- Australia faces continued external economic risks, with domestic growth slowing as housing, retail and commodity markets come off the boil. The Australian dollar has reduced to 0.6823 against the US dollar, strengthening about 1 US cent over the past week. The Reserve Bank of Australia held the cash rate at 1.00%, at its meeting on 6 August below the 1.6% inflation rate, despite a weaker Gross Domestic Product [GDP] reading in the June quarter of 0.5% or 1.4% for the past year, seasonally adjusted.
- Positively, Australia’s unemployment rate has remained steady at 5.3%, an important measure to ensure Australian households can continue to service high household debt levels.
- Globally negative-yielding Bonds are valued at approximately US$17 trillion when adjusted for inflation, investors are paying governments for the right to hold government debt. This is effectively a soft default by governments.
- The concern in regard to negatively yielding debt is that the purchase of these bonds by the market was done quite suddenly, this potentially an indicator that those managing trillions of dollars [mostly associated with banks and large pension funds] were acting on some type of proprietary information. If this is the case the information was sufficient to accept a certain loss for a high probability of receiving money back, or was an extremely large gamble that bond demand and possibly central bank buying would push bond yields even lower, this would effectively be a high risk bet that the global economy will slow further necessitating more aggressive actions by central banks around the world. There are some methods to potentially profit from negatively yielding bonds in the Over the Counter derivatives market though this can involve considerable counterparty risk. Using Occam’s razor the most likely explanation is that a large number of very large money managers expect the global economic outlook to deteriorate.
- The Australian market is anticipating further cuts to the Cash rate [currently 1.00%], possibly to 0.50% in 2020.
- There are currently efforts by the Australian government to ban the use of cash for transactions above $10,000. While this is said to be necessary to reduce the black economy, it has also been suggested by the International Monetary Fund [IMF] as necessary to lock people into the banking system should interest rates need to be pushed further into the negative. Thus there is some speculation the Australian government is positioning for a possible eventual move to negative interest rates in Australia.
- These concerns on a global scale are helping support the gold price [US$1515/oz.] and silver price [US$18.27/oz.]. Nickel prices have remained strong following the Indonesian nickel export ban [US$17,743.00/tonne].
- Iron Ore prices saw the largest two monthly drop in eight years, with Platts advising that lump iron ore premiums reduced 74% on trade tensions and tight steel margins. Iron ore 62% fines main Chinese port fell below US$100 per tonne.