Fleeing to cash

When will the selling stop? When bond yields fall, says Damien Boey, Credit Suisse’s Australian strategist.

At 1007 AEST the S&P/ASX200 Index was down 60.888, or 1.3%, to 4697.50, bringing its two-day decline to 3.4% or 163.881 points.

The index has fallen 10% since its 52-week high of 5220.987 on May 14.

Global money is fleeing for the perceived safety of cash. It may stay there awhile before deciding again to plunge back into securities. The first place cash will go will be US Treasuries, says Boey.

Some may be brave and attempt to front run a commodity rally, he says. Commodity prices are set to drop further. Gold has typically foreshadowed further falls in base metal prices, says Boey. Value investors will have to ignore terrible data if they are to snap up mining stocks. “They’ll have to close their eyes and hope the People’s Bank of China does something,” he says.

BHP shares fell 48 cents, or 1.5%, to $31.67. Rio Tinto shares dropped 60 cents, or 1.1%, to $52. BHP shares have slid 15% this year. Rio’s stock has dropped 21% since the beginning of the 2013.

This week China’s central bank is trying to squash rumors of a collapse of one of China’s biggest commercial lenders, the Bank of China. The PBOC denied such talk and then gave a commercial bank an emergency liquidity injection, says Boey. That bank was probably the Bank of China.

The Credit Suisse analyst says Australian bank stocks are going to get hammered. Boey is recommending investors sell banks as the stocks are expensive while their bad and doubtful debts are likely to rise form their current low levels because of the troubled local economy. “An increase in yields punishes anything with leverage like banks,” says Boey.

ANZ shares fell 35 cents, or 1.3%, to $27.30. Commonwealth Bank shares declined $1.03, or 1.6%, to $65.23. National Australia Bank shares dropped 46 cents, or 1.6%, to $28.74. Westpac shares slipped 63 cents, or 2.2 percent, to $27.53.

The Reserve Bank of Australia is not likely to come riding to the rescue. The rise in bond yields may be seen by the central bank as meaning its record-low cash rate is doing the job it was designed to do, stimulate lending and underpin an economic recovery. But that plainly is not the case, argues Boey, who worked at the Reserve Bank as an economist.

The Australian stock market has taken some comfort in the Stevens put, the room the Reserve Bank governor has compared to his global peers to cut the benchmark cash rate that is currently at 2.75%.

But Boey says the Stevens put is now meaningless for the local stock market after Federal Reserve chairman Ben Bernanke said this week he will scale back the Fed’s $85 billion monthly bond purchases. “The call the Fed has exercised is much bigger than the Stevens put,” says Boey. “It’s like comparing a bibi gun with a tank”.