In the Australian credit market, the relative lack of supply compared with demand continues to cause spreads to tighten in the physical market offsetting the risks of an unstable geopolitical environment.
Reasons for the recent weakness in the AUD include a fall in the iron ore price, the rally in the US dollar, weaker Chinese data, and indications that the Reserve Bank of Australia is considering macroprudential controls.
The minutes from the July Federal Open Market Committee (FOMC) minutes revealed that several participants favoured raising rates sooner than previously anticipated, if inflation and employment prints continue to improve more rapidly than the US Federal Reserve’s (Fed) expectations.
Credit spreads generally continued to tighten in August, although Australian physical spreads were mainly flat over the month.
At its 2 September meeting, the Reserve Bank of Australia again left the official cash rate on hold at 2.50%, and the Australian Industry Group’s Performance of Manufacturing Index slipped back into negative territory in August, following a brief stabilisation in July.
Improving US economic fundamentals have marginally offset the heightened geopolitical concerns in Russia/Ukraine and Israel/Gaza, leading to the sell-off in risk-free assets in July.
US high-yield funds, both exchange-traded and mutual funds, have seen heavy outflows in July with almost USD 10bn of outflows in the month, according to Standard Chartered Bank Weekly Fund Flows reports.
During the Federal Open Market Committee (FOMC) meeting in June, the US Federal Reserve (Fed) announced an additional USD 10bn per month in tapering, while keeping the target rate at 0.25%.