Regular readers will know my obsession with two prices: bank CDS and iron ore. These may seem unrelated but they are not. Bank CDS prices are the cost to ensure Australian bank bonds and as such are a good guide to the global perception of Australian bank risk. Iron ore makes up roughly a quarter of Australian export revenues so it’s a guide to the terms of trade and the commodity boom. Moreover, put the two together and you have a terrific leading indicator for our houses and holes economy.
Today the news is not so good. Bank CDS are off to the races again, rising with European risk. The jump overnight was 10 points or so:
On a longer term chart, you can see we are caught in a nasty up trend:
These levels suggest pricing for underlying bank bonds are already reaching uneconomic atmospheres. There’s no immediate cause for panic, the banks endured four months at and above these levels late last year. But it does mean more pressure to increase the spread to the cash rate.
It also suggests, however, that if Greece leaves the euro, CDS are going to the moon.
Meanwhile, the China slowdown is weighing more heavily on steel and iron pricing again. Steel prices in China fell 1% or so yesterday and the iron ore spot price ignored the PBOC as well, falling 0.65% to $136.70. As you can see from the below 12 month futures chart, this is a distinctly different reaction to the last RRR cut. The market appears to be suddenly considering that Chinese authorities do not have their correction under communist control. We are now down 8.5% from the recent high:
Thankfully no further falls were apparent in coal prices. Nonetheless, we are already at levels in both bulks that will cause another down leg in the trade balance from July onwards unless the dollar keeps pace with the falls.
In short, the moves afoot in Australia’s external pricing are not great right now and I do not expect them to improve in the near future without some significant central bank intervention in Europe and China.
Given the above, as well as the awful data flow for April in Australia and the Phil Lowe speech yesterday, the odds of a follow up rate cut of some substance in June have to be shortening considerably.
