It is (surely) just coincidence the Department of Industry’s outlook for iron ore prices was downgraded on the same day that Fortescue Metals Group announced it was pulling its US$2.5 billion dollar bond issue.
But what the failure of the Fortescue debt issue – and the associated inability of FMG’s lead managers to garner enough interest in the miner’s bonds – tells us is this: international sentiment about Australia, its companies, and maybe even its local banks might be more fragile than many appreciate.
That’s important because, as a capital importer, sentiment toward Australia and its assets is vitally important in balancing out the fact that each month we generally spend more in outbound payments than we receive from overseas.
That funding shortfall has to be met with either asset sales or debt issues. And when international investors aren’t as excited about the prospect of investing in Australia as they once were, it also puts downward pressure on the Aussie dollar.
When international investors loved Australia back at the peak of the mining boom, while the rest of the world was in the depths of the GFC, the $AU shot up to 1.1080 against the USD. Since then, as the mining boom passed and it has become clear that the Australian economy was slowing and rates falling, the Aussie slipped to a low of 0.7555c last week.
That’s below the long run average for the first time in years and the Aussie, even at 76c today, is the lowest it has been since it started rallying from the GFC lows in 2009.
Looking forward, the markets widely expect the Fed’s communique to change its language to better reflect intentions to raise rates – as soon as June, some suggest. But given recent non-employment economic weakness in the US, the balance of probabilities is any move will be little later, perhaps, September.
Unless there is a market catastrophe once the Fed starts hiking rates, they are unlikely to stop until they see rates in the 1.5-2% region.
Fed chair Janet Yellen said last year, when the reference to “patience” was first made, that the market should be focussed more on the size of Fed tightenings, rather than when they start. This means as the US economy starts to rally, and the interest rate differential – the excuse for investors to invest in Australia – contracts, the task of attracting international investors to Australia is going to become more difficult.
Don’t expect a lack of demand for Australian government bonds while we retain our Triple-A rating, but we aren’t issuing that many bonds anyway, so it’s corporate Australia that will feel the impact.
Margins, and absolute interest rates paid, will have to rise.
Fortescue couldn’t even attract enough bids to settle US$2.5 billion at a 9% yield at a time when interest rates all over the world are at or near zero. Sure it has “iron ore risk”, but that’s a signal Australia’s dream run through the world’s capital markets over the past five years might be about to end.