Australia will be the last to raise rates, says $100b global investor

Australian bonds are a buy because the Reserve Bank will keep interest rates at a record low for at least the next six to 12 months, according to Morgan Stanley Investment Management. The company is avoiding the Aussie dollar for the same reason.

"The RBA is the furthest away from hiking rates amongst any industrialised countries," Michael Kushma, chief investment officer for global fixed income, said in an interview in Singapore.

"That could allow Australian bonds to continue to do well versus US bonds and other Group-of-10 government bonds.''

While the RBA will probably stay on hold for the rest of this year, the US Federal Reserve is going to increase its benchmark rate at least three times over the next 12 months to 2.5 per cent, said Kushma, who helps oversee $US80 billion ($100.5 billion) for the New York-based asset manager.

Australia's bonds have outperformed most developed-nation debt this year, staying little changed, even as US Treasuries have slumped 2.3 per cent, according to data compiled by Bloomberg.

The South Pacific nation's benchmark 10-year note yields 2.84 per cent, 17 basis points below their US peers, compared with an average premium of 68 basis points during the past five years.

Kushma said he dislikes the Aussie dollar for the same reason he favours Australia's bonds.
Australian short-term interest rates are below those in the US, he said.

"You pick up yield by selling the Australian dollar for the US dollar, you actually earn incremental yield. It's the cheapest it's ever been to sell the Australian dollar today.''

The Australian dollar was slightly lower, Bank of Queensland is down

The Australian dollar is unruffled by the release of the minutes of the latest Reserve Bank of Australia meeting this morning, with the Aussie dollar recently trading at US77.69¢ against the greenback, down 0.1 per cent.

In the minutes out today the RBA mentions the currency and notes that there have been "fairly modest movements in most major exchange rates over the previous month."

The Australian dollar was slightly lower over the month as commodity prices dipped and interest rates in the United States moved above Australian interest rates, the cental bank notes.

The RBA gave no sign that interest rates would move any time soon. While the next move in interest rates will likely to be up than down, "members also agreed that there was not a strong case for a near-term adjustment in monetary policy," the minutes revealed.

Bank of Queensland is down 2.3 per cent at $10.66 today, with the banking group one of the worst performers in the ASX 200.

The bank posted a slightly higher rise in first half cash profit driven by lower loan losses and lending growth in commercial loans, but the numbers missed market expectations.

The regional bank also said it would sell its St Andrew's Insurance division to Freedom Insurance Group for $65 million.

ASX set for uncertain start as tensions rise

As last trading week came to a close in North America, there remained a question as to whether risk positions should be held over the weekend. On Saturday, news broke that France, the United States, and Britain conducted "precision strikes" on Syria.

The heightening of new geopolitical developments may cloud the data releases from the week ahead that included RBA minutes, Federal Reserve speakers, Bank of Canada's Rate announcement, and a heavy Chinese economic calendar that includes GDP, industrial production, retail sales and fixed asset data.

The difficulty for markets tends not to be pricing risk, but rather not knowing when risk needs to be priced as geopolitical concerns put traders and investors at the whim of various headlines, and not the economic calendar where we're more comfortable.

ASX: The local sharemarket is set for an uncertain start to the week. With the prospect of geopolitical tensions ratcheting higher between the US and Russia, volatility in global financial markets seems likely to reappear and drag down the S&P/ASX at the start of the week. Futures are pointing to a 6-point drop at the open.

Last week, the headline Australian stock index finished the week higher at 5829.10, good for a gain of +0.7% over the course of the week. Receding concerns over a US military strike in Syria proved to be a positive driver for global equities, but the catalyst appears to be short-lived: the US, UK, and France carried out airstrikes against Damascus early-Saturday morning in Syria

Market watch

Today, the Reserve Bank of Australia will release their semi-annual Financial Stability Report. The RBA is expected to reiterate that domestic risks remain benign, but that household leverage is still a concern that could impede future growth. On Monday, the RBA's Minutes from their April meeting will likely echo with Philip Lowe said in a speech this week that there was no 'strong case' to move interest rates and that any trade war would post a great risk to Australian exports.

SPI futures up 18 points or 0.3% to 5815 at about 7.15am AEST

AUD flat at 77.53 US cents

On Wall St: Dow 1.2%, S&P 500 +0.8%, Nasdaq +1%

In New York, BHP +0.3% Rio +1.4%

In Europe: Stoxx 50 +0.7%, FTSE flat, CAC +0.6%, DAX +1%

Spot gold -1.1% to $US1339.06 an ounce at 1.16pm New York

Brent crude -0.4% to $US71.74 a barrel

US oil -0.1% to $US66.75 a barrel

Iron ore -0.5% to $US64.47 a tonne

Dalian iron ore -0.2% to 447 yuan

LME aluminium +3.3% to $US2325 a tonne

LME copper -1.9% to $US6821 a tonne

10-year bond yield: US 2.84%, Germany 0.51%, Australia 2.66%