Weekly Market Recap

China for income

12/10/2020

Week in review

Australian Budget forecast $213b deficit in FY20/21, 11% of GDP
RBA holds cash rate at 0.25%
Australia business confidence rises to -4

Week ahead

U.S. CPI inflation
Australia consumer confidence
Australia labour market report

Thought of the week

Last week dovish central bankers were out in force around the world promoting the need for fiscal stimulus to kick-start the economy. Even with the reliance on fiscal spending, central banks themselves may be willing to do more. This guidance will weigh heavily on core government bond yields. To find yield investors only need to look to China. Better growth prospects have put upward pressure on bond yields, which are back to where they were at the start of the year. The 3% yield available on a Chinese 10-year bond certainly compares favourably to the sub-1% in the U.S. or Australia. There is little threat from a rising cash rate. Chinese officials are focused on maintaining economic momentum while mitigating imbalances in the economy or financial markets. This means that policy settings are likely to remain finely balanced and relatively stable. In a global market where there is ample liquidity and low rates are the default, the Chinese bond market offers income hunters a rare reprieve.

China is the new income market
10y U.S. govt bond yield and 1-year lending rate

Source: Citi, Tullett Prebon, FactSet, J.P. Morgan Asset Management, all returns in local currency unless otherwise stated.
Equity price levels and returns: Levels are prices and returns represent total returns for stated period.
Bond yields and returns: Yields are yield to maturity for government bonds and yield to worst for corporate bonds. All returns represent total returns. AusBond Comp is the AusBond Composite 0+ Yr, AusBond IG is the AusBond Credit 0+ Yr both provided by Bloomberg.
Currencies: All cross rates are against the Australian dollar. An appreciation of the foreign currency against the Australian dollar would be positive and a depreciation of the foreign currency against the Australian dollar would be negative.

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