US Fed highlights concerns about raising rates too early

Given that valuations at the start of the year were already above-average and earnings expectations are barely positive, one could only put the early 2015 Australian share rally down to central bank policy, both domestic and foreign. The February RBA rate cuts and reductions in 13 other countries and a QE in Europe has reignited the global search for yield and increased demand for our higher yielding securities in both equity and bond markets. There will be two waves in Australia from the search for yield surge and we are currently seeing the first with lower bond yields sparking a rise in valuations with investors paying above-average prices for below-average earnings. However, there is likely to be another large waves which may have started yesterday as cashed up global businesses take advantage of the declining Australian dollar and make bids for our large industry leaders. The Japan Post bid for Toll Holdings was excessive and won’t be the last. Indeed, in the next six months is a significant rise in the level of M&A in Australia is expected to as the lower Australian dollar offsets the valuation premium that global companies have to pay to acquire their targets. Toll will not be the last, nor the largest takeover in 2015.  

Summary

• Regional sharemarkets were mixed overnight as speculation grew that Greece was inching towards striking a deal with the Troika which would alleviate risk of a more damaging bank run starting in Europe's most fragile economy. Apparent concerns among policy makers, which were detailed in the latest round of US Fed minutes, about the damage of raising rates too early in the US saw an early decline fade coming into close and bond markets rally. Meanwhile, economic data was mostly below expectations, particularly in the US, but corporate news in Australia prompted the market to continue its recent strong run, although valuations have risen so much, it is hard to identify one quality business that has an attractive valuation. Elsewhere, it was a bit quiet on other markets and with around one hour left in the current US session, the MSCI World Index is higher ( 0.2%) with advances in Europe ( 0.9%) and Asia ( 0.4%) offset by a modest decline in the US (-0.1%).
• In other financial markets, 10-year government bond yields rose in line with better data out of Europe, but only by a few basis points (US Treasuries up to 2.05%, UK gilts higher at 1.68% and Japanese bonds closed at 0.42%), high beta currencies were mixed (AUD 0.3% to 77.62 and the Euro -0.1% to 113.90) and commodities were universally higher:
  • oil -2.8% to USD52.06 per barrel.
  • iron ore -0.9% to USD63.50 per metric tonne in US futures markets.
  • gold -0.6% to USD1,201 per troy ounce.
  • base metals were mostly lower.
  • Dr copper 1.1% at USC261 per pound.

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