The Raw Prawn

Review of the markets for the week ending 27 November 2009

Australian bond yields ended the week sharply lower on safe-haven buying.  Equity markets took a beating as financials begin to wobble.  Commodities provided a welcome reprieve.

Economic data
Domestic economic data was mixed with September quarter construction work rising a solid 2.2%. Private capital expenditure for the quarter fell by 3.9%, worse than market expectations. The RBA deputy governor gave an upbeat speech early in the week that reinforced market expectations of a rate rise.

In the US, the September quarter GDP was revised down to 2.8% from 3.5% (annualised).  Durable goods orders for October unexpectedly fell 0.6%. The housing sector showed renewed strength as new and existing home sales both recorded solid monthly rises.In the UK September quarter GDP fell by 0.3% as the UK continues to lag the world recovery.        

Rates
Interest rates at the very short end of the yield curve rose slightly. In contrast, bond yields fell sharply on safe-haven buying. Two year government bond yields fell 0.14% to 4.30% and 10 year yields fell 0.18% to 5.21%.US bond yields were lower on increased demand for safe-haven treasury securities with 90-day T-bills trading mid-week at 0%. Two-year treasury yields declined 0.04% and 10-year yields ended the week 0.16% lower.

Credit
There was little in the way of movement in credit market indices until the weakness of Friday. The Australian iTtraxx closed the week 10 basis points wider. The US CDX investment grade index was 4 basis points wider and high yield index 14 basis points.The Australian Senate passed a bill to remove interest withholding tax on Commonwealth-issued debt, which will be a positive for commonwealth government bonds. Shockwaves were sent through the credit markets after an announcement from Dubai that a state owned corporation needed to restructure its debt repayments. Swap and cash bond credit spreads were sharply wider on this news.

Primary market issuance was strong, with three local corporate deals pricing: AMP Wholesale Office Trust, Caterpillar and VW Finance. 

Other Markets
The Australian dollar was off sharply from mid-week highs against the US dollar as investors begin to unwind the popular carry trade. The A$ finished the week down 0.8% at US$0.906.Profit-taking, growing US inventory levels and slower-than-expected GDP growth weighed on oil prices and WTI crude oil finished the week down US$0.67 at US$76.05/barrel. Gold rose 2.6% over on further central bank buying and concerns about Dubai’s potential default. The CRB index rose 1.5%.

Equity markets tumbled amid Dubai fears.  The US S&P 500 finished the week unchanged, but 1.7% down from mid-week highs. The local S&P/ASX 200 was off 2.4% while Japan was belted down 4.4%.

The week ahead
The Australian calendar picks up this week with Monday’s September quarter company profits and private sector credit releases. The RBA announces its cash rate decision on Tuesday.  Building approvals and retail sales are also released.In the US, the key release is Friday’s non-farm payrolls. Releases ahead of payrolls include ISM manufacturing data, construction spending and the Fed’s Beige Book.

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