Mutual Daily Mutterings
Quote of the day…
“But the real tragedy was that 15 hadn’t been colored in yet…” – University coach telling fans that a dorm fire had wrecked a bunch of books
Chart du jour…global credit spread changes
Source: Bloomberg, Mutual Limited
“More Than Meets The Eye…”
Overview…”uneventful month end… ”
- Stocks closed on a slightly softer footing on Friday, taking weekly performance into loss territory. Fingers are being pointed at concerns over rising Delta variant cases and China’s tightening regulatory grip. On the month, however, most indices were comfortably higher and we’re seeing core markets still at or near all-time highs despite some developing headwinds – including growing concern that the post pandemic growth phase has peaked. Despite the headwinds, the ‘system’ remains awash with cash, so much so that the Fed’s overnight reverse-repo facility hit US$1 trillion at the end of last week, that’s an all-time high.
- With the risk-off tone, treasury yields fell on Friday and were lower on the week also, with US 10’s trading in a reasonably wide range (1.22% – 1.29%). Credit spreads were mixed, but we saw only modest moves in either direction. Noticeably US HY spreads have been exhibiting a somewhat entrenched widening trend for the past couple of weeks. Much of this has been supply driven with US$30bn priced, the heaviest July on record.
- Fed speak…Kashkari..”I was very optimistic the fall would be a strong labor market with many of those Americans coming back to work. That’s still my base case scenario…but if people are nervous about the delta variant, that could slow some of that labor market recovery and therefore be a drag on our economic recovery.” There are 7 – 9 million Americans still out of work. US Non-Farm Payrolls due on Friday.
- Vaccine news…on the local front, the National Cabinet has played policy bingo and pulled the figure of 70% out of the barrel as the target vaccination level that will allow the country to live with COVID, without the need for lockdowns. If we get to 80% vaccinations, international borders will reopen. As of today, 18% of the population is full vaccinated (two-jabs). No timeline set for this target, but estimates suggest November-December, and these are predicated on no supply bottle-necks.
- The RBA meets tomorrow, with attention likely focused on their tapering intentions given the state Sydney finds itself in.
- Offshore Stocks – a soft close to the week for offshore markets. The DOW closed down -0.4%, outperforming the S&P 500 (-0.5%) and NASDAQ (-0.7%). The Euro STOXX was also down around -0.5%. Despite the slight pull-back, markets remain within spitting distance of their all-time highs and are looking ‘toppy’ in the face of moderating fundamentals (peaking growth?) and developing headwinds (spread of the Delta variant). Within the S&P 500, some 58% of stocks closed in the red. Discretionary (-2.8%), Energy (-1.8%) and Utilities did most of the downside damage, while Materials (+0.4%), REITS (+0.3%) and Staples (+0.1%) did their best to lift the index, but in the end, it wasn’t enough. Key indices were all up on the month, with Healthcare (+4.7%), REITS (+4.6%), Utilities (+4.2%) and Tech (+3.8%) dominating the S&P 500. Energy (-8.4%) was the only sector to really soil the bed, Financials (-0.6%) were in the red, but only marginally so. All other sectors closed higher.
- Local stocks – a modest risk-off session to end the month on Friday. The ASX 200 dropped a third of a percent, led south largely by Tech (-2.5%), Utilities (-1.7%), and Energy (-1.0%). REITS (+1.3%), Industrials (+0.2%), and Financials (+0.0%) were the only sectors to put up some semblance of a fight. In the end, just shy of 60% of stocks closed lower on the day, and on the week the index was, let’s be generous and say it closed flat (-0.02%). Monthly return was +1.1%, with Materials (+7.1%) and Industrials (+4.3%) dominating, while at the other end of the spectrum, Tech (-6.9%), Energy (-2.5%) and Financials (-1.4%) were all drags on performance. Despite weak leads from US and EU markets, futures are signalling a moderately firm opening (+0.5%) this morning. Tech stocks will likely get a boost today with AfterPay receiving a takeover bid at $126/share, some $0.30 above Friday’s close.
- Offshore Credit – about 57% of new US IG corporate bonds sold last week were trading tighter in secondary markets. New issue performance was hampered a bit by the rally in Treasury prices with recent sales performing poorer than the prior week when 85% of new bonds advanced. Consensus forecast for issuance this week is in the $25bn area with some room to the upside as the first week in August is seasonally busy in the primary markets. Most companies will be out of their earnings blackout period and have attractive funding levels available with the average high-grade corporate spread at T+85 bps and a 10-year treasury yield of currently 1.22%.
- Local Credit – from the traders, with some modest editing from yours truly….”fairly tame end to the month with only the index extension flow to speak of. Risk appetite improved throughout the month as illustrated by tightening spread across major bank senior and sub spreads. That would seem somewhat obtuse given local COVID restrictions are now at their must onerous (Sydney) yet if we scrutinise further, it would probably be more appropriate to describe the flows we have seen of late as credit curve steepening.” On financials, which is our wheel-house, “spreads unchanged but July has delivered an impressive return. Given we have another A$7bln+ of financials maturing throughout August (including $4bn from major banks) we would expect the ongoing drip buying from clients and the street to force spreads yet tighter. It is now quite evident that any residual holders of major bank senior paper will hold up until the point that we see local supply and even then, we expect any selling to be well absorbed.” On the month the major bank Jan-25’s closed -5 bps tighter at +27 bps, while the 2026 callable tier 2 paper closed up to -6 bps tighter at +120 – 122 bps. Still hankering for some supply.
- Bonds & Rates – a modest increase in local bonds (yield) on Friday despite the slightly softer risk tone, although yields closed the week lower (-1.5 bps in the 10’s). Over the month 10-year yields fell 35 bps, from 1.53% to 1.18%, primarily reflecting Delta variant concerns – and associated economic impacts. The 3s10s curve flattened 20 bps over the month. Local bond yields edged inside US treasuries again, which has been relatively rare-air over the past 12 – 15 months…but was common through 2018 – 2019. US treasuries fell on Friday, which will likely place downward pressure on local bonds also.
- Local Macro – a range of data prints this week, including loan value, building approvals, ANZ job ads, and retail sales. None of these are likely to be market moving. The RBA meeting on the other hand will be of great interest to markets with growing expectations the previously announced tapering plans will be shelved on account of the Sydney lockdown dragging on. There has been a growing call also for the RBA to actually increase monthly buying, from $5bn to $6bn. The previous meeting saw the Bank announce plans to cut bond buying volumes $4bn. This seems unlikely now.
- Offshore Macro – the Bank of England meets, with a policy meeting that is considered ‘live’, meaning that some in the market expect a change in settings, most likely around QE. But, at the same time enough in the market also expect no change given the Delta variant. Nonetheless, each word of the statement will be dissected to within an inch of its life. US ISM Manufacturing data (June) is due out, with Bloomberg consensus signalling a slight increase is expected, from 60.6 top 60.7. Lastly, the all-important US Non-Farm Payrolls are scheduled for Friday evening our time. Consensus expect 900K jobs were added through July, after adding 850K in June. Higher wages and more aggressive recruiting could have sped up job growth in the service sector, with OpenTable data suggesting a recovery in restaurant reservations. The unemployment rate is expected to sink to 5.7% from 5.9%.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907