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Mutual Daily Mutterings

 

Quote of the day…

“The problem with political jokes is they get elected” – many people have said it

 

Dashboard…

 

“Spring Fling…


Source: www.hedgeye.com

 

“From the mouths of babes…”


Source: ‘the Googles..’

 

 

Overview…”To hike or not to hike, that is the question …”

  • Moves: an unconvincing risk on session,… stocks , bond yields , curve , credit spreads , volatility and oil ….
  • Once more unto the breach, dear friends, once more….and thus the valiant dip buyers entered the fray.  European stocks closed lower, reflecting the carnage from US leads night before.  When they came on line, US markets looked to be heading south again, with the S&P 500 down -1.7% heading into the final hour of trading.  It was then, in the last hour of trading, the ‘hour of power’ (tip of the cap to NAB for that one) that the brave, some might say foolhardy, dip buyers bounded over the horizon on gleaming white steeds to save the day.  There was no news or data flow to underpin the reversal in tone, so caution is warranted.  Credit was sideways on balance.
  • Talking heads…”as we turn the calendar to May, we may see a short-term oversold bounce, however, we still have several reasons for concern. We believe our longer-term equity indicators are not yet oversold enough to have a high conviction ‘buy’ call.  We also believe managers have started to reprice stocks using recession like multiples. If that is the case, we are still overvalued.” And….”on the positive side, the market is currently so oversold, any good news could lead to a vicious bear market rally. We can’t rule anything out in the short term but we want to make it clear this bear market is far from completed, in our view.”
  • Ahead of the FMOC meeting, which kicks off tomorrow, US treasury yields inched higher again, reaching levels not seen since Q4 2018, with the 10-year hitting 3.0% intra-day.  Analysts project the Fed will boost rates by +50 bps tomorrow to tackle the hottest inflation in over 40 years, and begin trimming its balance sheet at a maximum pace of US$95bn a month — a quicker shift than most envisaged at the start of 2022.
  • Oil prices continue to face headwinds with no evidence to suggest China – the world’s biggest oil importer – will ease-up on its draconian COVID restrictions.  With demand limited, oil prices will likely find it hard to regain their highs of earlier this year, providing some respite to surging inflation rates. Brent crude is down -15.9% from earlier peaks, which we set last month, but are still +59% higher than a year ago.

 

The Long Story….

  • Offshore Stocks – European stocks in the red following weak leads from US markets the night before.  US markets looking to be heading the same way with stocks down almost -2.0% intra-day, but then with no rhyme or reason, markets staged a strong recovery.  Dip buyers to the fore.  It was a relatively shallow rally.  Within the S&P 500, only a smidge over half of stocks gained ground, and at least five sectors retreated (out of eleven).  The most popular sectors on the day were Telcos (+2.4%), Tech (+1.6%) and Energy (+1.4%).  Meanwhile the moody EMO’s sulking in the corner included REITS (-2.6%), Staples (-1.3%^) and Utilities (-1.0%).
  • Talking heads…”sentiment measures have reached extremes, while the market has historically traded higher after a four-week losing streak. However, given the current technical backdrop of lower lows and lower highs, an advance at this juncture should be considered a countertrend rally and not suggestive of a bottom being set.

 

  • S&P 500 Relative Strength Indicators:


Source: Bloomberg

 

  • Local Stocks – yep, as expected…a down day yesterday, although in aggregate, it wasn’t too bad.  The ASX 200 dropped -1.2% vs losses in the US on Friday night of -3.6% (S&P 500), but again not surprising, much of the pain in the US came through tech stocks, which has a lower weighing in local markets.  On the day yesterday, we saw 85% of the index retreat, and no sector was able to really fire a shot in anger.  The best of the worst was Industrials (-0.3%), followed by Utilities (-0.3%) and Energy (-0.5%).  The cellar-dwellers were led by Tech (-4.0%), REITS (-3.6%), and Telcos (-2.2%).  Despite the late rally in US markets, local futures are in the red, -0.34%.

 

  • ASX 200 Relative Strength Indicators


Source: Bloomberg

 

