Mutual Daily Mutterings
Quote of the day…
“I’ll make the money by selling one of my livers…I can get by with one.…” – Homer Simpson
Chart du jour… High Yield Spreads
“Here we go again…”
Overview…”dip buyers are back, back again…”
- Europe still being pummelled with markets dropping further as omicron events weigh on sentiment, while across the pond in the US, it ain’t nothing but a thang! Markets ploughed on, rising strongly as investors latch on to the ‘mild symptoms’ theme developing around the new COVID variant, and for the day ignoring inflationary pressures….at least that’s the narrative du jour. It could easily swing the other direction tonight given we’re still 5 – 10 days away from having a more complete picture on the efficacy of current vaccines on the omicron variant (according to the scientists), but early signs are promising.
- In other markets, bond yields were divergent across the Atlantic, a modest sell-off and steepening in US treasuries, while GILTS, OATS and BUNDS all rallied to varying degrees, around 2 – 3 bps, while peripheral bonds had a little more juice to the rally, yields falling -4 – 6 bps. Fed speakers were out and about spruiking more rapid completion of the Fed’s tapering agenda. An agreement to keep the US government funded for a little longer has averted a pre-Xmas shutdown, but the risk isn’t completely off the table – some rogue members of the Senate are threatening some shenanigans. Offshore credit spreads continue to drift higher, with high yield under significant widening pressure (see chart du jour).
- JPMorgan strategy comments….”the recent omicron turmoil may offer investors a chance to position for a trend reversal in reopening and commodity trades. But the whipsawing of markets in the last few days suggests something is different. Omicron has exacerbated other fears, about the Fed, inflation and valuations. And increased restrictions and jittery consumers will likely feed through to some reopening stocks, further perpetuating their relative underperformance.”
- Talking heads….”what we’re seeing is the propensity to buy the dip…and why are we buying the dip? Because there’s just so much money sitting on the sidelines. Even though these short bouts of volatility are surprising and certainly have sent a chill through markets, we still have a significant bank of equity returns to enjoy year to date.”
The Long Story….
- Offshore Stocks – after two down days, a reasonably convincing rally in US stocks. European markets were less buoyant, well they sank, the opposite of buoyant, is suspect on greater fear of social restrictions being introduced. Within the S&P 500 it was a broad-based rally with more than 90% of stocks advancing and no sector left on the bus and the index back above its 50 DMA. Financials (+2.9%) dominated the leader board, followed by Industrials (+2.9%) and Energy (+2.8%). Healthcare (+0.5%), Tech (+0.9%) and Discretionary (+1.1%) all tried, but still finished the day at the bottom of the ladder.
- Local Stocks – a modest down day, and we know why. Around 60% of ASX 200 constituents gained ground, yet only four (out of eleven) sectors closed in the green – Utilities (+1.5%), Industrials (+0.8%), Financials (+0.6%), and Discretionary (+0.6%). Financials did most of the heavy lifting though. The red-riders were dominated by Tech (-3.2%), Healthcare (-0.9%) and Materials (-0.8%), with the latter countering much of Financials support. Much of the Tech damage was curtesy of Afterpay (-6.1%) and Xero (-5.1%). Futures are signalling a solid rally this morning, +0.8%.
- Offshore Credit – “US investment-grade bond spreads closed yesterday at the widest level so far this year. A flatter yield curve, falling breakeven rates and greater volatility present more obstacles to spread tightening today, and high-grade bond spreads will continue struggle as a result…. The 10-year Treasury yield is near the lowest since September and break-evens have been on a downward trend since the middle of November, defying fears of longer-term inflation. Considering high-grade bond spreads tend to widen as breakeven rates fall, early moves today add further reason for widening, particularly as credit-risk gauges continue to flash warning signs. As expected, better omicron news didn’t offer a respite from widening, and bond traders today appear again comfortable with forgoing yield from corporates to buy safety in government bonds.” (Bloomberg). “….at the end of the day, the buyer base has not been showing up as heartily as it was before…” (Loomis Sayles).
- Local Credit – trader’s commentary …”it was a productive day for the A$ secondary credit market with an uptick in bid side interest from clients across all sectors, but most pertinently in SSA’s. Higher beta stock does continue to face selling pressure however and whilst street liquidity remains thin, much of this interest is met with widened bid spreads.” No change to the major bank senior curve with the Aug-26’s at +63 bps, Jan-25’s at +44 bps and the generic three-year curve around +40 bps. Yesterday, ANZ launched a 1 year FRN at +15 bps, a fraction above the secondary curve (+14 bps). As the majors manage their maturity profiles post the disruption of the pandemic and RBA’s Term Funding Facility, random maturities will probably become the norm. Having said that, I believe the ANZ deal was a reverse enquiry. While senior spreads were stable, tier drifted wider again with the curve adding another basis point. The 2026 callable cohort is at +145 – 148 bps, inching closer to the +150 bps level, where I reckon I’d be interested…all other things being equal. Speaking of tier 2, APRA yesterday announced the finalisation of it’s TLAC requirements at 4.5% of RWA (this is after the recently announced capital reforms which APRA estimate will reduce RWA by 5%. Hence the additional 1.5% of TLAC is more like 1.0% on today’s RWA). NAB and ANZ announced they both expect to meet the additional requirement through T2 issuance. Market response was muted.
