Mutual Daily Mutterings
Quote of the day…
“Facts are meaningless. You could use facts to prove anything that’s even remotely true!””.…Homer Simpson
Chart du jour…global stocks, Dec-2019 to now…
Overview…”a pinch and a punch …”
- Confidence is waning with a plethora of headwinds weighing on risk appetite, especially in the face of frothy valuations. Overnight stocks ended the month and quarter on shaky ground with all core indices closing down. For the S&P 500 it was the worst month since the onset of the pandemic in early 2020, with consumer stocks coming under considerable selling pressure as labour data weakened again in the US, while supply-chain woes continue to escalate leading into the busiest time of the year (the festive season).
- Bond yields did very little on the day despite Congress passing a stopgap bill to keep the US government funded through to December 3, avoiding any imminent shutdown. This is from the standard debt ceiling play-book, we’ve been here before. Treasury Secretary Yellen pushed for the limit to be eliminated completely (wishful thinking). While, Fed Chair Powell voiced his concern around the economic harm if the borrowing limit isn’t raised. In the same speech he also reiterated the Fed’s house view that inflation is transitory, caused by temporary supply-chain disruptions that should clear through the first half of 2022. A hotly debated view.
- Bond yields were significantly higher and steeper over the month, with consensus expecting more to come in the months and quarters ahead. President Biden’s US$550bn fiscal spending bill continues to be kicked around Washington, with seemingly minimal progress – some want more, others less.
- On a quarterly basis, Q3 has historically been the ‘weakest’ quarter for the S&P 500. While Q3 has delivered gains in eight out of the last ten quarters, the same as Q1 and Q4, the average gain for Q3 has been less, just +1.4%, the weakest quarter. Historically, Q4 has been the best performing quarter with +4.7% average gains. This time around, history may not repeat itself given a number of headwinds. Namely tough earnings comparisons, elevated valuations, political discord, inflation and rising interest rates, all of which could counteract previous seasonality. The ASX 200 displays a similar historical trend with Q3 weakest quarter and Q4 the strongest quarter on average.
- Offshore Stocks – offshore stocks didn’t cover themselves in glory at month and quarter end, with all key indices down. The DOW was the worst performer on the day, down -1.6%, followed by the S&P 500 (-1.2%), while the NASDAQ (-0.4%) only lost a little ground. On the month the pecking order was reversed with the DOW down -4.3%, the S&P 500 down -4.8%, and the NASDAQ down -5.3%. Over the session, 90% of stocks retreated and no sector gained ground. Industrials (-2.1%) performed worst, followed by Staples (-1.9%), and Financials (-1.6%). The least-worst performers were Telcos (-0.4%), Tech (-0.7%), Utilities (-0.8%). The S&P 500 is now down -5.1% since its recent record high set in August. Over the month forward EPS expectations remain unchanged, although that could change through October as companies provide earnings updates(Q3) – early signals suggest its going to be a sombre month with supply chain issues and the impact of Delta flare-ups. Valuations remain ‘frothy’ with forward PE’s of 21.0x, well up on the pre-pandemic 5-year average of 17.7x (14.3x – 20.1x range). Any mean-reversion from here presents down side risk from here of around 10% – 11%. VIX was elevated at 23.4%, up 0.8 ppts on the day.
- Local stocks – month and quarter end brought a last gasp rally in local markets with a solid +1.9% advance on slightly larger volumes than average. Some 86% of stocks in the ASX 200 gained ground and no sector let the team down. Lines honours went to Staples (+2.7%), followed by Materials (+2.4%), Health (+2.2%) and Energy (+2.0%). On a handicap basis, Materials and Financials (+2.0%) contributed half of the index’s gains. Eight out of eleven sectors gained ground by more than +1.0%. It was less jovial on the month, down -2.7% and down -3.9% from the mid-August record high. The index closed with a forward PE of 17.9x, still on the frothy side compared to pre-pandemic averages and considering growth uncertainty over the coming year as monetary conditions tighten and COVID uncertainty persist. Over the month, analysts cut their EPS expectations by -2.0%. Futures are signalling a tough day in the equity trenches, -1.6%.
