Market rates surge on inflation fear; Rex boss admits misleading market; hay fever epidemic

Market rates surge on inflation fear; Rex boss admits misleading market; hay fever epidemic

News in brief

Former Rex executive chairman Lim Kim Hai has confessed to a Sydney court that he misled the market and breached his legal duties by promising that the embattled airline would make a 2023 profit, when it was in fact on track for a $35 million loss.

 

The S&P/ASX200 finished down 1.2 per cent yesterday, falling back below 8,500 points, and is eight per cent below its peak. Local investors are worried about rising interest rates and slowing economic growth.

 

The price of gold has fallen back below $US4,500, meaning the precious metal is now trading close to 20 per cent below its peak in late January.

 

Chinese President Xi Jinping yesterday welcomed Russian President Vladimir Putin to Beijing, just days after a similar summit took place with US President Donald Trump.

 

Hay fever – also known as allergic rhinitis – has become a national crisis in Japan, with an estimated 43 per cent of the population experiencing medium to severe symptoms. This compares to 26 per cent in the UK, about 24 per cent in Australia and 15 per cent in the US.

Fear-o-meter

For most of us rising bond yields don’t set the heart racing. But given the levels they are sitting at in major economies, including Australia, they probably should.

 

Bond yields, or market interest rates, set a benchmark for other asset classes. Bonds are king. If yields on bonds are rising, returns from other asset classes like equities can look less attractive given their higher risk profile.

 

Bond yields set the benchmark for the cost of borrowing. For example, fixed rate home loans are likely to be more expensive. And fixed rate deposits might rise too.

 

Higher US bond yields attract investment in that economy, and that can push down the value of non-US currencies. The Aussie dollar is down to 71 US cents, which has an impact on tourists, as well as exporters and importers trading in commodities priced in US dollars.

 

Importantly, higher bond yields are more likely to trigger a global recession, which will have an impact on the Australian economy.

Fear & Greed Q+A today

On the outlook for commodities including copper, LNG, iron ore and rare earths - and the potential for the oil to hit $US200 a barrel:

 

"A lot of the price expectations in coming months will be completely determined by when this Strait of Hormuz is eventually reopened. And this is the X factor.

 

I think the whole market right now — all the scenarios we were initially testing — okay, we’re gonna open in April, then we’re gonna open in May, and now it’s looking like, is it gonna be June? But the problem is there is a time limit to this.

 

What happens with the rate of inventory drawdown? And at what levels do we need to get to before panic comes back in? Because if you look at the drawdown rates and what’s happening, our estimation is that by June, July, it’s going to get to levels where you’ll have operational stress. And that’s probably where prices for oil will have to be set at levels that cause demand destruction — particularly in emerging Asian economies — and that we put at around US$150 a barrel.

 

But the worst part comes if in September we don’t have a deal. That’s when we get to operational floor levels for global inventories. And if that gets reached, we’re talking potentially demand destruction for advanced economies. That’s when people start talking about US$200 a barrel for oil."

Market interest rates, otherwise known as bond yields, are hitting multi-decade highs in major economies as the likelihood of a widespread surge in inflation increase.

 

With the war in the Middle East nowhere near conclusion, investors fear higher energy prices will feed through to other prices more broadly, triggering inflation and higher interest rates from central banks.

 

Japan’s 10-year bond yield is at its highest level since 1996. In the UK, the 30-year bond yield is at a multi-decade high. French and German yields have also surged.

 

The US 30-year yield is at its highest level since 2007, as money markets have priced an 81 per cent chance of a rate rise by the US Federal Reserve this year. The Australian government 10-year bond yield hit 5.29 per cent yesterday – the highest since 2011.

 

Bond yields set the benchmark for other asset classes, and have impacts on exchange rates, fixed rate loans and deposits, and federal finances.

Greed-o-meter

Industry	Past 12 months %	Past 3 months %
Education & Training	6.0	1.0
Trades & Services	4.4	1.3
Healthcare & Medical	4.3	1.4
Construction	4.3	2.0
Administration & Office Support	4.1	1.1
Hospitality & Tourism	3.7	1.0
Retail & Consumer Products	3.6	0.9
ICT	3.0	1.5
Marketing & Communications	2.6	1.7
Banking & Financial Services	2.6	1.0
Government	1.7	0.8

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