- Bonds & Rates – local bonds followed the risk off theme with a bull flattening of around 5 – 6 bps across the 3s10s. Offshore leads, particularly out of the US will likely see that move reverse to a greater or lesser extent. US rate hike pricing has shortened on the back of several Fed speakers out and about pushing a more aggressive tapering agenda – which moves rate hikes closer…”with the Fed having tilted hawkish and more hawkish comments overnight by Bostic, Barkin, Daly and Quarles, markets have brought forward pricing for the first rate hike with May 2022 now 95% priced, from 86% yesterday. There is now 73 bps worth of tightening priced for 2022 from 63 bps yesterday. With the Fed expected to move earlier, market proxies of the terminal rate remain lower than they were last week with the 5Y1Y at 1.45%.” (NAB)
- Range trading will likely remain the order of the day for local markets, until we get greater clarity on the science behind the new COVID variant…and we probably won’t have that today. The 3’s have traded in a 0.85% – 1.05% range over the past month, after peaking previously, and briefly, at 1.22% at the end of October (+90 bps on a month earlier). Accordingly, one could argue the higher inflationary outlook has been baked in, at least for the time being. It’s a similar theme in the 10’s, although the risk to growth caused by omicron has seen a more meaningful drop in long yields over the past week. The 10’s are back at 1.68%, vs 2.09% at the end of October, and 1.48% at the end of September.
- Offshore Macro – More inflation angst….”Food prices climbed +1.2% last month, pushing closer to a record, as the cost of grains and dairy went up. The UN’s gauge of global prices has been rising steadily, thanks in part to bad weather hurting harvests, inflated shipping rates and worker shortages. While it typically takes some time for commodity costs to trickle down to supermarkets, the rally is evoking memories of spikes in 2008 and 2011 that contributed to global food crises.” (Bloomberg). Tonight, US payrolls, which would normally dominate, but omicron headlines risk stealing payroll’s thunder as far as market reaction is concerned. Consensus is looking for 545K jobs (vs 531K in October) and an unemployment rate of 4.5%, down from 4.6% a month earlier. Average hourly earnings is expected to be +5.0% YoY (I wish).
- Local Macro – main data of note yesterday was housing loan value data….”new housing loan approvals fell -2.5% MoM in October, against expectations for a +1.5% MoM increase. The weaker-than-expected outcome was driven by a -4.1% MoM decline in new owner occupier loans. New investor loans, in contrast, rose +1.1% MoM, its 12th consecutive monthly rise, to reach its highest level since the all-time high in April 2015. Over the past year, investor loan commitments have only accounted for one third of new home loan commitments, reflecting the surge in new owner-occupier loans.” (NAB). Today we have PMI data.
- More omicron commentary…a good summary from NAB’s morning note…”as for virus/vaccine news it was on net positive. News out of South Africa reveals a surge in new Covid cases and hospitalisations with the Omicron variant expected to quickly outcompete Delta and become the dominate strain. Within that news though there were glimmers of hope with the Anne von Gottberg, an expert at the South Africa’s NICD noting: “ we believe the number of cases will increase exponentially in all provinces of the country. We believe that vaccines will still, however, protect against severe disease. Vaccines have always held out to protect against serious disease, hospitalisations and death.” Scientists from the same institute have also noted initial data suggests Omicron may provoke less severe illness than previous variants although that may be skewed by the cases having been identified in younger individuals.
- That cautious positivity was reflected in words by Pfizer, who re-iterated the comments from their vaccine partner BioNTech in stating that it didn’t expect its vaccine would see a significant drop in efficacy. Also overnight one early lab test suggested the Covid-19 antibody treatment by GSK/VIR is effective against certain omicron mutations. You scribe also notes that it of course remains still early days as far as lab testing for existing vaccines which will likely take at least two weeks. Given vaccine makers had started those efforts earlier in the week, we may have the first assessment of efficacy in 8 or so days. Meanwhile Germany is said to announce new restrictions on unvaccinated people to motivate more people to become vaccinated. Merkel also flagged that Germany might follow Austria in making vaccination mandatory from February next year as an “act of national solidarity”, with a vote in parliament likely to happen soon.”
Have a good weekend….
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Scott Rundell, Chief Investment Officer
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