US still being supported by yield

The dominant theme of global markets remains high yielding cyclicals. I have discussed this at length for Australia but it’s also a US event.

US Stocks
Source: Bloomberg

Despite corporate bonds in the in the US underperforming this month, spreads have held up well and high yield corporate bonds are still outperforming investment grade sovereign bonds.

In common equity, US banks are continuing to lift their dividend pay-outs (some as much as 53%) despite FX headwinds as 28 of 31 individual US banks pass the Fed’s stress test overnight.

It is likely to equate to over $100 billion in disbursements in the next 15 months. Citi is going to be the biggest mover on dividends, having failed the test late last year and only paying a one cent dividend, so a return to normal service is likely - the consensus is 60 cents.

Morgan Stanley has joined the parade of share buybacks with $3.1 billion over the next five quarters and will provide a 15 cent dividend. Goldman Sachs has just upped its quarterly dividend on the stress test results to 65 cents, Bank of America has also announced a buyback while American Express has announced a $6.6 billion buyback. While the dividend growth is below the market average, the yield average remains well above the average of the 50 largest players on the S&P.

As we mentioned yesterday, since 2011, US corporates have spent $900 billion on buying back their own shares or dividends (not including today’s announcements). To put it another way: 20% of the total market capitations in today’s equity prices have been paid out by US corporates. 

All this explains why the yield trade - and the thrust for return of capital for the risk of investment - is so prominent the world over. Even with the Fed poised to raise rates, it won’t end overnight.

However, the VIX index is clearly suggesting Richard Fisher’s comments of ‘I would rather see rates rise early and gradually than later and steeper’ is beginning to alter investment strategy.

The moves in the USD are clearly showing the market is repositioning itself on the belief that rates will move sooner rather than later. The euro, JPY, GBP and AUD - take your pick; all are making new lower lows against the USD. Goldman Sachs estimates that a 10% move on the trade-weighted index lowers total EPS estimates for the S&P by $3 – All this to lead to an underperforming S&P.

So, the yield trade is still the supporting trade of not just Australia but the US as well. However, with earnings under pressure from the rising USD, scope for higher pay outs and more capital management is thinning and a ‘patient’ Fed is becoming a real threat.

Ahead of the Australian open

Iron ore slid further into the abyss – US$57.71 a tonne overnight and news of more steel mills closing hit Asian trade. FMG broke its January low yesterday and broke through $2 once more. The trend and the momentum in the stock is very much to the downside.

The AUD printed its lowest read since May 2009 yesterday as the USD took off. The market is still pricing in a near enough to 100% chance of a May rate cut, so you may see support through the 75 cent handle. Today’s employment read is likely to just reinforce the perception a rate cut is coming, as the unemployment rate remains elevated. 

With the US market settling overnight we are currently calling the ASX 200 up a solitary point to 5794.

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