It’s Never Enough…

  • Supernova strength
  • Counting down to the big reveal

When is enough, enough?

When it comes to promoting financial newsletter subscriptions, the answer is, never.

There’s always something to show you. This latest video series from Callum Newman and Phil Anderson is a great example.

If you haven’t seen the four-part series yet, go here.

But there are some things where enough truly is enough. We’ll explain more below. First…

Markets

Overnight, the Dow Jones Industrial Average gained 51.23 points, or 0.28%.

The S&P 500 index added 3.45 points, or 0.16%.

In Europe, the Euro Stoxx 50 index closed up by 9.14 points, or 0.29%.

Meanwhile, the FTSE 100 added 0.56%, and the German DAX gained 0.39%.

In Asian markets, the Nikkei 225 index is down 551.14 points, or 3.24%.

The Shanghai Composite index is down 35.78 points, or 1.21%.

In Australia, the S&P/ASX 200 index is higher by 30.79 points, or 0.59%.

On the commodities markets, West Texas Intermediate crude oil is trading at US$45.18 per barrel. Gold is trading for US$1,249 per ounce.

The Aussie dollar is worth 75.92 US cents.

Supernova strength

In my view, there are some things it’s impossible to get too much of — weekends, cheeseburgers, relaxing in the garden, reading, watching sport…and reading interesting and insightful financial newsletters (such as those produced by us).

But there are some things where it is possible to say, enough is enough.

That’s the message we would have for the Bank of Japan today. As the Financial Times reports:

Japan has fallen back into year-on-year deflation for the first time since 2013 just ahead of a crucial Bank of Japan meeting that markets reckon has a 50:50 chance of unleashing monetary easing.

The headline consumer price index was down by 0.1 per cent on a year ago, compared with analyst expectations of flatlining, as slumping global commodity prices and a stronger yet weigh on BoJ governor Haruhiko Kuroda’s effort to drive inflation to 2 per cent.

In anticipation of the Bank of Japan (BoJ) cutting interest rates further or printing more money, the Nikkei 225 index was up more than 1% earlier today.

However, that changed when the BoJ announced that it would keep things just as they are…for now.

The result? Japanese stock prices sunk. The Nikkei is currently down 551 points.

So, is that the end of it? Alas, no. As Kyohei Morita, chief Japan economist at Barclays told Bloomberg:

Kuroda wanted to make it clear the BOJ won’t make monetary policy driven by market demands. It’s too early to make another move after implementing the negative rate a couple of months ago. The important message is that the BOJ will be data-dependent and I expect they will bolster stimulus in July as they review the outlook of inflation.

There is no such thing as ‘enough’ where the Bank of Japan is concerned. It’s purely about the timing of when they’ll cut interest rates even further into negative.

According to Morita, that could be as soon as July.

But what the heck. Who cares? That’s Japan. It doesn’t impact Australia, right?

Perhaps it does, and not for the good either. Again, from Bloomberg:

Forget domestic inflation, the Reserve Bank of Australia and even the Federal Reserve. The “black hole” of Japanese and European interest rates will be the thing that drags down Australian bond yields, according to HSBC Holdings Plc.

The advent of negative interest rate policies in two of the world’s largest fixed-income markets is “the biggest beast in the room,” outweighing even China in their impact on Australian yields, according to Andre de Silva, Hong Kong-based head of global emerging market rates research at HSBC. Speaking in an interview in Sydney on Wednesday, he likened the impact of negative-yield Japanese government bonds and German bunds to that of a supernova drawing other markets closer to zero.

“You’ve got the gravitational pull,” de Silva said. With negative yields, he said it’s “no surprise that there’s a desperate hunt to go elsewhere. Australia is a significant target.”

If you’re confused by the jargon, let me put it simply.

As Japanese interest rates look certain to go even lower, investors will pull money out of Japanese bonds in order to invest elsewhere.

When doing so, they’ll look for politically stable countries, with a yield that’s, well, higher than zero.

One such place is Australia.

The patriotic Aussie inside of you may be tempted to stand up and belt out a verse or two of Advance Australia Fair.

But before you give the larynx a good workout, just consider this.

