Broad risk off move affects global equities and commodities, US strip bond market signals little concern for inflation, ASX futures 36 points lower

First thing is first - living and working so close to yesterday's crisis on Martin Place, Rivkin and its staff would like to pay tribute to those who were killed, injured and terrorised yesterday, as well as the authorities who handled the nightmare situation. Our thoughts are with all of those affected and our respects are with the families of those who didn't make it out of the cafe yesterday. There are over 7 billion people in this world with varying levels of mental health, all we can do is try our best to remove the means to harm others from those who have completely lost their sensibilities. Australia's federal government did a great thing in 1996 with the gun buyback scheme and National Firearms Agreement, yesterday will no doubt remind us that this process of disarming Australia is a marathon and not a sprint.

In the midst of uncertainty with regard to commodity prices, there is one thing that investors seem quite certain about - a lack of inflationary pressures in the US. There's a good article on Bloomberg today (click here to read it) that focuses on the US Strip bond market. While these securities (which are Treasury bonds without the coupon payments) might seem a little obscure, but the demand for their style of return is a clear indicator that many investors believe that the threat of higher-than-target inflation will be absent for many, many years. Why? These Strips don't pay any interest. If you like, the interest is stripped from the bond, while all the investor gets is a promise to receive the face value of the bond back in a fixed number of years. So it's a zero-coupon bond.

The longest-dated Strip, an August 2044 30-year Strip, which can be bought at US$42.60 or a 57.4% discount to its US$100 face value, offers the buyer an annualised 2.90% return upon payment of the principal in just under 30 years' time. What the buyer is not protected against, however, is inflation. So in simple terms, if inflation were to sit at an average of 2% over the next 30 years, the investor's REAL return (nominal return minus inflation) would be a pesky 0.90% per annum. This tells the market that investors in these securities have very little fear of inflation. And if the US were to experience deflation, then the potential real return for the investor could be greater than the 2.90% nominal yield. So do investors in these bonds have rocks in their heads? Seemingly not. Demand for these bonds has risen significantly this year, with the price for 30-year markets returning up to 47.2% this year to date, according to Bank of America.

While these Strips make for interesting trivia, the guts of what I'm conveying here comes down to drivers for US interest rate change - there just don't seem to be any. Yes ultra-low interest rates fuel risk due to the need for investors to search further up the risk spectrum in order to fund the gap between their income and their liabilities; however, the pockets of excess created by this is likely to be more palatable than pushing the US into a deflationary funk. And if the US doesn't move higher on interest rates, Australia won't be moving higher on interest rates - especially if Glenn Stevens wants the Aussie dollar to be buying US$0.75. The US Federal Reserve has an interest rate announcement coming up on Thursday 6am Sydney time, which follows the release of US inflation data at 12:30am the same morning. I'm guessing that the 'considerable time' reference to how long the Fed will wait to move interest rates will be kept in there. This is not exactly consensus expectation, and would likely have the effect of weakening the US dollar, strengthening US dollar spot gold and probably leaving the Aussie unchanged, as traders price in a similar probability of action from Australia's central bank.

I'll finish now with some reference to today's charts: USDJPY has lost its mojo a little after the unchanged state of the Japanese parliament since Sunday's election. Today's 4-hour USDJPY chart (in black) shows that it is looking vulnerable to a break back below its recent 117.5 lows, and this may be due to PM Shinzo Abe's language, which focused on the inequality of the effects of stimulus measures to date. The economic structural reforms that make up the third part of his strategy require implementation to get Japanese spending and investing again, and that's probably a lot less direct in its potential affect on the USDJPY pair. The orange line is the Nikkei 225, which is no doubt dragging the yen down with it, and one would expect this to continue today after a poor night in the US and Europe.

Today's second chart shows a stagnating US dollar index, while today's last chart illustrates a couple of potential beneficiaries that may be slightly behind the curve as far as the falling-oil-price arbitrage is concerned. FedEx (FDX) and United Parcel Service (UPS) will benefit from an increasing competitive advantage over rail and falling gasoline input costs from the falling oil price. They've both responded well to the falling oil price, but have not moved in the same leaps that the airlines have so far.

Today’s charts are taken from the Rivkin Trader platform. 30,000 global instruments available to trade including FX, commodities, index, ETFs and international shares. Trade Australian share CFDs from just $8 or 0.10%. Click here or phone 1300 748 546 to get your free $100,000 demo account.

Upcoming economic announcements: RBA minutes out at 11:30am, HSBC Chinese manufacturing PMI at 12:45pm, UK CPI out at 8:30pm, Germany's ZEW survey out at 9pm, all Sydney time.

comments powered by Disqus

DISCLAIMER: Rivkin aims to provide clear and simple information to those visiting our website. If any part of this disclaimer does not make sense, please phone Rivkin and ask to speak with a member of our Dealing and Relationship Management Team. Rivkin provides general advice, securities and derivatives dealing services and accounting administration services. Rivkin does not provide advice that takes into account your, or anybody else's, investment objectives, financial situation or needs. We strongly suggest that you consult an independent, licenced financial advisor before acting upon any information contained on this website. Investing in and trading securities (such as shares listed on the ASX) and/or derivatives (such as Contracts for Difference or 'CFDs') carry financial risks. CFDs carry with them various additional risks that differ from more simple securities such as fully-paid company shares. Some of these risks include not owning the underlying instrument from which a price is being derived, settling trades 'over the counter' with a financial institution rather than on a stock exchange, and using leverage to gain access to trades that may have a higher face value than your initial deposit. This risk of leverage means that it is possible to lose more than your initial investment. Our aim is to create more life choices for our clients, which means improving the wealth of clients throughout many market cycles by nurturing a relationship spanning many years. If you are not comfortable with your understanding of the risks involved before using a Rivkin product and service, please contact our office to seek further information or a Product Disclosure Statement, or make an appointment to sit with one of our friendly financial experts. It is in our interest for your Rivkin experience to be a rewarding and comfortable one. Rivkin is a trading name of Rivkin Securities ABN 87123290602, which holds Australian Financial Services Licence No. 332 802.