Irrationality. There is nothing like markets being consistent, is there? It’s reassuring that our Masters of the Universe (aka fund managers) know what is going on, have their fingers on the pulse, and are managing our money so soundly, prudently. Pig’s arse! It’s the blind leading the partially sighted. The investment crowd sold off banks on Monday, and then yesterday in Australia and Asia, driving world markets lower, and then suddenly went, “Oh, look, oil is falling (again), sell energy!” The result? The sell-off in banks slowed and down went energy stocks of all types. The International Energy Agency helped by issuing a gloomy oil outlook and S&P kicked in by warning that some oil and gas companies could be further downgraded, while speculation continued that the second-biggest US shale gas group, Chesapeake Energy, could go messily bankrupt. But that selling ran out of puff and despite a big slide in oil prices on the day. Wall Street turned tail and bounced back in late trading, before fading again at the death to end the day a teensy bit negative.
It’s enough to leave you sitting on the sidelines, shaking your head and wondering if you are living in a parallel universe. The latest slide in oil prices (which topped 7% for Brent crude and 5% for West Texas stuff in the US at one stage) eased in late trading, hence the turnaround in markets. The Aussie dollar recovered 71 US cents (a far better guide than the ASX 200 and the panic merchants) then fell back to around 70.50. Remember, for every seller, there’s a buyer and there are an awful lot of investors out there snapping up shares in banks and other companies at very low prices, but you never hear from them at times like this, do you? And these overpaid panic merchants get their fees when they lose money, as they are all doing now. — Glenn Dyer
Negative Japanese rates terrify banks. Japanese 10-year bond yields finally went negative yesterday and continued overnight. Nearly two weeks after the Bank of Japan decided to start paying negative rates on new dollops of surplus cash, banks leave at the central bank, in an attempt to force them to start using the cash and lend it out (the negative rates don’t start being paid until next week). The fall in the 10-year bond yields was a big drop of 0.22% from the time of the Bank of Japan announcement to yesterday when yields went below zero in Tokyo for the first time (and the first time that yields on debt issued by a G7 country have gone negative) to -0.1% and then to -0.2%, where they remain. Complicating the matter has been a surge in the value of the yen against the US dollar (a 15-month high this morning), which wasn’t supposed to happen. The slide into negative rates and the very strong currency triggered yesterday’s 5%-plus slide in the Tokyo sharemarket. — Glenn Dyer
Australia slides. By the way the slide in Japanese yields spilled over into Australia where there was a surge in foreign demand for our bonds (that’s why the Aussie dollar remained well above 70 US cents in yesterday’s sharemarket slide). And with Chinese markets closed for the Lunar New Year, aren’t we lucky their panicky investors have been absent from proceedings this week? Yields on two-year bonds are now under the 2% cash rate at around 1.74% and yields on 10 year bonds fell to 2.40%, only roughly 0.15% from the all time low hit last April. This could allow the Reserve Bank to cut rates if these falls are maintained for the next month or so. With Japanese 10-year yields at minus 0.20%, it’s becoming a chance. — Glenn Dyer
CBA fat. And one bank sweating on rates is the Commonwealth, which produced its long-awaited interim result this morning. No change in the fat dividend of $1.98 a share, and the fat return on equity was still there — 17.2% (compared to the bond yield of 2.4% for 10-year securities) — even though it was down 1.40% from the previous year. That was because the bank has added $5.1 billion in new capital. The bank’s cash profit was an equally fat $4.8 billion, up 4% from a year ago. Pre-tax profits were a fatter $12.36 billion (up 6%). Net interest margin dipped to 2.06% from 2.11% a year ago and the cost to income ratio was steady on 42.2% (a good figure).
Why this solid result? Well, in July last year the CBA lifted rates on investor home loans by 0.27% (with the tacit approval of regulators trying to cool the investor loan market) and then lifted other variable home loan rates by 0.15% in October. Without the 0.4% plus rise in home loan rates, it is doubtful the CBA would have produced the modest rise in earnings today, and the unchanged dividend would have been under pressure. So shareholders win, but part of the price has been a near 24% slide in the value of their CBA shares in the past year, with more than half that figure (13%) coming in 2016. — Glenn Dyer