high (up 20% YTD and is among the best performers in Europe) despite the never-ending increase of the value of the Swiss Franc. 

The Euro/US$ exchange rate in the meantime is amazingly steady despite the much weaker European economies and big interest rate differential between the two continents. In addition, the never-ending Brexit drama has gone into the next round with new PM causing all sort of issues. 

On the yield side we have the German 10y Bund at minus 0.47% (recent low of minus 0.75%) and the Swiss 10y showing minus 0.71% (recent low minus 1.10%).