Pre-Open Data
Key Data for the Week
Key economic data released this week:
- Tuesday – EUR – Gross Domestic Product – The Eurozone economy contracted 0.6% in the December quarter, to be down 5.0% over the year.
- Wednesday – UK – Consumer Price Index
- Wednesday – US – Retail Sales
Australian Market
The Australian sharemarket lifted on Tuesday for a second consecutive session, to close up 0.7%. The Energy, Materials and Industrials sectors outperformed, while the Consumer Discretionary, Consumer Staples and Information Technology sectors all closed weaker.
The Financials sector closed up 0.5% yesterday, as the major banks, with the exception of Commonwealth Bank, finished higher. NAB added 1.1% after the bank released a quarterly update, which saw a 47% increase in cash earnings during its first quarter of trading. Westpac and ANZ lifted 0.5% and 1.0% respectively, while Commonwealth Bank fell 0.5%, as the company traded ex-dividend.
Despite weakness in the Information Technology sector yesterday, buy-now-pay-later provider Zip Co rallied to a new record high, closing up 10.0%. Despite no market announcements, artificial intelligence company Appen climbed 7.7%.
The Materials sector saw mixed performances yesterday among the mining heavyweights. Fortescue Metals gave up 3.0%, following an announcement that three high-ranking officials at the company have resigned over an undisclosed matter. Rio Tinto jumped 3.0% and BHP gained 2.7% after the company announced an interim dividend of US$1.01 per share, an increase of 55% on a year earlier.
The Australian futures market points to a 0.29% fall today, driven by weaker overseas markets.
Overseas Markets
European sharemarkets closed lower overnight as gains among major mining and bank stocks were offset by losses across most sectors. Mining heavyweight Glencore climbed 2.0%, which lifted the European mining index to a near 10-year high. The Financials sector also enjoyed gains on Tuesday; Barclays and Lloyds Bank both added 1.0% and Deutsche Bank lifted 1.7%, while HSBC jumped 4.2%. By the close of trade, the broad based STOXX Europe 600 and the UK FTSE 100 both slipped 0.1%, while the German DAX lost 0.3%.
US sharemarkets were mixed on Tuesday. The Energy sector gained 2.2%, as ExxonMobil climbed 3.0% and Chevron lifted 0.6%. The Financials sector also outperformed; Bank of America added 2.7% and JP Morgan Chase closed up 2.4%, while Citigroup rose 0.8%. By the close of trade, the S&P 500 and NASDAQ lost 0.1% and 0.3% respectively, while the Dow Jones rose 0.2% to a record high.
CNIS Perspective
Since the start of 2021 we have seen some interesting developments in the US high yield corporate bond market. Recent figures show that more than 15% of every dollar raised in the US high yield bond market has been sold by groups with ratings of triple C or below, or what is more commonly known as the highest risk of ‘junk’ bonds.
These are the riskiest businesses in America making up their largest portion of junk bond sales since 2007, or pre-GFC levels.
Stimulus measures from the Federal Reserve have pushed interest rates on higher quality bonds lower, leaving investors to hunt for riskier bets further down the ratings ladder, hence the demand for these junk bonds is currently strong.
To put this into perspective, cruiseline operator Carnival Corporation last week had no trouble raising US$3.5bn at a rate of 5.75% p.a.; this is on top of US$19bn already raised since the pandemic. Carnival is a business that has largely been in hibernation since March last year, with a credit rating of ‘B’. While still classified as junk, the company retains a higher credit rating than the corporates we have in question.
It’s a major bet by bond investors that the US economy rebound will take shape and lift corporate profits right down the ratings spectrum. Time will tell whether this is the case, if not, expect bond defaults to rise.
Should you wish to discuss this or any other investment related matter, please contact your Investment Services Team on (02) 4928 8500.
Disclaimer
The material contained in this publication is the nature of the general comment only, and neither purports, nor is intended to be advice on any particular matter. Persons should not act nor rely upon any information contained in or implied by this publication without seeking appropriate professional advice which relates specifically to his/her particular circumstances. Cutcher & Neale Investment Services Pty Limited expressly disclaim all and any liability to any person, whether a client of Cutcher & Neale Investment Services Pty Limited or not, who acts or fails to act as a consequence of reliance upon the whole or any part of this publication.
Cutcher & Neale Investment Services Pty Limited ABN 38 107 536 783 is a Corporate Authorised Representative of Cutcher & Neale Financial Services Pty Ltd ABN 22 160 682 879 AFSL 433814.
