ASX to get another boost from a solid US session, Fed minutes fuel buying into the close, ASX futures up 58 points

An imminent US interest rate hike became even more apparent this morning with the release of Federal Reserve minutes from its October meeting, along with a press conference including three Fed officials. The market lapped up the news, potentially signalling that all traders want is more certainty, irrespective of whether it means higher Fed rates.

I caught up with Saxo Bank Chief Economist Steen Jakobsen last night, and we had a good discussion about US Fed policy. Beyond the normal considerations that one might encounter when interest rates change, there are three things that stand out to me when pondering the market effect of this next US interest rate rise, the first since December 2008:

  1. The real cost of corporate borrowing has already risen in anticipation of this event: the 'spread' (or margin over and above what the equivalent government bond yield is) on investment grade corporate bonds in the US has risen from about 1.06% in June last year to 1.62% now, a rise of 53% in 17 months; and the equivalent measure for junk bonds has gone from 1.42% to 2.21% (+38%) over the same period. (Source: FRED, Bank of America/Merrill Lynch US Corporate Master OASBank of America/Merrill Lynch US Corporate BBB OAS)
  2. For the conspiracy theorists, the Fed may know that the publicly-available inflation figures are nonsense: It is very convenient to have official inflation statistics that are close to zero at a headline level when your country has patchy growth and over US$18 trillion in public debt - it means you can keep government bond yields lower for longer until you start producing budget surpluses. So are official figures to be believed? Google 'alternative inflation measures' or similar, there are many who think not!
  3. The US Fed has primed the market for more hikes than it will be prepared to make: Looking a year out, the market has prepared itself for between 50-75 basis points of hikes in the US, including a very high likelihood of a 25 basis point hike in December (next month). If the market is reading this as a trend or trajectory of US rates, rather than a 'one-and-done' or 'two-and-done' scenario, then credit conditions might become more relaxed if no trend emerges. Remember, the Fed has done nothing with the Fed Funds rate for seven years, is it really about to hike two/three times in the next 12 months?


In today's charts: I've first plotted the US dollar index, taking a run up to 100 in anticipation of Fed minutes this morning, before turning around and settling back to 99.6 - remember to keep an eye on this US dollar theme, it's extremely important for the emerging Asia region that was trade so much with, as well as commodity prices for our resources sector; second you can see that the ASX 200 SPI futures are showing good signs of support at and above 5,000 points; and third I've shown the AUDUSD currency pair, which would likely be one of the most direct beneficiaries of a US dollar turnaround. 

I'll be conducting a video interview with Saxo's Steen Jakobsen today for Rivkin members where we'll discuss scenarios for the US dollar and the likely impact for global markets. 

One last note, a trade idea for anyone sitting in cash: ANZ Convertible Preference Shares (ANZPA) are sitting on an anticipated yield to conversion of 5.52%, with a conversion date of 15 December, 2016. This could prove a great parking spot for those who don't see it as an opportunity cost for investing in other growth opportunities - Shannon Rivkin will discuss this in more detail today.



Source: Rivkin, Bloomberg

To view the Rivkin economic calendar and Global Markets matrix, members can click here.

This article was written by Scott Schuberg, CEO of Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3600.

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