Mutual Daily Mutterings
Quote of the day…
“When you go into court you are putting your fate into the hands of twelve people who weren’t smart enough to get out of jury duty” – Norm Crosby
“Talk’s cheap …”
- Overview – a tough week down the salt mines, although the tone across both risk and safe haven markets on Friday was a little less volatile…just. The global rout in bond yields took a breather with central banks from the RBA to the Fed to the Korean central bank talking a big game, i.e. their ability and willingness to buy more bonds as and when required to keep markets on a stimulus induced stupor (not their exact words of course). The RBA put its wallet where its mouth is by splashing $3bn on some shiny new bonds (well some second-hand ones), an out of cycle purchase, but that didn’t really do much to ease the pain. The prevailing and dominant theme and narrative across markets is that with additional and extraordinary fiscal stimulus coming down the line, combined with apparently successful vaccine deployment programs globally, growth will rebound with vigour and drag inflation up from the gutter. Consequently, investors are punting central banks et al will be forced to tighten or taper, choose your own vernacular, prevailing monetary policy largesse. In layman’s terms, the punchbowl will be taken away. VIX traded north of 30% intra-day, but closed just lower at 28%. Oil closed weaker on the day, but firmer on the week (+5%). Gold was smacked around the nose with a rolled up news-paper, the weekend edition too, down -3.9% on Friday, and now -16.0% down on its mid-2020 peaks. It’s a heavy week for economic data, but realistically, given last week’s action, markets will likely maintain a laser like focus on central bank commentary more than anything else – most notably, Fed Chair Powell is scheduled to talk on the US economy on Friday.
- Offshore Stocks – a volatile week with all major indices sporting an arterial shade of red, with tech stocks particularly roughed up, as evidenced by the underperformance of the NASDAQ. Across the S&P 500, only Energy (+4.3%) was able to hold its head up, everywhere else was sporting varying degrees of blood loss. Utilities was the classroom dunce for the week, down -5.1%, followed by Discretionary (-4.9%), Tech (-4.0%), and Staples (-2.7%). It was a global pull-back, so European and Asian markets also unloved and sporting some wounds. Asia on Friday had a particularly tough time of it with the NIKKEI down -4.0% on the day, while the Hang Seng was down -3.6% on the day, and -5.4% on the week. Shanghai fell -2.4% on the day to be down –7.7% on the week. E-mini’s closed in the red, down -0.5% in the S&P 500.
- Local Stocks – it was a tough day on the tools for local stocks on Friday, taken behind the woodshed for a bit of a roughing up, and no sector was spared, each taking their licks. Tech (-5.3%), Discretionary (-3.2%), Healthcare (-2.7%) and Energy (-2.5%) all underperformed the broader market, with the best performer on the day, Industrials (-1.0%) still putting in a stinker. It’s a little better for some sectors on the week, at least three holding their heads up. Energy (+2.5%), Materials (+1.7%) and REITS (+0.8%). All other sectors looking sheepish with red on their face, Tech more so than others, down -12.8% and Telcos, down -7.1%. Relative strength indicators weakened, down to 42 for the ASX 200, levels not seen since just before the US election. Forward PE’s have dropped below 20.0x (to 19.4x), levels not seen since the onset of the pandemic. Futures are suggesting a modestly positive open, but it’ll likely be a volatile week. I’m on the sidelines for now.
- Offshore Credit – despite volatility in bond markets, it was an unusually active Friday across US IG markets with four borrowers printing $3.3bn. Average deal metrics were constructive, but less so than YTD averages and those witnessed over much of 2020. Books were 2.1x oversubscribed vs 3.2x YTD and 4.0x over 2020, while spread compression was in line with YTD, -24 bps vs -25 bps, but less than 2020 (-30 bps). A solid day also for US HY, with three deals printed despite HY spreads in secondary trading +32 bps wider (at +373 bps). Across IG, spreads were +2 – 6 bps wider in US and +3 – 4 bps wider across EU IG markets (+12 bps in EU HY).
- Local Credit – in a word, wider…but importantly it’s an orderly wider (for now), it’s not a full-blown panic, there’s no murder on the dance floor…again, for now. From the traders…”liquidity stretched across the board in AU fixed income markets with credit clearly impacted, but importantly in no way dysfunctional. There are still two-way flows, and although heavily skewed towards client selling, bonds are still trading. Bid/ask spreads have once again leapt wider, but that is only reflecting the broader lack of liquidity in all AUD fixed income sectors. The selling we saw was orderly from those accounts that needed to sell. Volumes traded were very modest”….”bid side levels another matter, with trading points significantly wider again. Stability and confidence will return to the credit markets once we get some meaningful rates stability”….yep, agreed on that point. Major bank senior paper wider again on Friday, with the Jan-25’s +4 bps to +32 bps, or +8 bps wider on the week. In the tier 2 space, +2 – 8 bps on the day and +15 – 19 bps on the week. The WBC Jan-26 calls are at +140 bps (most recent deal), while the NAB Nov-26 calls are at +144 bps.
- Bonds & Rates – some extreme trading ranges witnessed last week with some +/- 20 bps moves in the ACGB 10’s, and that was in one session. The 10’s closed the week at 1.92%, +18 bps on the day and almost +50 bps wider on the week. This represents a material underperformance to US treasuries, which saw 10’s climb from 1.34% to 1.41%, a modest +7 bps rose relative to the heavy hitting seen locally…but, treasuries did reach as high as 1.60%. In a historical context it’s a bit absurd to be saying highs of 1.60%, like its nose bleed levels, but that’s the world we’re in. Despite the RBA’s YCC target of 0.10% in the 3’s, yields hovered around 0.13% for much of the week, before easing back to 0.117% (Apr-24’s). Beyond 3-years the curve is almost vertical, with the Nov-24’s at 0.437%, +30 bps for just 7 months extra tenor. Cray-cray! On the week the 3’s10’s curve is over 30 bps steeper as investors punt on the RBA, and other central banks globally, being forced to taper and tighten sooner than previously forecast and that such action may stall the recovery, which I touched on above. For some context around the quantum of moves in yields recently, US treasuries last week were almost 3x their August 2020 lows. What’s next? Expect some jaw-boning and re-commitment from the global central bank posse in a bid to keep a lid on any rising yield momentum. Talking heads… “we expect the Fed to stop observing that surging yields are benign, for example by signalling it may delay tapering if bond markets remain volatile…a shift in tone by the Fed would help stop 10-year Treasury yields rising further towards 2.0% in the next few months and instead stay at very low levels still to the benefit of risk assets.” But, the volatility across treasuries, and other bond markets, will likely carry into this week with markets feeling belligerent and in the “mood to challenge the Fed view of running everything hot.” Friday was a pause, not necessarily a calming of the waters.
- Macro – lifting some commentary from CBA this morning “in our view, US economic data will take a back seat to bond market developments. Bond markets are moving well in advance of economic fundamentals. US February ISM manufacturing index (Tuesday) and Non-Farm Payrolls (Saturday) are the highlights. We expect the ISM manufacturing index to remain elevated. We also forecast a jump in jobs created, in part because of the most recent stimulus payments. We forecast the unemployment rate remained elevated at 6.3%.” Locally, we have the RBA monthly Board meeting tomorrow, the minutes of which will be dissection with surgical like detail. No change to official settings expected
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907