Mutual Daily Mutterings
Quote of the day…
” You couldn’t fool your mother on the foolingest day of your life if you had an electrified fooling machine” – Homer Simpson
“Investing Club Meeting…”
“A Wolf In Bear’s Clothing…”
Overview…”Release the Frackin…”
- Moves: risk on … stocks ↓, bond yields ↓, credit spreads ↔, volatility ↑ and oil ↑….
- So, it’s April Fool’s Day. As Mark Twain once said “this is the day upon which we are reminded of what we are on the other three hundred and sixty-four.” After a decent two-week rally, stocks lost favour overnight, with a late but meaningful sell-off across US markets, while yields rallied and curves bull flattened. The recent rally in stocks hasn’t been enough to prevent a sizeable quarterly loss (S&P 500: -4.1%), the worst since the onset of the pandemic, and 8th lowest in the past decade. Treasuries pared recent losses on the day, but still delivered their worst performance in 50 years. Credit spreads did little, closing the quarter +25% – 33% wider vs where they started, albeit with a tightening trend into quarter end.
- Oil puked after US President Biden ordered a massive release of strategic oil reserves, the largest in history at a million barrels a day for the next six months. OPEC+, of which Russia is a member, has decided not to increase production despite record prices. Not surprisingly, Biden blamed Russia for domestic gas prices, but also fired some shots at US oil companies… “companies have an obligation that goes beyond just the shareholders — to their customers, their communities and their country. No American company should take advantage of a pandemic or Vladimir Putin to enrich themselves at the expense of American families.”
- Talking heads…”aside from quarter-end considerations, oil is very much the centre of attention. All the usual suspects are still in play, keeping the market in check, including the spectre of the Fed pursuing an aggressive path of monetary policy normalization over the coming months.”
- Fed speak…markets are broadly pricing in a strong probability the Federal will hike rates by fiddy basis points at its May meeting. Talking heads…“this week’s brief inversion in the U.S. bond market, combined with elevated volatility on Treasury options, is a warning that the risk of US recession should not be ignored. US bond markets are showing signs of stress. This is not mirrored in equities, where the VIX remains subdued and US indexes trade above their pre-war levels. The bond market would appear to have a better handle on the potential risks.”
The Long Story….
- Offshore Stocks – a sharp deterioration in sentiment in late US trading saw the S&P 500 drop -1.3% in the last hour of trading to end the day down -1.6%. The DOW (-1.5%) and NASDAQ (-1.5%) were in the same neighbourhood. On the day, almost 9 in 10 stocks retreated and no sector was spared the rod, all in the red. Financials (-2.3%), Telcos (-2.0%) and Discretionary (-2.0%) did the bulk of the damage. Over the quarter, it was very much a barbell play, with Energy (+37.7%) at the top of the tables, but then it’s a fair distance to second place, Utilities (+4.0%) and then after that it’s crickets. All other sectors in the poo, with Telcos (-12.1%), Discretionary (-9.2%) and Tech (-8.6%) wallowing in their own self misery. Last night’s decline marks the S&P 500’s 35th down day this year, the greatest number of first-quarter drawdowns since 1984, according to data compiled by Bloomberg.
- S&P 500 Sector Quarterly Performance…
- Local Stocks – a modest down day to end the quarter for the ASX 200 yesterday, down -0.2%, with two thirds of stocks retreating with their tails between their legs. Only three sectors advanced on the day, Materials (+1.5%), Telcos (+0.7%) and Industrials (+0.2%). Misery elsewhere, led by Tech (-2.2%), Discretionary (-1.3%) and Energy (-1.0%). A strong monthly performance for the index, +4.9% with all sectors advancing, led by Financials (+8.9%), Tech (+7.8%) and Utilities (+6.7%). On the quarter, it was a little more mixed. Like US markets, Energy led (+25.1%), but unlike the US there was a stronger supporting cast (charted below).
- ASX 200 Sector Quarterly Performance…
- Offshore credit – negligible action on the day in cash spreads, a basis point here or there, but nothing too significant. Spreads tightened over the month despite persistent geopolitical risks and the evolving inflation / monetary policy situation. On the month, US$230bn priced in US IG markets, the 4th highest on record and +70% higher than predicted by the Nostradamus like street strategists, and up 17% on the same period last year. EU IG issuance reached €172bn, and was dominated by banks.
