POSTED BY ANGUS GEDDES
US equity markets were lower on Thursday, selling off as bond yields rose, and despite an intra-day recovery. The Dow Jones closed down 0.74% while the S&P500 ended the session 0.94% lower. The big event on Thursday was in the US Treasury market with the 10 Year and 30 Year bond yields moving higher to 2.37% and 2.9% respectively. The selloff in bonds had some contagion and the 10-year German Bund yield also had a sizeable jump higher. What is bad news for bond investors is great news for the global banks, and the financials lifted into the close.
We are overweight banks across our European, Asian and Global Portfolios, and also in the Fat Prophets Global Contrarian Fund. At the beginning of the year, we outlined a scenario where bond yields would rise this year, but not before a decent correction. We have now seen this correction terminate, and the stage is set for US bond yields to challenge the highs of earlier this year. A steepening yield curve is going to be particularly challenging for bond investors who have had a one-way ride over the past forty years.
Euronext and Bolsas Y Mercados have provided a trading update in June. Euronext has announced an average daily transaction on its order book of €8.24bn in June. This was off 1.2% on a year ago and 2.7% on the previous month and appears to reflect relatively low market volatility. Five new listings took place during the month including ALD with a market capitalization of €5.8 billion. In the corporate bond market a total of €6.1bn was raised while follow-on equity issues raised €7bn.
Turning to the Spanish exchange, Bolsas Y Mercados Espanoles (BME), and trading in June was very strong. Trading volumes came in at €73.2 billion which was the strongest since April 2016 and was up 18% from May and 11.1% on a year ago. This largely reflects a recovery in the Spanish stock market with the number of trades in June at 4.8 million up by only 1.1% from May. The number of equity trades in the first half was down 11.6% on a year ago at 26.6 million.
BME reported a net profit of €39.3m in the first quarter versus €42.9m in the first quarter of 2016. First half results are due to be released on 27 July and BME currently trades on a forecast P/E of 17X for 2017. BME is a high conviction top 10 position in the Fat Prophets Global Contrarian Fund and is also held in the European and Global Opportunities Managed accounts.
The A$ pulled back under 76 cents yesterday, and as our analyst team noted in their outlook this year, the currency also has relevance to how the Australian market will perform this year, with excessive strength likely to see more losers that winners. Current levels are still relatively low in historic terms (and not a major headwind for exporters), but at recent three-month highs just below 77 cents this would be creating a few nerves. Especially for the RBA which has made no bones about the fact that currency strength would ‘complicate’ the economic recovery.
This also in our view is going to be the ‘tie breaker’ that ensures the cash rate remains low for some time. We have low unemployment, and resilient GDP growth, but any inclination by the RBA to tighten will be tempered on the other side by the vulnerability of the housing market, and the high levels of consumer/household debt.
A contained currency has direct economic benefits as we know, and this was evident in the trade numbers for May. The economy’s surplus leapt to $2.47 billion from a surplus of $555 million in April, and well ahead of forecasts of $1 billion. Exports jumped 9% in May, helped also by a rebound in coal shipments following Cyclone Debbie. Overall, exports to China hit record highs in the year to May which highlights why we do not want to get out most important neighbour off side.
A still low $A will also continue to underpin the tourism sector where numbers continue to swell into Australia. In this regard we continue to rate Mantra which had a solid session yesterday, rising 3.3%. We continue to be of the view that concerns over the negative impact of disruptors such as AirBnB have been overstated.