Homepage
PR Newswire
18-10-2014, 08:34 AM
Growth fears reignite yield hunt
Volatility Vesna Poljak
792 words
18 Oct 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
Mounting expectations the United States Federal Reserve will have to keep interest rates at zero through 2015 have revived old concerns about global growth and breathed new life into defensive yield trades.
Bank stocks have rallied the past week, defying the gloomy outlook, as investors scramble to pick up shares in the Big Four at compelling dividend yields versus the skinny returns on offer in the bond market.
Anton Tagliaferro, Investors Mutual founder and investment director, said equities would be volatile for longer and sectors such as property trusts and banks were emerging as winners.
"We've had a reality check the last few weeks," he said.
"The fact is economic growth around the world is not exactly effervescent and there are still some macro risks. Interest rates are not going to go up anywhere in a hurry because of that very subdued economic environment.
"This correction, where some stocks have got back to yields of 6 or 7 per cent, it's not a bad entry price."
The major banks are trading on yields in excess of 7 per cent, with National Australia Bank offering 8.45 per cent and Commonwealth Bank of Australia 7.5 per cent. Defensive favourite Telstra offers 7.8 per cent.
The Australian dollar found favour with traders looking for safe-haven, holding against the greenback as volatility surged. It was fetching US87.46¢.Delay in tapering
Bond markets have shown uncomfortable parallels with the European sovereign debt crisis as a downturn in the region appears almost certain. Investors are increasingly doubting the European Central Bank's ability to hit its inflation target as the disinflation trend continues. On Thursday, official data showed inflation within the euro zone came in at a five-year low of 0.3 per cent on an annual basis for September.
The fear is the region will fall into deflation.
Meanwhile, St. Louis Federal Reserve president James Bullard said the Fed might consider holding back the tapering of bond purchases at its next meeting to provide further liquidity and support inflation. The Fed had been expected to end its bond-buying program, now down to $US15 billion ($17 billion), altogether following the October meeting.
Although Mr Bullard does not have a vote on policy his comments were significant because he is one of the Fed's leading hawks.
BT Investment Management head of income and fixed interest, Vimal Gor, said there was a risk the Fed could not justify tightening in 2015 as bets on the first rate hike from the Fed were quickly pushed out. That leaves the Reserve Bank of Australia in an awkward position of potentially witnessing a rallying Australian dollar over the next year.
"This is just the start. Increasing volatility is now here to stay," Mr Gor said of the upheaval in all asset classes over the past week.
He predicted a more aggressive stimulus effort from the European Central Bank. Quantitative easing policies typically drive currencies lower, and any action from the ECB can be expected to drive the euro down.
"I'd be surprised if they don't move to full sovereign QE in the next few months. The ECB has been deliberately not willing to provide more monetary stimulus . . . It would have liked there to be more of a reformist agenda but that hasn't happened," he said.Weakness in Europe
HSBC's chief economist in Australia, Paul Bloxham, said Europe is where the major economic risks lie.
"We've seen a selloff in Greek bonds, weak German data in recent weeks and the ECB has already got interest rates at zero. They've really got little room to move which is making markets nervous that Europe could see another downturn," he said.
"Disinflation continues and the threat of deflation persists. Markets are not believing that the ECB will get there."
Mr Bloxham said the weakness in Europe was hurting the US economy as a trading partner, but its impact on Australia was more indirect in that it would be felt through Asia demand.
But he does not think an imminent reversal in global growth will prompt the Reserve Bank of Australia to cut interest rates. "They're already lifting the housing market, the construction cycle, the business sector . . . any loosening of policy in Australia is likely to come through the currency more than anything else."
Potentially causing problems for the RBA was the fact that throughout the past two weeks of increased market volatility, the Australian dollar has shown safe haven qualities and resisted the further weakness in commodity prices.
"If the Aussie dollar doesn't come down we'll see the RBA sit still for longer," Mr Bloxham said.