Whenever there is an increase in buyers into any market, it invariably pushes up prices. That shouldn’t be any different in the bond market. More buyers means higher bond prices.

The trouble with that is bond yields move inversely to bond prices. So, if bond prices rise, bond yields must…that’s right, fall.

In other words, lower interest rates in Japan look set to result in increased demand for Aussie government debt. Which means lower interest rates in Australia…even if the Reserve Bank of Australia (RBA) doesn’t do a thing with the Cash Rate.

And this isn’t just theory. Check out the chart below of the respective 10-year bond yields. You can see an uncanny magnetism between Australian (yellow line) and Japanese (white line) government bond yields.

chart image

Source: Source: Bloomberg
Click to enlarge

As Japan’s yields fall, so do Australian yields.

Sure, Australia’s interest rates are still significantly above Japan’s, but the trend is clear.

From 2009 through 2010, Australian bonds yielded around 5.5%. At the same time, Japan’s 10-year bond averaged around 1.3%. That’s a spread (the difference between the two) of 4.2 percentage points.

Today, the Australian 10-year government bond yields 2.5%, while Japan’s is at –0.075%. That’s a spread of 2.575 percentage points.

The gap is closing as rates in both countries continue to fall.

If HSBC’s analyst is right about the ‘gravitational pull’ between the two, and if the Barclay’s analyst about the prospect for even lower rates in July, just how much lower can Australian yields go?

Looking at other bond rates worldwide, it’s a mistake to think rates won’t go negative in Australia. 13 of the 19 Eurozone countries currently have negative interest rates on two-year bonds.

Eight have negative interest rates on five-year bonds. And Latvia briefly went into negative interest rate territory on its five-year bonds in April. They’re currently positive, but for how long?

It just goes to show you that anything can happen. In the old days (ie. eight years ago), you could use relative interest rates to assess the risk of one economy compared to another.

If a country’s bonds had higher yields than another’s, you would be reasonably safe in saying that the higher yield country was a higher potential risk. Not always, but it was a pretty good rule of thumb.

But now, and excuse us for an element of home bias if you will, but would any sane investor really argue that Latvia is a safer place to put your money than Australia?

Hey, who knows? Maybe it is.

But in our view, it’s just more evidence to show how much central banks and governments have distorted the world’s economy. The mainstream appears to see this distortion as a necessary evil to ‘fix’ economies.

Call us an old stick-in-the-mud, but we just see it as evil.

Counting down to the big reveal

As we continue to prepare for our 2016 investment conference, it’s clear that interest rates will be a big theme.

Many see interest rates as boring and not relevant to their daily lives or investment strategies. It’s wrong to take that view. As much as I’d like to ignore them, and instead focus on individual stocks, it’s impossible to take interest rates out of the equation.

So, interest rates look as though they’ll take centre stage and be a key theme of the conference.

We’re close to finalising everything. By the time we reveal all the details to you in two weeks, it looks as though we’ll have every speaking slot filled.

I’m excited about that, because when we first started planning this event, I wondered how we’d be able to attract the talent we wanted to attract.

Turns out we didn’t have a problem. The schedule is full, and it’s bound to be an exciting, insightful, and potentially controversial show.

Look out for full details soon.

Cheers,

Kris

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End of day market data

If you have any ideas about what you would like us to include in our end of day market data drop us a line at letters@portphillipinsider.com.au, and type ‘Market data’ in the subject line.

52-week highs: 31 stocks, including Breville Group Ltd [ASX:BRG], Magnis Resources Ltd [ASX:MNS], Echo Resources Ltd [ASX:EAR], Pact Group Holdings Ltd [ASX:PGH], Perseus Mining Ltd [ASX:PRU], and Supply Network Ltd [ASX:SNL].

52-week lows: 19 stocks, including 3P Learning Ltd [ASX:3PL], Countplus Ltd [ASX:CUP], MZI Resources Ltd [ASX:MZI], and Volpara Health Technologies Ltd [ASX:VHT].

Note: The stocks listed above are stocks that hit an intra-day 52-week high or low during today’s trading. The stocks didn’t necessarily close at the 52-week high or low.