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The Shaky Isles - August In Review

Fuseworks Media
Fuseworks Media
The Shaky Isles - August In Review

The Fed left the Fed Funds rate unchanged, but surprised some by agreeing to maintain the size of its balance sheet, ANZ reported today.

The ECB and BOE left policy on hold, and Australia had its closest election result in 70 years. In NZ, unemployment rose and business confidence fell, but dairy prices rose. South Canterbury Finance was placed in receivership, but the Crown agreed to guarantee all depositors. More recently (in fact on September 4th) the Canterbury region was struck by a magnitude 7.1 earthquake.

Economic and Market Backdrop The economy has softened in recent months. Caution remains evident in domestic spending, with a moderating tone also evident in measures of business and consumer sentiment. Deleveraging remains pervasive as households, farms and other businesses concentrate on improving balance sheets. On top of this, the Canterbury earthquake is likely to weigh on economic activity in the short-term.

Performance Monitor The ANZ All Swap Index was once again the best performing index in August. It was also the best performer over the last 3 months, but came in slightly behind the ANZ Corporate Investment Grade Index for the year.

Relative value Monitor Outright yields relative to Australia and negative swap spreads have currently made NZD Supranational paper uninviting to many. However, for those investors with a focus on relative levels to USD Libor and requiring the highest quality diversification from government debt, NZD supranational paper can be relatively cheap.

Government Bond Tender Watch The DMO tendered $1.25bn of bonds in August, taking issuance for the fiscal year to date to $2.425bn. This means issuance around $340m ahead of schedule, which is a positive given the DMO may need to increase issuance over the next few years if the EQC choose to redeem its bonds to cover damages from the Canterbury earthquake.

Swap and Basis Swap update Swap spreads moved deeper into negative territory over the month of August, while basis swaps held steady. We discuss recent developments.

Special report - Canterbury earthquake We discuss our latest views on the Canterbury earthquake and the impact it will have on the economy after visiting the region for ourselves. Among other things, we were pleasantly surprised by how functional New Zealand's second largest city was in the aftermath of such a significant disaster.

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