Mutual Daily Mutterings
Quote of the day…
“We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle”…Winston Churchill
Chart du jour… spread changes, global…
Overview…” aimless again…”
- The first half of the calendar year ended with a whimper for US stocks, very modest gains, while European stocks ended lower. Nevertheless, it was the best first calendar half for US markets in over 20-years. The ASX 200 did little to end the local financial year yesterday, modestly firmer. Bond yields and the curve did little offshore overnight and about the same yesterday here. Credit continues to grind tighter, and commodities inched higher.
- All up, little trading conviction as markets continue to grapple with conflicting cross winds. Macro data continues to support views the broader economic recovery is entrenched, yet the spread of the Delta COVID variant is beginning to weigh on risk sentiment, especially when valuations are stretched so tight. On the other hand, this uncertainty is helping to sustain a bid for bonds.
- Talking heads…”the Delta variant should not have significant repercussions for the pandemic situation in developed markets (e.g., Europe and North America, which have strong progress in vaccination) due to the level of population immunity, and hence positioning in markets should not be driven by this or any other subsequent variant of Covid-19 for which current vaccines are effective”.
- Fed speak…pilfered from NAB’s morning note…”Dallas Fed President Kaplan told Bloomberg TV that better communication around tapering – which he hopes to see “soon” – should avoid a repeat of the 2013 tantrum, whilst Atlanta Fed President Bostic cautioned that it would still take some time for employment levels to return to pre-pandemic levels.”
- For you youngsters out there, in 2013 then Fed President Ben Bernanke mentioned the word ‘tapering’ with regard to the Fed’s prevailing QE program….and markets had a ‘tantrum’, a ‘taper tantrum’. The S&P 500 fell -4.8% in just over a week, US 10-year yields spiked +49 bps (from 2.15% to 2.64%), while the ACGB 10’s went up +66 bps (from 3.39% to 4.05%), and credit spreads lifted 15 – 25 bps in the investment grade space. Different times then vs now, i.e. markets more familiar with QE now, but with the degree of leverage in the system, the rubber band is stretched tighter now vs then.
- Offshore Stocks – very modest gains for the S&P 500 and NASDAQ, while the DOW dawdled and lost some modest ground. In Europe, the Stoxx600 fell -0.8% as food retail held out to be the only sub-sector to close in the green with downside more widespread, led by autos, utilities, banks and tech. In the S&P 500, 57% of constituents advanced, and six of the eleven main sectors also advanced. Energy (+1.3%) led the peloton, joined by Industrials (+0.85%) and Staples (+0.7%), while at the back, hindered by a sign wielding tourist, REITS (-0.8%), Telcos (-0.2%) and Utilities (-0.2%) stumbled. YTD the S&P 500 has gained +14.4%, reportedly the best first half of the calendar year since 1998, where the index gained +16.8%. The DOW has recovered in after-market trading with e-minis up +0.8%, while S&P 500 e-minis are up +0.3% as I type.
- Local stocks – the 2021 financial year closed with a fizzer, although volumes were a tad elevated vs recent sessions. All up, a very modest and relatively narrow rally with 57% of stocks advancing, while six out of the eleven sectors also closed higher on the day. Telcos (+2.7%) carried the banner to greener pastures, backed up by Materials (+0.8%) and Industrials (-0.5%). Sitting on the sidelines with the half-time oranges and a note from the nurse were Utilities (-3.2%), Healthcare (-0.8%) and Tech (-0.8%). For June the ASX 200 delivered gains of +2.1%, while over the financial year the index advanced +24.0%. YTD the index gained +11.0%, and the post pandemic recovery – from trough to now – sits at +60.9%. The index is now +2.1% above pre-pandemic highs. Valuations remain elevated with forward PE’s at 19.1x, which is well ahead of 5, 10 and 20 year averages of 17.3x, 16.0x, and 15.3x respectively. Forward earnings are forecast (consensus) at $382/per share. If we assume earnings estimates prove accurate, and the multiples mean-revert (not my base case) over the coming year, the downside risk is eye-watering. At 15x – 17x PE’s, the implied ASX 200 would be 11% – 22% below current levels, obviously worse again if we assume say a 5% or 10% miss on earnings. Assuming traditional valuation metrics have any meaning, at say 15x – 17x multiples, we’d need to see a 11% – 25% upgrade to forward earnings in order to justify today’s ASX 200 levels.
- Offshore Credit – from Bloomberg….”investors seem to be shrugging off the rapidly approaching seasonal summer lull. Two real estate investment trusts came to market overnight and saw ravenous buyers put in orders 7.5 times deal size on average, leading to new issue concessions that were negative by double digits”. New issue concession on the deals was -10 bps, and spread compression a chunky 30 bps.
- Local Credit – From the traders…”interesting that the major bank senior curve has actually flattened modestly (-1 bps) over the course of the month when many, including ourselves, would have expected to see some steepening (on expected supply). Once again flows were light.” In the tier 2 space, “a much calmer month for T2 spreads with the 29-24s the standout performer. We saw little sign of the supply fears that pushed spreads wider in May and as we round out the month, we continue to receive interest from multiple buyers. With all four major banks having made significant progress in issuing TLAC commensurable to 5% of their RWA by 2024 we think that A$ issuance that does appear, will likely be well received”. The term funding facility expired yesterday, with final drawdown volumes yet to be published. As at June 23rd (latest data available), a total of $162bn had been drawn against estimates of total allowances of $209bn. ES balances have risen $35bn since June 23rd, indicating final allocations are being drawn. The first primary senior deal from one of the majors is probably a Q4 consideration. The AusBond Credit (Fixed) index has delivered a YTD loss of -0.4% and +2.5% gain over the financial year. The FRN index on the other hand has delivered a positive YTD gain of +0.3% and financial year gain of +1.4%. While FRNs underperformed fixed over the financial year, they exhibited 4x less risk in doing so.
- Bonds & Rates – concerns around the Delta COVID variant are supporting a broad bid for bonds, while the slight hawkish tilt from central banks has moved the front and belly of the curve higher for now. Minimal movement overnight in treasuries and only modest movement in local bonds yesterday. With rising bond yields earlier in the year, YTD the AusBond ACGB index has delivered a total return of -2.0% and -1.4% over the financial year, while the Semi index has lost -1.6% YTD and -0.2% over the financial year.
- Offshore Macro – from CBA’s morning note on US data last night…”ADP employment increased by more than expected in June, though May was revised down. Market participants are likely to revise up their expectation for non-farm payrolls (currently 711,000) ahead of tomorrow’s release. US consumer confidence surged in June to a high level though is still short of pre pandemic levels. The manufacturing ISM is tonight’s highlight (midnight Sydney time). Already released regional manufacturing indices point to a stabilisation in the ISM to a high level around 61pts. Market participants will focus on signs bottle necks – which are causing delivery delays and pushing prices higher – start to ease”
- Local Macro – again, some commentary from CBA…”immediate focus in Australia remains on the current outbreak of Delta Covid 19 infections across the country. South Australia is the latest state to tighten restrictions. Based on past experience, the economic impact of Australia’s current lockdowns will likely be limited. Lockdowns have a large and immediate negative impact on consumer spending. But government compensation payments to households and businesses help to cushion the financial blow. As a result, household savings spike during lockdowns which supports a swift rebound in spending when restrictions are eased.” Yesterday, we had private sector credit growth for May, indicating growth of +0.4% MoM vs +0.3% MoM in April, while annual data saw growth of +1.9% YoY vs 1.6% YoY last, in both cases – monthly and yearly data, growth exceeded expectations
Click here to find the full PDF from our Chief Investment Officer’s daily market update.
Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907