Equity and credit markets were slightly stronger last week, led by the US, as President Donald Trump signalled he would advance campaign promises to lower taxes. Bond markets were broadly unchanged last week but there has been a noticeable change in trend for market-implied inflation expectations (measured by the difference between nominal and inflation linked treasury yields). Inflation has been a key part of the “Trump trade” which is when investors bet on consumer prices picking up alongside revived economic growth. That’s been based largely on the expectation that President Donald Trump will cut taxes and roll back regulations. Measures of the breakeven rate of expected annual inflation peaked in late January and have steadily reversed a good portion of the post-election jump. European sovereign concerns are back in vogue with the IMF talking about participating in a third Greek debt bailout programme. While at the same time many jitters surrounding European elections (i.e. France) are putting pressure on sovereign bond yields as markets become increasingly concerned about further instability within the European Union. On the domestic front report season is now in full swing. While only a handful of companies have reported to date, the results have been uninspiring. Although it was somewhat expected weakness in the life insurance sector is causing issues for all providers. AMP has taken the pain and rebased the value of this business which in turn has caused a significant impact on their bottom line. Other results have been mixed with AGL providing a strong result but Genworth showing ongoing weakness due to structural headwinds. In other news, last week APRA Chairman (Wayne Byres) announced (click here) that they would no longer wait for the Basel Committee of Banking Supervision to finalise its work on the revised bank capital regime (note that it was delayed in January and the possible roll back of Dodd Frank in US could result in inconsistencies). The crux of the speech was that they intend to define what “unquestionably strong” capital adequacy should be in coming months. Our expectation is that capital requirements will only go up but the question is in what form. The IMFs review said that “banks are expected to steadily accumulate further capital” and comments from APRA suggest there is more of a focus on rating agency measures of capital strength. In a way, this would make sense as Standard & Poor’s uses a standardised Risk-Adjusted Capital (RAC) ratio benchmark which would then allow for a global ranking. Inevitably market stakeholders will discuss the outcome in great detail. This week we have reporting from: • Aurizon Holdings (1H 2017) • Bendigo Bank (1H 2017) • GPT Group (FY16) • Commonwealth Bank (1H 2017) • Vicinity Centres (1H 2017) • Wesfarmers (1H 2017) • Dexus (1H 2017) • Goodman Group (1H 2017) • Mirvac Group (1H 2017) • Tatts Group (1H 2017) • Sydney Airport (FY16) • Telstra (1H 2017)
Chart 1: Bloomberg AUSBond Composite Index (Monthly) Chart 2: Bonds vs Equities 2016/2017 (Monthly) Chart 3: Term Deposit Review – January