Fairfax Media Management Pty Limited
Document AFNR000020141017eaai0001l
Volatility Vesna Poljak
792 words
18 Oct 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
Mounting expectations the United States Federal Reserve will have to keep interest rates at zero through 2015 have revived old concerns about global growth and breathed new life into defensive yield trades.
Bank stocks have rallied the past week, defying the gloomy outlook, as investors scramble to pick up shares in the Big Four at compelling dividend yields versus the skinny returns on offer in the bond market.
Anton Tagliaferro, Investors Mutual founder and investment director, said equities would be volatile for longer and sectors such as property trusts and banks were emerging as winners.
"We've had a reality check the last few weeks," he said.
"The fact is economic growth around the world is not exactly effervescent and there are still some macro risks. Interest rates are not going to go up anywhere in a hurry because of that very subdued economic environment.
"This correction, where some stocks have got back to yields of 6 or 7 per cent, it's not a bad entry price."
The major banks are trading on yields in excess of 7 per cent, with National Australia Bank offering 8.45 per cent and Commonwealth Bank of Australia 7.5 per cent. Defensive favourite Telstra offers 7.8 per cent.
The Australian dollar found favour with traders looking for safe-haven, holding against the greenback as volatility surged. It was fetching US87.46¢.Delay in tapering
Bond markets have shown uncomfortable parallels with the European sovereign debt crisis as a downturn in the region appears almost certain. Investors are increasingly doubting the European Central Bank's ability to hit its inflation target as the disinflation trend continues. On Thursday, official data showed inflation within the euro zone came in at a five-year low of 0.3 per cent on an annual basis for September.
The fear is the region will fall into deflation.
Meanwhile, St. Louis Federal Reserve president James Bullard said the Fed might consider holding back the tapering of bond purchases at its next meeting to provide further liquidity and support inflation. The Fed had been expected to end its bond-buying program, now down to $US15 billion ($17 billion), altogether following the October meeting.
Although Mr Bullard does not have a vote on policy his comments were significant because he is one of the Fed's leading hawks.
BT Investment Management head of income and fixed interest, Vimal Gor, said there was a risk the Fed could not justify tightening in 2015 as bets on the first rate hike from the Fed were quickly pushed out. That leaves the Reserve Bank of Australia in an awkward position of potentially witnessing a rallying Australian dollar over the next year.
"This is just the start. Increasing volatility is now here to stay," Mr Gor said of the upheaval in all asset classes over the past week.
He predicted a more aggressive stimulus effort from the European Central Bank. Quantitative easing policies typically drive currencies lower, and any action from the ECB can be expected to drive the euro down.
"I'd be surprised if they don't move to full sovereign QE in the next few months. The ECB has been deliberately not willing to provide more monetary stimulus . . . It would have liked there to be more of a reformist agenda but that hasn't happened," he said.Weakness in Europe
HSBC's chief economist in Australia, Paul Bloxham, said Europe is where the major economic risks lie.
"We've seen a selloff in Greek bonds, weak German data in recent weeks and the ECB has already got interest rates at zero. They've really got little room to move which is making markets nervous that Europe could see another downturn," he said.
"Disinflation continues and the threat of deflation persists. Markets are not believing that the ECB will get there."
Mr Bloxham said the weakness in Europe was hurting the US economy as a trading partner, but its impact on Australia was more indirect in that it would be felt through Asia demand.
But he does not think an imminent reversal in global growth will prompt the Reserve Bank of Australia to cut interest rates. "They're already lifting the housing market, the construction cycle, the business sector . . . any loosening of policy in Australia is likely to come through the currency more than anything else."
Potentially causing problems for the RBA was the fact that throughout the past two weeks of increased market volatility, the Australian dollar has shown safe haven qualities and resisted the further weakness in commodity prices.
"If the Aussie dollar doesn't come down we'll see the RBA sit still for longer," Mr Bloxham said.
Fairfax Media Management Pty Limited
Document AFNR000020141017eaai0001l