Morning Report Thursday 16 July 2015
*Greek Parliament votes in favour of bailout plan – no great surprise.
Canada is arguably the most correlated economy to Australia and last night, the Bank of Canada cut interest rates for the second time this year from 0.75% to 0.5% - significantly lower than our 2%. The “commodity currencies” not surprisingly tumbled, with the $A reaching multi year lows at 73.54c (towards the levels where the RBA Governor is comfortable). Locally we can see one more rate cut to 1.75%, but interestingly for the economists, we believe long term bond yields have reached their lowest levels of the cycle – see chart 1. Bond yields are generally more important to underlying share prices than the RBA cash rate, as we have illustrated recently how the CBA price tumbled $17.50 (-18.1%), as 3 year bond yields rallied – see chart 1. There is danger on the horizon, with term deposit rates likely to fall further, causing investors to chase “ high yielding” equities into current strength, which we believe is likely to lead to capital losses.
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