Get out of the way. The greenback is charging higher. After rising fitfully for the past few weeks, the US dollar jumped sharply overnight, knocking everything in its path lower. The euro fell more than 1.5 US cents and is now at a 12-year-plus level of just under US$1.07. Gold fell, oil fell, iron ore prices fell, and the Aussie dollar fell to just above 76 US cents.
Emerging market currencies such as the Brazilian real all dropped sharply, some to multi-year lows. Wall Street also fell by around 1.7% (for the S&P 500) to 1.9% for the Dow. It was the second triple-digit fall for the Dow in three trading days. European shares all fell, most Asian markets did yesterday, and ours will be down sharply as well this morning. The quantitative easing starting in the eurozone and a growing belief US interest rates will rise sooner rather than later combined to trigger a massive sell-off in currency markets.
The rise of the US dollar is doing Australia a big favour as it drives the Aussie currency lower to levels that will make the Reserve Bank happy. But the rapid move in all markets has resulted in Wall Street wiping out the gains so far this year (we are still ahead after the 9.4% rise in January and February). More toing and froing between Greece and the rest of the eurozone is also starting to worry markets. Greece doesn’t seem to be serious in trying to strike a new deal and is shilly-shallying. Our market opened down this morning. Ouch. By 11am it had lost another 66 points. Double ouch. — Glenn Dyer
If US rates are rising, why are bond yields falling? The unsettled state of markets also coincided with a slide in US bond yields, with the 10-year security ending at 2.12% overnight Tuesday, against 2.24% last Friday. Now, if US interest rates are supposed to be going up, you’d expect bond yields, especially on the most liquid of all — the 10-year security — to be rising. The fall since Friday tells us how fraught sentiment has become in the past two days, with the speed of the rise overnight the big shock. Don’t be surprised if there are more occasions like the past 24 hours, especially after the end of next week’s two-day meeting of the US Federal Reserve, which is now widely expected to leave a big hint as to the timetable for a rate rise. Fear and uncertainty drives investors to the safety of US bonds, so expect more of the apparently contradictory stance of a push to lift US interest rates and easing yields on US bonds. — Glenn Dyer
Follow the money, WWI has ended, finally. Ninety-seven years after being issued in 1917, the British government is finally retiring the last bit of perpetual debt sold to finance the “war to end all wars”. On Monday of this week, the UK Treasury redeemed the final 1.9 billion pounds (more than $3.5 billion) of debt from the “War Loan”, which was originally issued in 1917 with a coupon (interest rate) of 5%. It was refinanced into a bond with a yield of 3.5% in the depths of the recession (when interest rates plunged).
According to Britain’s Debt Management Office, some 5.5 billion pounds of interest on the 5% and 3.5% war loans has been paid since 1917. The UK’s national debt soared from 650 million pounds at the start of the war in 1914 to a massive 7 billion pounds by the end in late 1918. The final redemption of the War Loan is part of a wider strategy initiated by the Chancellor of Exchequer George Osborne, to get rid of all six undated or “perpetual” bonds without maturity dates in the British government’s bond portfolio.
Data shows there were still more than 100,000 holders of the war bond at the time of redemption (and around 38,000 with less than a 100-pound stake each). The UK government will save an estimated 15 million pounds a year redeeming the bond and replacing it with a loan costing a fraction of the 3.5% coupon rate. — Glenn Dyer
Now that’s what I call a pounding. Ardent Leisure last night revealed a change in CEO and the shares were smashed this morning, down 28% at one stage. Long-time CEO Greg Shaw has quit and will be replaced by Deborah Thomas, the former magazine publishing executive with ACP and then Bauer. The shares recovered to be down 12% at 11am. Investors don’t like surprises, do they? Shaw leaves at the end of the financial year after 13 years as CEO. Thomas has been a non-executive director for 15 months. Still, the more than $120 million loss in value will be a millstone for her to wear so far as investors are concerned. — Glenn Dyer
Deflating fun, China style. Despite an improvement in headline inflation in February, the detail in China’s latest inflation report tells us the economy is not out of the woods so far as deflation is concerned. In fact, deflation has tightened its grip on the country’s huge manufacturing sector (or as the Financial Times so nicely put it, the “world’s manufacturing floor”). While the CPI rose to an annual rate of 1.4% last month, from the troubling 0.8% in January (and rose 1.2% month to month), much of this was related to higher costs for food because of the week-long Lunar New Year/Spring Festival break.
It’s somewhat ironic that the same falls in commodity prices — especially for those causing problems for Australia (and our terms of trade) — are also wreaking havoc on Chinese users and consumers of the same commodities. That’s a zero-sum game at the moment for both countries. And even having a good time and celebrating in China is now a headache, and could be hazardous to your health and/or your wealth. China’s vicious, official anti-corruption campaign seems to have forced the prices of tobacco and alcohol — traditionally favoured gifts and bribes given at Chinese New Year — lower as demand fell for premium wines (Grange Hermitage from Australia and French red, plus top-shelf brandies and whiskies). The CPI data show the prices of tobacco and booze fell 0.6% in February, according to the Financial Times. — Glenn Dyer
Activists and greenmail? It’s all blackmail to me. Whatever you might call shareholder activism carried out by hedge funders such as Bill Ackman, individuals such as Carl Icahn and a host of imitators, such as Nelson Peltz, buying shares in companies and forcing them to disgorge cash and other benefits to shareholders is nothing but 1980s greenmail. It is cheered by business media from The Wall Street Journal to the Financial Times and The Economist, but there is nothing virtuous in its process.
General Motors Corporation will immediately begin buying back US$5 billion worth of shares and will pay out the same amount in dividends to shareholders over the next year or so in a deal to make one of these so-called activists, Harry J. Wilson, go away. The deal is part of a two-pronged pledge by the automaker to maintain an investment-grade balance sheet supported by a new cash balance target of US$20 billion, which is lower than the previous target. Wilson had been lobbying for a US$8 billion share buyback over the next year. The problem for GM is that despite the biggest car sales boom in the US for decades in the past three years, its shares have gone nowhere. They currently trade around US$36, US$3 lower than January 2014. GM shares debuted at $33 during an initial public offering by the US government in November 2010 after its bailout during the GFC. GM has had several car recall programs linked to flawed products, especially ignition systems since early 2014, which have also raised concerns among investors. — Glenn Dyer
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