Mutual Daily Mutterings
Quote of the day…
“The only thing that keeps this organization from being recognized as one of the finest in baseball is wins and losses at the major league level …” – Former Rays General Manager, Chuch Lamar
Chart du jour…two cartoon Tuesday
Source: Bloomberg, Mutual Limited
Overview…”peaking … ”
- US stocks followed a firm lead from EU markets initially, up +0.6% in early trading, but then softer than expected US manufacturing data came out and took some jam out of the market’s donut. By day’s end both the DOW and S&P 500 had slipped moderately into the red, while the NASDAQ clung to modest gains. Oil puked, down -4.5%, amid concerns over global demand and the outlook for consumption.
- Fed speak…Kashkari again…”a surge in the Covid-19 delta variant could harm the US recovery and keep some Americans from looking for work”. The net effect of these themes is a lower and flatter yield curve. Last night, US treasuries bull flatten, where back yields fall faster than front end yields, so 10’s were -4.5 bps and 2’s were -1.1 bps lower. US 10’s are now at that lowest since mid-February, and some -56 bps below their Mar-Apr ‘reflation trade’ peaks.
- Talking heads…”I think people are looking at the sharp drop in long rates and flattening of the yield curve and they are getting worried about economic growth…that growth concern comes from the inflation-driven slowdown we’re seeing in some sectors in addition to delta variant worries in emerging markets.”
- Most of the US reporting season heavy lifting has been done with two-thirds of the S&P 500 now reported. Aggregate sales have exceeded expectations by +4.5% with 83% of companies beating, while earnings have exceeded expectations by 17.8% on aggregate, with 86% of firms beating. Aggregate sales growth has come in at +27.1% YoY and aggregate earnings have grown +100.0% YoY with c.90% of firms reporting sales and / or earnings growth. That’s as good as its going to get, it can only be downhill from here.
- The RBA meets today and there is a strong case being mounted for the Bank to walk away from its planned tapering agenda. Some in the street are even calling for the Bank to increase buying. The statement is released at 2:30pm.
- Note, there will be no daily tomorrow…unless the world goes completely bonkers. My grandfather passed last week and tomorrow is his funeral.
- Offshore Stocks – European markets advanced moderately in a broad-based rally led by a mix of tech and growth stocks, while banks lagged as rates markets also put in a solid session. This gave US markets an initial boost, but the weaker than expected manufacturing data scuttled early gains. All up 58% of stocks in the S&P 500 posted daily losses, led primarily by Materials (-1.2%), Industrials (-0.7%) and Energy (-0.7%). Only four sectors gained on the day, led by Utilities (+0.7%), Discretionary (+0.3%) and Healthcare (+0.2%)…the fourth was REITS, but it’s gains were miniscule. E-mini’s are all in the red, including the NASDAQ.
- Local stocks – a cracker of a day for the bulls yesterday with the ASX 200 up +1.3%, fuelled by gains in Tech (+6.5%), in turn underpinned by the Square bid for AfterPay. Financials (+1.9%) and Healthcare (+1.6%) completed the podium. Seven out of the eleven main sectors return greater than 1% gains on the day. The weakest performer was Materials (+0.1%), followed by Industrials (+0.5%). Only 15% of stocks in the ASX 200 failed to fire. Relative Strength Indicators are getting toppy, but with weak offshore leads, and futures pointing to a negative open, some heat will come out of the market today.
- Offshore Credit – a frisky start to the week with six deals and US$7.7bn priced in US IG markets. Investor demand waned somewhat with deals were less than 2.3x covered, translating into about 6 bps in average new issue concessions. YTD book coverage has averaged 3.1x and new issue concessions has averaged just shy of 2 bps. Spread compression from launch to final pricing was -16 bps, well inside the -24 bps YTD average. Issuers were once again forced to navigate a bull-flattening yield curve that saw the 10-year rally to 1.14% before pulling back slightly to 1.18%. EU markets were quiet, just one deal, from Barclays, €1.5bn 8-NC-7 out of the Holding Company. The book was 2.2x covered and spread compression was -23 bps.
- Local Credit – Sydney was out for a bank holiday yesterday…given the lockdown situation, I’m not sure many people would have noticed. Either way, it was a dull day in local credit markets. Nothing to report.
- Bonds & Rates – the risk on tone yesterday saw local bond yields trend higher, although only moderately so, which signals continued cautiousness amongst bond investors around the impact of the Sydney and Brisbane lockdowns and what they mean for growth…and monetary policy settings. Softer leads from US treasuries will see yields dip again, especially if the RBA does in fact put the tapering cue back in the rack.
- Local Macro – a busy day today with a range of data releases, per the following table, but realistically the RBA policy statement is the only one that will matter today. For mine, I expect tapering will be off the table for now, to be re-visited once Sydney is out of lockdown.
- Offshore Macro – US manufacturing data dipped to 59.5 vs 61.0 consensus expectations. A very modest miss, but still a very robust number. On the positive side, the employment component moved back into expansionary mode, rising to 52.9 in July from 49.9 in June. Survey respondents still point to difficulty in finding labour, nevertheless this was an improvement relative to the previous month. The new orders also pushed higher and, while production was lower, the index of customer inventories fell to a record low, boding well for future output. On the not so good side of the ledger, the prices index remained at a very elevated level of 85.7, but 6.4-points lower than June. From a historic perspective a 59.5 manufacturing ISM reading is still a very robust activity reading, nevertheless reaction to the data release by the UST market suggest the market is concern over “peak growth” and the potential for more slowdown ahead…commentary lifted from NAB’s morning note.
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