Mutual Daily Mutterings
Quote of the day…
“You can beat forty scholars with one fact, but you can’t beat one idiot with forty facts”– Rumi
Two cartoons…coz it’s Friday…
- After four up days, markets were put back in their box overnight, a swift, sharp swat across the beak with a rolled-up newspaper, the weekend edition too. Much of the pain stemmed from some nasty falls in tech stocks, in turn results driven. Exhibit A…the company formally known as Facebook (now Meta Platforms) plunged ↓26% after reporting stalled user growth. The collapse in FB’s share priced wiped off more than US$250bn of market value, equal to the combined market value of three of our major banks, and the biggest single company fall in history.
- Bonds also copped a swift kick to the delicate undercarriage on tightening monetary policy prospects. The ECB hinted that rate hikes this year weren’t out of the question…”Lagarde noted “risks to the inflation outlook are tilted to the upside, particularly in the near term” and signalled the potential for a major policy pivot at an upcoming meeting: “Our March meeting, and then later on, our June meeting will be critically important to determine whether the three criteria of our forward guidance are fully satisfied.” The market ramped up pricing for ECB rate hikes this year following the press conference, with around a 70% chance of a 10bps move now priced for June and more than 40bps now priced-in by the end of the year.” (NAB)
- The BOE also tightened the taps, hiking +25 bps (to 0.5%), which was expected, although some officials (almost half) were banging the drum for +50 bps in response to rising inflation concerns. The BOE will also unwind its near £900bn of bonds, and will hock all of its corporate notes by the end of next year. In the end, 10-year GILTS (yields) were +11 bps, BUNDS (+10 bps), and OATS (+12 bps). Treasuries were a little more restrained in their pessimism, outperforming their European counterparts, only +4.5 bps higher in the 10-year.
- Macro… in the US, the ISM services gauge fell from 62.3 to 59.9 in January (source: 59.5). Factory orders fell by 0.4% in December (survey: 0.2%). According to Challenger, job cuts rose from 19,052 to 19,064 in January (survey: 23,000). New claims for unemployment insurance fell by 23,000 to 238,000 in the past week (survey: 245,000). (Source: CBA)
The Long Story….
- Offshore Stocks – it was down from the get-go for Northern Hemisphere stocks, with Tech stocks driving the bus of despair into the depths of bearish hell. Too much? Possibly. Either way, it was a tough day in the trenches for investors with the S&P 500 down over -2.4%, with no sector spared the rod. While Tech (-2.6%) did most of the damage at the index level, the scale of daily losses was greatest amongst Telcos (-6.7%) and Discretionary (-3.3%). Four in every five stocks retreated. The NASDAQ was belted, six of the best behind the woodshed, down -3.7%, taking year to date losses to -11.0%.
- Local Stocks – much of the negative headlines around Facebook came out in our time-zone, which sent S&P 500 futures south, and in turn put a downer on the ASX 200. In the end, a modest decline. Materials (+1.5%) did their best to keep the indices’ nose above water, with a bit part played by Utilities (+1.6%), but in the end the weight of losses everywhere else was too much and the ASX 200 dipped into negative territory…just (-0.1%). Tech (-5.9%) suffered the most, which was to be expected given the news out of the US on Facebook (through our trading day). The 50D moving average has dipped below the 200D moving average, which I’m sure means something to those who embrace technical analysis. I think it’s if the 50D, 100D and 200D converge then something momentous might happen…but I can’t quite recall if its good or bad. Either way, given market momentum and in the face of increasingly likely rate hikes and reduced monetary accommodation – I would suggest it’s not going to be sunny days and picnics at the beach any time soon for markets. ASX 200 futures are down almost -1.0%.
