Last week both equity and bond markets were weaker with the domestic 10-Year futures yield rising from 2.73% to 2.83% (partially retracing this morning to 2.76%). Markets were muted on Friday ahead of the US the non-farm payrolls job number, the Austrian presidential election and the Italian referendum on constitutional reform (early exit polls suggest the no vote is leading). The US jobs number came in pretty much in line with expectations which resulted in the unemployment rate falling from 4.90% to 4.60% (following a fall in the participation rate and the October number being revised down). This was the last box that needed to ticked leading into the Fed’s December meeting and now we can almost certainly expect a US rate hike later this month. Earlier this morning European Union leaders breathed a short-lived sigh of relief as the pro-European Austrian independent candidate Alexandar Van De Bellen defeated the conservative leader Norbert Hofer. However, in Italy the Prime Minister Matteo Renzi announced that he will resign following the ‘No’ vote winning the referendum which will create some headaches. Markets are reacting negatively to this result with the Euro falling by ~1% against the US dollar (at the time of writing) with the Australian share market also down. This result that will add to market volatility as a rescue scheme for Italy’s more indebted banks could be derailed. Remaining overseas, the international banking supervisory committee met last week in Santiago (Chile) to discuss the Basel global standards and new regulatory framework for the coming years. Similar to ongoing debates in Australia, the global regulators remain focussed on the need for sustainable prudential banking, including strengthening supervisory conduct, governance and culture in banks and how to improve best practices in banking services and assessing the impact of expected loss provisioning. The committee expect to complete a revamp of capital standards at the beginning of next year after making progress in bridging policy divides between the US and Europe. APRA therefore also remains on target to translate these recommendations into an Australian context during 2017-18. November was a defining month in terms of asset class returns as US equities rallied strongly (Dow Jones, S&P500 and the NASDAQ returning 5.41%, 3.42% and 2.59% respectively) following Donald Trump’s US Presidential Election win. This had a spill-over effect to the Australian market with the ASX200 accumulation index returning 2.99%. In stark contrast, global bond markets fell as inflation expectations continued to rise and the yield curve to continued to steepen (longer dated bonds rose in yield more rapidly than shorter dated bonds). This resulted in US bonds returning -2.87% and the benchmark Australian composite bond index returning -1.44%. The ASX listed hybrid index was up 0.69% in November as major bank issued hybrids enjoyed another positive return from investor demand outpacing new issuance supply. This trend is expected to continue over the Christmas/New Year period as evidenced by the recent A$350 million IAG Capital Notes (Prospective ASX Code: IAGPD) issue that attracted bids in excess of A$1 billion. The only domestic bond issuance last week was the Bendigo Bank 10-year A$125 million wholesale Tier 2 issue, issued as a private placement to wholesale investors (and therefore not listed on the ASX). The first optional call date of this bond was set at 5 years (9 December 2021) with an initial margin of 2.80% over the 90 day BBSW rate. This security is also Basel III compliant meaning that it has non-viability language embedded in the terms and conditions.
Click below for Charts Chart 1: Bloomberg AUSBond Composite Index (Monthly) Chart 2: Bonds vs Equities 2015/2016 (Monthly) Chart 3: Term Deposit Review – October
