In another shortened (Easter) week for markets, global politics continue to dominate headlines. While some of the media spotlight has shone on the pending French election which is likely to have consequences for European Union stability, of greater importance are the forthcoming plans for the Trump Administration’s tax reform. A formal announcement is expected on Wednesday and will reveal how closely the two political parties are aligned on fiscal stimulus and the subsequent timeline and magnitude of any tax cuts. Additionally, further powers have been given to US Treasury secretary Steven Mnuchin to address the Dodd-Frank act, where “burdensome” financial regulations will look to be repealed. On this basis, the Trump reflation trade showed signs of life during the week as the US and Australian 10-Year Treasury yields broke the downward trend and had a notable shift upwards (~0.15%). However, this is still 0.30% off the peak established back in March 2017 suggesting markets remain cautious of policy execution risk. Last week, there were a number of key announcements from companies that confirmed our recommendation assumptions. Coca Cola Amatil (ASX: CCL) revealed its core Australian Beverages unit is experiencing weaker price and volume conditions (due to ongoing structural challenges regarding competition and consumer tastes), Aurizon (ASX: AZJ) revised earnings estimates downwards as a result of Cyclone Debbie and ANZ (ASX: ANZ) announced the sale of its Vietnam retail business to Shinhan Bank as part of its broader Asia divestment strategy. The big company news of the week was confirmation that Amazon will officially begin launching retail services with Australia after years of speculation. In our January outlook we stated that the rise of e-commerce is delivering a new surge of convenience for customers and combined with the traditional concept ‘value for money’, bricks and mortar retail is at risk (Myer, JB Hi-Fi, Harvey Norman). This risk extends to the supermarkets industry which is exposed to relatively inelastic demand. As a result, Amazon would have the ability to undercut incumbents (Wesfarmers and Woolworths) in an already fiercely competitive market but we continue to believe the negative credit impact will over the longer term (3-5 years). On Friday, ANZ announced the redemption of ANZ Subordinated Notes (ASX: ANZHA) which will take place on the 20th of June 2017. No roll-over security has been offered by the group which will leave ~$1.5 billion of retail money uninvested and we expect this will add to the current downward pressure of margins. Positively, the listed fixed income exchanged-traded fund (ETF) market continues to represent a healthy alternative with investment firm VanEck expecting to launch its inaugural Australia Corporate Bond Plus ETF (Prospective ASX Code: PLUS) in coming weeks.
Chart 1: Bloomberg AUSBond Composite Index (Monthly) Chart 2: Bonds vs Equities 2016/2017 (Monthly) Chart 3: Term Deposit Review – March
Interest Rates The RBA’s April board meeting minutes were released on Monday and reiterated similar rhetoric illustrated in the Financial Stability Review released the week prior (i.e. rising risks in the housing market). Board members highlighted their confidence in global growth but inflation and employment continue to be the primary drivers of domestic monetary policy. As a result, Consumer Price Index (CPI) data scheduled for release on Wednesday will be closely watched. Market consensus currently sits at 0.6% on the previous quarter which translates into an annual rate of 2.2%. If this eventuates, inflation will sit within the RBA’s target rate of 2-3% for the first time since 2014 and will strengthen the argument that we have reached the bottom of the interest rate cycle.