- Despite the global malaise impacting markets, default rates remain well below average. Per S&P data, US speculative grade default rates are running at 1.5% for US markets and 1.6% globally (EU at 1.2%). The long run average is ~4.5% and the Global Financial Crisis peak was ~12.0%. Low cost of borrowing (historically speaking), fiscal stimulus measures, and recent aggressive growth rates (post pandemic rebound) have been key supports of low default rates. Given deteriorating conditions, default rates are expected to hit 3.0% by year end, still below average.
- Offshore Credit Indices – Spread Changes MoM & QoQ…
- Local Credit – traders…”yesterday saw stock better bid across the board and investor engagement building steam. Undoubtedly, month end contributed to the uptick in volume however a strong bid tone across SSA’s, T2 and long dated senior helped return a glimmer of confidence to the local market.” Major bank senior spreads were unchanged across the board, with the exception of 5-year paper, which was able to sneak a basis point tighter to +86 bps (+13 bps on the month). Over the quarter we saw indicative 5-year senior paper +23 bps wider. Word on the street is the street is short inventory – normal for quarter end, so we’ll likely see some early spread tightening as the street re-stocks, supported by the expected subdued near-term issuance back-drop. Remember, three of the four majors are in black out ahead of interim results (early May).
- Tier 2 ended the month and quarter with a bang, tightening 4 – 5 bps across the curve. Better buying from local real money and interbank fuelled the moves, particularly the longer dated 2026 calls, which are now pricing +168 – 173 bps, +20 bps on the month and +64 bps on the quarter. The 2025 callable paper is quoted around +153 – 154 bps, a basis point tighter on the day. The new SUN tier 2 line, is in to +215 bps, or -15 bps through the reoffer margin. A cracking deal in hindsight.
- Major banks senior & tier 2 spreads, CoM & CoQ…
- Major bank senior 5-year generic spread…
Source: Westpac, Mutual Limited
- Bonds & Rates – modest moves in the end for local bonds, with the curve bear steepening on the last trading day of the month and quarter. Three-year yields closed the month and quarter at 2.33%, +80 bps and +146 bps higher respectively. Ten-year yields closed at 2.84%, +70 bps and +121 bps higher, representing the second largest quarterly rise in yields over the past 20 years (no. 1 being Q1 last year). With yields marching higher, index performance has been abysmal. The Bloomberg AusBond ACGB Index, heat map tabled below, delivered a negative total return of -4.0%, its second worst month in over the past 20+ years. The quarterly loss was -6.3%, the worst in over 20 years (probably much longer, but I don’t have the data). Dangerous to predict, but I suspect April will bring lower losses, and possibly positive returns as the growth story looks very uncertain, which should anchor the long end. The front end on the other hand will be dangerous water to sail, especially if you’re of the view the Fed, RBA et al are well behind the curve and will have to play aggressive catch up.
- “Wall Street’s biggest banks are all in on bets that the Fed will be much more aggressive in tightening than predicted just weeks ago. Goldman, Morgan Stanley and JPMorgan are among those now forecasting at 50-bp boost in May and June. Citi expects jumbo hikes to continue at subsequent meetings. It’s a big turnaround since the end of January, when most banks were projecting hikes no bigger than 25 bps.” (Bloomberg)
- Macro – “Credit growth was +0.6% MoM in February (Consensus and NAB +0.6%), in line with last month’s rise and bringing the annual growth to +7.9% YoY. Housing Credit growth slowed a little in the month, rising +0.6% MoM after three consecutive +0.7% MoM gains. That was reflected across both Owner Occupier and investor housing credit. Owner occupier credit continues to drive housing credit growth, but slowed to +0.7% MoM from +0.8% MoM in the prior month. Investor credit growth remained at +0.4% MoM. Business credit recovered a little, growing +0.8% MoM from +0.6% MoM in January and overall remains very strong at +11.3% on a six-month annualised basis.” (NAB)
RBA Credit Growth…
Source: RBA, Mutual Limited
Source: Bloomberg, Mutual Limited
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907