U.S. Retail Sales Weighing On Rates

Posted on | by Leon Hinde | Leave a Comment on U.S. Retail Sales Weighing On Rates

U.S. Retail Sales fell for a third straight month in February as households cut back on purchases of motor vehicles and other big-ticket items, pointing to a slowdown in economic growth in the first quarter.

Consumer spending, which accounts for more than two-thirds of U.S. GDP, appears to have slowed at the start of the year.

The combination of weak consumer spending data and global manufacturing data has been enough to see yields run into resistance.

The peak optimism on synchronized global growth and inflation pick-up, now appears to have passed.

With yields moving lower, we’re likely to see a better environment for the yield sensitive sectors. Telecommunications, Utilities, Consumer Staples and Real-Estate.

Some of the local names in these sectors include: SYD, TCL, AGL, GPT, SCG and WFD.

The chart below illustrates the yield on the 30-yr bonds falling relative to the shorter dated 2-yr bonds. This is typical during a period of slower economic growth.

 

 

Yield Names Get A Boost From Lower US Rates

Posted on | by Todd | Leave a Comment on Yield Names Get A Boost From Lower US Rates

As US 10-year bond yields pull back from recent highs, shares in local yield sensitive names have been lifted off their recent lows.

The inverse correlation between US interest rates and GPT, SYD and TCL  has been acute over the last 3-months.

Since January 1st, US 10-year yields have risen over 20%, climbing from 2.40% to reach a 4-year high of 2.95% last week.

During this same period, the share prices of GPT, SYD and TCL have all dropped by over 10%. However, both SYD and TCL gained over 2% on Friday.

It’s our base case that the US 10-yrs will find resistance at the 3% level and offer upside price action in the local yield names.

All three of the above names are included in our ASX Top 50 model portfolio.

We expect to see price appreciation in the 4% to 6% range over the near-term as US yields retrace lower.

 Sydney Airport

Transurban

 

The US Government Is Back Open………….Until February 8th

Posted on | by Todd | Leave a Comment on The US Government Is Back Open………….Until February 8th

The US Senate was able to agree on a short-term resolution to allow the Government to reopen until the 8th of February.

The US has not had a properly ratified budget since 2009 and these “stop-gap” agreements are now getting shorter in duration.

The DOW, S&P 500 and the NASDAQ all responded by making new all-time highs.

Interestingly, as illustrated in the charts below, not only are the 2-yr Treasury notes now yielding more than the SP 500 in the last 10 years, but the Index itself is the most overbought in history.

We suggest that the extreme valuations on Wall Street will soften US yields over the medium-term.

As such, we would expect to see buying interest in the ASX yield names such as TCL, SYD and WFD .

Our ALGO engine currently has flagged buy signals in TCL and SYD at $11.70 and $6.80, respectfully.

2-yr versus SP 500 yields

SP 500 Sentiment Oscillator

 

 

 

 

 

ALGO UPDATE: Stay Long Transurban

Posted on | by Todd | Leave a Comment on ALGO UPDATE: Stay Long Transurban

We added TCL to the model portfolio on July 3rd at $11.70 and our ALGO engine triggered a buy signal on July 12th at $11.20.

With its $9 billion pipeline of road projects over the next 7 years, the stock should be well supported with increased longer-term cash-flow numbers.

For the six-month period ending December 31st, TCL will pay 28.5 cents per share and a total of 56 cents per share over fiscal 2018.

This equates to 4.5% with the share price at $12.40 (plus some limited franking credits.)

We see the next resistance level at the December 19th high of $13.15.

Transurban

Softer US Yields Could Lift Local Names

Posted on | by Todd | Leave a Comment on Softer US Yields Could Lift Local Names

The recent move higher in longer-dated US Treasuries has created a headwind for some of the yield sensitive names listed on the ASX.

Over the last 10 days, the US 10-year notes have risen from 2.28% to just under 2.50%.

This 10% move has also lifted the 2yr to 30yr spread from 85 basis points to a full 100 basis points.

The impact on local shares has been a 4.5% drop in TCL and a 3.3% fall in SYD.

Looking forward, it’s reasonable to expect the US yields to soften and the yield curve to flatten.

Given the current correlation to the local shares, we see the US flattening trade as potential positive for the local names such as TCL, SYD, WFD and GPT

US 2yr versus 30yr spread

 

TCL Entitlement Offer

Posted on | by Leon Hinde | Leave a Comment on TCL Entitlement Offer

TCL is undertaking a 3 for 37 entitlement offer at $11.40 per share to raise $1.9b of new equity. The retail offer will close on 24th January.

The TCL share price has hit an all-time high today at $12.93.

And while the internal momentum indicators on the daily charts are approaching an overbought reading,  we expect prices to move higher and consider TCL a cornerstone holding in the model portfolio.

Transurban

 

 

 

 

Transurban – Preferred Holding

Posted on | by Leon Hinde | Leave a Comment on Transurban – Preferred Holding

TCL announced a $1.9bn fully underwritten renounceable entitlement offer to
fund WestConnex & West Gate Tunnel Project in Melbourne.

We continue to see high single digit growth in dividends with FY18 guidance at $0.55, placing TCL on a forward yield of 4.8%

TCL & SYD are current holdings in our ASX 50 model portfolio, following the recent Algo Engine buy signals.

 

 

Sydney Airport & Transurban React to Lower Yields

Posted on | by Leon Hinde | Leave a Comment on Sydney Airport & Transurban React to Lower Yields

With the short end of the interest curve in the US moderately increasing and the longer end not reacting, we’re seeing a flattening in the US yield curve.

The message this sends,  is the bond market believes US rates will rise short term but the global economy is still fragile and inflation is low, therefor the prospects of longer term rate increases are quite low.

These events are helping to support interest rate sensitive names such as SYD and TCL.

SYD will pay a $0.16 dividend on the 29th of Dec and TCL will pay $0.26.

SYD is in the ASX 50 model and TCL is on both the ASX 20 and ASX 50 model.

We consider both names fully valued at current prices and recommend overlaying a covered call option to enhance the return.

 

 

 

TCL Firms On Lower US Yields

Posted on | by Todd | Leave a Comment on TCL Firms On Lower US Yields

On October 5th, shares of TCL  traded as low as $11.62. At that time the US 10-year bonds were yielding 2.40%.

US yields have now dropped to 2.28% and TCL’s share price is over 6% higher at $12.30.

This interest rate correlation and sensitivity is linked to several other ASX stocks including WOW, SYD and SCG.

With the odds of a FED rate hike in December still over 70%, we see limited upside in TCL beyond $12.50.

As such, we like selling the $12.50 TCL calls into March and collecting the 40 cents premium.

In addition, TCL is set to pay a 27 cent dividend in December, which will bring the total cash flow from the derivative overlay strategy to 67 cents.

   Transurban Group