Equity markets were weaker (ASX 200 down ~1.9%) last week as fear caused a run for the safe haven of treasury bonds prior to the US election. Credit markets were mixed (but marginally wider) following international leads. This morning the interest rate futures market (10-Year Government Bond) is weaker following Fridays release of the RBA Statement of Monetary Policy. The US Presidential election will dominate the week and markets will remain jittery as news drips out. Month end results are in and broadly it wasn’t a great month for investors: • ASX 200 down 2.15% • AUSBond Composite down 1.28% • AUSBond Credit Index down 0.56% • All Hybrid Index up 1.03% Bank Hybrid securities have been the driver of outperformance this month but the majority of gains came early in the month. There is no real fundamental justification for this other than less pressure on the supply side. Company specific news continues to roll in with few positives. On Friday Standard and Poor’s revised the outlook for AMP Limited (and its Insurance Subsidiaries) to Negative (click here). This change is a reflection of the Q316 update which noted worsening trends in the Life business and a 33% chance they may lower the group rating if it is “unable to fully leverage its very strong competitive position across a range of businesses in fiscal 2017”.  Hybrid investors should not be concerned as the group has sufficient surplus capital to address these issues. They have made other announcements (i.e. reinsurance deal with Munich Re) which will mitigate any short-term pressure on capital. Westpac reported full year results this morning and cash earnings are broadly flat at ~$7.8 billion. Although the result was slightly below market estimates and statutory numbers were down ~7%, the strength in retail banking offset the weakness in wealth and the investment bank. Surprisingly, the net interest margin was up slightly (to 2.13%). The standout was WBC stating its 15% return on equity target was no longer realistic (low interest rates and increasing capital requirements). Look out for our full review later today. ANZ also reported and broadly speaking it was a messy result with a number of ‘one off’ items effecting the statutory numbers. The sale of the wealth business should alleviate some capital pressure but the key is timing of the sale at a time when organic capital generation seems to be going backwards. Pressure on Crown Resorts continues with Melco Crown reporting quarterly earnings late last week. The financial covenants under the loan facility are very tight with the first covenant test scheduled in March 2017. While this has no direct impact on Crown Resorts (Melco has 60% ownership in Studio City) it could have an impact on the divestment of the international assets. It may be too early to make any conclusions here. Finally, Genworth Australia released a number of updates including its contract renewal with CBA, its major shareholder’s result (Genworth Financial) and its own quarterly results. Overall the trend is poor with Gross Written Premium down ~25% and the normalised loss ratio deteriorating (rose to 45% from 26% over the same period). Reported regulatory capital is sound at 1.55x prescribed capital (and target capital range of 1.32 to 1.44x) but overall delinquency rates continue to increase even in a low interest rate environment. The company is going through a period of change and has very strong risk management capabilities but the pressure from the parent to distribute capital is a key element to our recommendation and we will watch developments of capital management policy with the new shareholder closely.

Click below for Charts Chart 1: Bloomberg AUSBond Composite Index (Monthly) Chart 2: Bonds vs Equities 2015/2016 (Monthly) Chart 3: Term Deposit Review – September