The ASX record book is being rewritten

In its very short lifespan (15 years), the ASX has only once made 11 consecutive green print sessions; the All Ords has only seen that occur twice in the past 30 years.

Source: Bloomberg

Today, further records will be written, with the futures market forecasting a twelfth consecutive green print - something the ASX has never done.

Since the ECB entered the brave new world of quantitative easing, the Swiss National Bank gave up protecting its peg and central banks the world over have been scrambling to devalue their currencies through interest rate cuts; the globe has become yield mad. It has sent bond and equities markets in to a bidding frenzy, which illustrates that my baseline strategy of yield hunting has been the correct one.  

Here is the dilemma in Australia at the moment: the cash rate is currently 2.25% (expected to fall to at least 2% by June). Australian government bonds currently stand at the following:

Two-year: 1.895%

Three-year: 1.873% (another record low)

Four-year: 1.895%

Five-year: 1.957%

Ten-year: 2.397%

15-year: 2.612%

The front and even the middle end of the curve are all well below the new cash rate, and if the ten-year wasn’t dumped as hard as it was on Wednesday (rising 18 basis points), it would be even with the cash rate. This illustrates perfectly why from a baseline strategy perspective  high yield has been correct. It also shows that it’s unlikely to let up.

CBA is marching towards $100 completely unabated; the consensus estimate for is full-year dividend is $4.21 a share - that’s a net-yield of 4.5% (and it’s only going to get smaller today). {shares:TLS-AU|Telstra] too has a net-yield of 4.5% and is trading on a PE ratio of 19 times. The yield trade is getting very narrow and the concern here is for total return erosion and a squeeze lower. That however is a longer-term concern that the bond market is clearly telling me that in the coming weeks the squeeze isn’t going to happen yet.

You also need to ask yourself, what will the earnings and corporate environments be like if the Australian economy needs to see interest rates at 1.5% to 1.75% (according to some estimates? Earnings in the back half of the year are a real concern; if the economy is indeed slowing as much as forecast, they are going to be under real pressure.

Commodity prices continue to print new lower lows (iron ore another record low for Qingdao delivery, copper to 13-year lows overnight); retails sales are weakening further (a benign 0.2% growth read yesterday) and inflation, particularly wages, is falling. What will that do to full-year numbers?

Ahead of the Australian open

What is also likely to support the market’s positioning is the RBA’s monetary policy statement. Further elaboration on Tuesday’s decision and its outlook for the coming six months will likely add weight to the yield trade. Rate cuts (and hikes) never come in ones, so the expectation of a second is close enough to a certainty. However, if there are signs of a third or fourth, the Aussie bonds will be off to the races and yield stocks will be closely following.

The ASX is now up over 10% this year, and has been the best performing index in the world in the past two weeks. The fact that oil whipped back the energy space is likely to recoup the losses from yesterday and will on add to the support that is likely to be seen. We are currently calling the ASX up 29 points to 5840 as everyone piles into equities with return of capital.


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