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Aug 19

Another dodgy market update

Obviously a pretty difficult investment environment at the moment. Markets tanking again overnight and following on in Australia this morning. Watching Billabong drop around 25% this morning demonstrates the benefits of diversification…I’d hate to be an adviser with an overweight Billabong position in my client’s portfolio. Anyway I digress.

Volatility in the sharemarkets will continue for many more months yet and its difficult to see when it may end. The US has shown that the politics is more important than the economic and jobs will take a back seat to political points…they seriously need to raise taxes on the rich and they really have little choice for more Quantitative Easing (QEIII). The ECB is looking a little silly by raising rates earlier in the year on the back of inflation fears driven by food, energy and other commodities of which they had no control over. Raising interest rates in Europe, given the fragility of the peripheral countries, was never going to help. On the plus side in Europe, the ECB’s bond buying program appears to have assisted the Italian and Spanish situation as their bonds are yielding around 100+bps below where they were when this current ‘crisis’ began. Current news reports suggest the latest night of sharemarket volatility is driven by European banks looking a little fragile…hardly a surprise there.

At the time of writing the Australian sharemarket is down around 2.6%…msotly the big 4 banks influence. Basically, they’re always going to suffer if overseas banks are suffering because it simply makes their capital raising efforts a little more difficult and expensive. With the exception of a few days this month, our sharemarket is pretty much linked to the global markets so whatever happens there will largely be reflected here. Those few days of difference I’m guessing were probably due to the annual reporting season whereby some companies must have reported results that may have surprised on the upside.

Australian bond yields are low. Very low. I’ll update my chart soon, but I can tell that this morning, our 12 year government bond is yielding 4.38%…that is way below the RBA’s current cash rate of 4.75%…and whilst I’m sure there is signficant overseas demand for our AAA Australian bonds, I’m guessing it’s also a sign that our economy isn’t all it’s cracked up to be. With these bond yields as low as they are, as a personal mortgage hold, I must say I am a little frustrated that fixed interest rates haven’t dropped further…I’m not seeing too much incentive to fix yet. Mind you that leads me to the only decent return for risk investment for most people…the term deposit.

My good friends at RimSec send me a daily note which includes term deposit rates for numerous banks, credit unions, and building societies. Whilst the RBA is at 4.75% and 1 year Australian government bonds are at 3.68%, you can still buy term deposits maturing between 3 and 12 months with yields in excess of 6%!!! Nice. These yields have decreased by around 5 to 25bps over the last week or two but compared to bonds, that’s a great result. With overseas banks looking to struggle I can only assume local banks will continue to raise much of their capital via term deposits so these decent (relative) yields are bound to continue.

Australian government bond yield curve coming soon.

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