Higher bond yields are never good for stockmarkets. Yields for US treasuries are at two-year highs. Higher yields are putting pressure on the price-earnings ratios of dividend-yielding stocks, notably the four largest banks and Telstra, those so favoured by investors this year.
If yields continue to rise, the attractiveness of stocks compared to more direct exposure to interest-rate sensitive securities such as bonds lessens. Moreover, bank shares and Telstra are now trading at such high multiples that many struggle to justify adding more shares in ANZ, Commonwealth Bank, National Australia Bank, Westpac and Telstra to their portfolios.
ANZ trades at 1.94 times book, CBA at 2.51, NAB at 1.81, Westpac at 2.14 and Telstra at a whopping 4.86.
For the rest of the market, earnings season has excited it as much as the federal election campaign. Even the most bullish of analysts, such as Citigroup’s Tony Brennan, can only point by way of positive news that 2014 earnings forecasts probably will not have to be downgraded.
It is no surprise the S&P/ASX200 Index beat a retreat today of as much as 1.1 per cent. After an 11 per cent gain between June 25 and August 13, such profit taking may be justified. Investors may also be a little spooked by the sell-off in some of Australia’s most important export markets as investors beat a retreat to the safe haven of the US market. There is not much evidence of this having a direct impact on Australian share prices, but such money flow close to home makes some nervous.