  • Offshore credit – US high-grade borrowers navigated bouts of volatility in risk assets overnight, prompting another rash of issuers standing down.  There was a dozen or so prospective issuers, yet only five were brave enough to test the waters, pricing just under US$5bn.  The FOMC’s rate decision tomorrow will be weighing on borrower’s minds.  While concessions remained elevated at more than 13 bps and spread compression was less than 18 bps, order books were nearly 3x oversubscribed and attrition rates dropped to just ~17% from peak on average.  In secondary, spreads were modestly mixed, a couple of basis points wider here, a couple of basis points tighter there.
  • Local Credit – ahead of today’s much anticipated RBA policy meeting, flow was reportedly well down on average, with investors sitting pat.  In the financials space, traders noted…”spreads pushed wider on little flow. Whilst the long end has retraced some of the recent outperformance, the shape of the curve remains very flat as short bonds are still better offered in the face of burgeoning street inventory. We also note an uptick in outright buying of fixed rate paper.”  In the major bank senior space, 5-year paper was +3 bps wider, closing at +90 bps, while 3-year paper is +2bps wider at +70 bps (changes vs Thursday last week).  If we see a senior deal anytime soon, I’m seeing spread conversations starting at +100 – 105 bps, which is relatively new territory for bank treasurers to have to contemplate.
  • With the uncertain risk back drop and constrained liquidity conditions, tier 2 spreads continue to drift wider.  Traders are noting little done in the space, yesterday, but what action there was, it was biased to selling.  CBA’s recent Apr-27 callable line is now pricing at +202 bps (vs +190 bps at issuance), a few basis points wider vs last week’s close.  Any new tier 2 deal to come in primary over the immediate future would have to come with initial price talk north of +225 bps (±5 bps), I’m thinking.  With yesterday’s rout in bond yields (comments below), fixed rate credit copped a belting, the Bloomberg AusBond Credit (Fixed) index dropped -0.37% on the day, taking YTD losses to -6.26%.  Once again, the Bloomberg AusBond Credit (Floating) index’s lack of meaningful duration risk had it resilient in the face of rates volatility, unchanged on the day and YTD losses of just -0.34%.
  • Bonds & Rates – local bonds were smoked yesterday, as expected given offshore leads.  Three-year yields were +11.5 bps higher at 2.83%, while ten-year yields were +13.5bps to 3.27%, both at eight year highs.  I still think selling out the back of the curve is overdone and there is scope for a meaningful pull-back, but as things stand right now, momentum is driving yields higher.  Yesterday’s move higher has seen the Bloomberg AusBond ACGB index dust -0.75% for the start of the new month, in turn taking YTD losses to -8.37%.  It’s a similar story for Semi’s, dropping -0.67% on the day and taking YTD losses to -8.20%.  If the RBA hikes today (discussed below), expect yields to punch higher again today – offshore leads are also higher.
  • Three out of the four majors have pencilled in rate hikes this afternoon (2:30pm).  Six out of 30 strategists surveyed by Bloomberg think the RBA will sit on their hands, preferring to wait for the May 18 wages data before making the final call to hike rates.  Possibly, they may hold fire so as to not be used for political reasons given the upcoming Federal Election – some might say them not doing something will be used for political reasons.  A bit from column A, a bit from column B.  Either way, the consensus is at +15 bps, taking the cash rate to 0.25%. Still a very accommodative rate.  There are a small handful of strategists calling for a +40 bps hike to be announced, to 0.50%, but I think that’s too aggressive.
  • Whether the RBA hikes this month or next, when it comes, it will kick off the first rate hike cycle since October 2009.  The 2009-2010 cycle, just the fourth over three-decades, started with the first of seven +25 bps hikes, from 3.00% to 4.75%, with the last hike coming in November 2010.   By the end of October 2009, and after the first hike, 10-year yields had risen +37 bps (to 5.54%) and  3-year yields were up +24 bps to 5.02%.  BBSW was at 3.94%, up +26 bps.  The cycle saw three consecutive +25 bps rate hikes (Oct, Nov, and Dec), before a pause.  Another run of three +25 bps hikes followed in Mar, Apr, May 2010 before another pause.  Then, the final +25 bps hike came in November 2010 to 4.75%.  Thereafter the RBA cut rates 17 times between November 2011 and March 2020, from 4.75% to 0.25%, and then one final 15 bp cut to 0.10% in November 2020.
  • When the last rate hike cycle commenced, at the beginning of October 2009, the world was just recovering from the financial crisis (and on the eve of the European crisis).  CPI was a lowly +1.2% YoY, rising to 2.9% YoY by the end of the hike cycle.  GDP was well below trend, running at +1.5% YoY, and if memory serves, the main impetus to the RBA cutting rates.  Growth would improve to 2.6% YoY by the end of the cycle.  Unemployment was 5.7% at the beginning, falling to 5.10% by the end.  By the end of the cycle yields had done very little, with 3-years just +18 bps higher and 10-year yields +9 bps higher.  This meant that carry drove fixed income market returns, with ACGB’s returning +5.3%, fixed rate credit returned +7.9%, and floating rate credit returned +6.7%.  The ASX 200 returned +0.7%.  Despite rising cash rates, house prices rose +10% broadly.

 

  • Last RBA rate hike cycle (2009 – 2010), pre and post yield behaviour…

 

  • RBA Cash Rate Pricing, and MTD Change

 


Source: Bloomberg, Mutual Limited

 

  • Macro – RBA rate decision…drop the mic.

 

  • Charts…

 

 

 


Source: Bloomberg, Mutual Limited

 

Click  here to find the full PDF from our Chief Investment Officer’s daily market update.

 

Contact:

Scott Rundell, Chief Investment Officer

T: +61 3 8681 1907

E: Scott.Rundell@mutualltd.com.au

W: www.mutualltd.com.au

Mutual Limited Daily Update

Mutual Funds

MCTDF – Mutual Cash Fund
Gross running yield: 0.50%
MIF – Mutual Income Fund
Gross running yield: 1.57%
Yield to maturity: 1.66%
MCF – Mutual Credit Fund
Gross running yield: 2.85%
Yield to maturity: 2.44%
MHYF – Mutual High Yield Fund
Gross running yield: 5.93%
Yield to maturity: 5.89%