- Offshore Credit – “September came in like a lion and went out like a lamb”….market volatility and weakening risk sentiment curtailed primary activity over the latter half of the month. Despite the weaker performance across stocks, US IG credit markets performed well in secondary markets with spreads tightening – 4 bps to -5 bps across financials and corporates. Not so rosy for US HY, spreads were +23 bps wider on average. In CDS, the CDS index closed +7 bps higher on the month. In the EU IG space, spreads ranged from a touch tighter to a smidge wider, while in HY, spreads were +67 bps wider. The MAIN Index (CDS) closed +5 bps higher.
- Local Credit – month and quarter end for most, and financial year end for a select few. Traders comments (from one of the ‘few’)…”on October 1st 2020 we opened 3yr majors at +36 bps and our interpolated 5yr at +56 bps. Over the next 11 months the senior curve embarked on 1-2bp/month grind tighter before giving back 50% of the year’s tightening on the recent CLF news before rounding out the financial year at levels displayed below. Secondary volumes have been consistently light and we now await the point at which domestic real money accounts re-engage. Post CLF announcement we have seen modest selling but no buying. This leads us to believe that the curve will continue widening and steepening and we see little incentive in opposing this. We think that the 3yr point may find some traction in late October as A$3bln+ of maturities come due and redemption proceeds are reinvested, however, we think that investors will avoid the likely landing spots for primary issuance”. No disagreement here. We’ve been pushing the drift wider in spread narrative for a while, and to be honest we welcome it – helps with running yield. As for performance through September, in our sandpit, the Bloomberg Credit FRN, delivered a total return of -0.06%, the best performing cohort within the ‘interest rate’ products universe. The fixed credit index dropped -0.74%. Much of the return figure in the FRN space was driven by major bank spread widening following APRA’s CLF announcement earlier in the month, which has seen 5-year spreads around +8 bps wider (BBSW 3M is +0.5 bps higher).
- Bonds & Rates – bond yields have stabilised over the past few sessions after ripping higher through much of September. Over the last month and a bit, since around mid-August, ACGB 10-year yields have risen +41 bps, from 1.08% to 1.49%, underperforming US treasuries which have risen +25 bps over the same period. Consequently, I pity any investor long ACGB’s through the month, and Semi’s for that matter. ACGB 3-year yields weren’t spared the rod either, +7.5 bps to 0.31%. The Bloomberg ACGB Index, all maturities, dropped -1.68% through September, and the Bloomberg Semi Index, all maturities, has delivered a return of -1.40%. Not a good month to be carrying any duration risk as it would seem….and we didn’t. Our funds carry minimal interest rate risk, so keep that in mind as rates are expected to continue rising. Consensus forecasts for ACGB 10-year yields by year end are averaging 1.53%, so just +4 bps from current levels – while these numbers were updated a week ago, I’d suggest they could be a little stale. Looking through the underlying data, the most bearish forecaster has nailed to the mast an end of year expectation of 1.90%, while some of the peeps I respect more, are hovering around 1.75%. Having said that, I also see another person of respect at 1.10%, so not looking good for their performance review. Very little action in offshore yields overnight, so expecting a quiet end to the week in local bond markets – although with three of the major banks starting a new financial year, it might be more active than I thought.
- Local Macro – Australian credit growth has surprised to the upside (vs consensus) with the latest data released yesterday. For the year to the end of August, credit growth has reached +4.7% YoY, up +0.6% MoM vs consensus of +4.6% YoY and +0.5% MoM respectively. Housing credit grew +6.2% YoY vs +3.2% YoY this time last year, while personal credit growth continues to fall, down -5.6% YoY (vs -12.6% YoY as at August 2020). Business lending continues to accelerate, growing +0.6% MoM and +3.4% YoY, up on the +62.7% YoY run rate reported in August 2020. Owner-occupied lending remains robust, +8.4% YoY, accelerating from the +7.7% YoY reported in July, while investor lending has eased off the gas a touch, +2.2% YoY vs +2.3% YoY at the end of July.
Have a good weekend
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907