- Local Credit – the main focus for traders and investors alike yesterday was the Newcastle Permanent Building Society 5-year deal (BBB/A3). The deal was well supported, with initial guidance of +105 bps offering an implied pick up over their Mar-26 line of +26 bps. More than sufficient compensation for the 11-month term difference. The book was at $450m (vs historical average issue side of $225m) just before close with pricing tightening into +100 bps (still attractive). Johnny-come-lately investors pushed the book to $540m, resulting in greater scaling. If I had my way, investors who bid early and bid firm would be rewarded with the size of their allocation proportionate to their conviction and promptness. Unfortunately, the world doesn’t work that way, more’s the pity. In the end NPBS printed $250m. Traders…”as has been this week’s theme, traded volume was light yet skewed to better buying. Spreads performed in the long end of the senior curve, with stock well bid by the offshore buy base. Elsewhere, spreads close unchanged with much of Asia still out and many domestic accounts focused on forthcoming primary.” Against expectations, some modest spread compression in major bank senior paper, with 5Y paper averaging +66 bps, a drop of -2 bps on the day, while 4Y dipped a basis point to +57 bps, and 3Y dropped a basis point also, to +43 bps. No change to the major bank tier 2 curve…traders “with the direction of flow beginning to find balance again. Local real money is still active on the offer though the size of this interest is shrinking and a bid has re-emerged from the Asian based PB community. The street remains long though we anticipate the return of Asia to full capacity next week may help alleviate excess inventory.”
- Bonds & Rates – a modest rally in local bonds yesterday, a few basis points across the curve, although I suspect much of that will be wound back today given offshore leads. With the BOE hiking and the ECB conceding that hikes this year were now ‘plausible’ (not their word, I borrowed it from the RBA), it’s safe to say the path for rates strategically is higher. Tactically also, although no doubt we’ll reach stages over coming months where yields have run to high too fast, which will give duration players chances to trade their way out of trouble, or send them further down the rabbit hole. Meanwhile, we’ll be kicking back in the floating rate space, enjoying the relative tranqulity. So, in this context, have I told you about our range of floating rate funds? More on this below, under ‘steak knives.’
- Offshore Macro – US ISM data out last night and it wouldn’t be pleasant reading for the Fed. Some snippets from procurement professions (vis Bloomberg)…”costs have escalated to what we believe are unsustainable levels. Available labour is non-existent, so we have cut staffing and are taking on fewer projects temporarily in an attempt to reduce cost. Outsourcing where possible. We are not optimistic at this time.” [Construction]. “Supply constraints and outages persist. With mechanical component parts, the problems are severe. We are finding widespread depletion of field service part inventories to sustain factory production of new product orders. The inability to satisfy replacement part demand creates tremendous operational risk.” [Accommodation & Food Services]. “Constrained supplies of many key product groups continue. Inflation worsening; however, sales and profitability continue to be strong.” [Wholesale Trade]. “January has been tough, as product quantities intended for holiday sales are just now coming in, inventories of seasonal products are (very) high and now dormant for nine months, cash flow is down, and new orders are delayed. Omicron is keeping between 20 and 25 percent of our workforce out daily. Inflation is a concern.” [Information].
- US Payrolls tonight, and next week US CPI…”according to Bloomberg’s survey, economists are expecting the figure to rise to 7.3% from 7.0%. And that alone should keep the Fed on track to front-load rate hikes by raising rates at the next three FOMC meetings. The risk is skewed toward tightening as lower prints won’t change Fed guidance appreciably. And since three consecutive hikes are already priced in, the question now goes to what would make the Fed get even more aggressive. That’s important given the recent backpedalling we have seen from policymakers.”
- Local Macro – Building Approvals out yesterday, for December, with a +8.2% MoM change, which was well ahead of consensus (-1.0% MoM) and November (+3.6% MoM). January PMI’s were also released, which showed some improvement on December, 46.7 vs 45.3 (Dec) – composite. Main focus today is release of Statement of Monetary Policy forecasts…from BAML “Lowe pretty much covered all bases on Wed so there is not much scope for a surprise. It will be a reminder that updated labour market and core inflation forecasts are consistent with higher rates. Expected labour costs in the NAB 4Q survey yesterday are expected to reach 4% in the next 3-mths. Supply today is $1bn Nov-25.”
- Steak knives – blatant chest beating and self-promotion alert. With the release of our monthly performance data, I wanted to flag the performance of our three flag-ship retail funds. Specifically, performance over the past year and since the onset of the pandemic, and specifically against the broader market. The chart on the left below displays our 12 months return vs risk (standard deviation of monthly returns) and the same for ACGB’s, Semi’s, Credit (Fixed) and Credit (Floating) – using all Bloomberg AusBond indices. The chart on the right below is the same, but with a longer time frame, back to the eve of the pandemic (December 2019). Our three funds, MIF (income fund), MCF (credit fund) and MHYF (high yield) have generally delivered superior performance, and in most cases with much less risk. Just saying…
|Last 12 months…
||Since December 2019….
- Put differently, $1,000 invested across our funds vs each asset class mentioned above, is charted below:
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