Mutual Daily Mutterings
Quote of the day…
”I would like to see every single soldier on every single side, just take off your helmet, unbickle your kit, lay you’re your rifle, and set down at the side of some shady lane, and say, nope, I aint a gonna kill nobody. Plenty of rich folks wants to fight. Give them the guns…”…Woody Guthrie
“Second Law Of The Second World…”
“Small Little Man…”
Overview…”I can’t find the off-ramp…”
- Moves: risk off on balance… Stocks ↓, bond yields ↔, credit spreads ↑, volatility ↓ and oil ↓….
- War rages as markets and investors continue to weigh up the economic consequences. European stocks copped a meaningful touch up, down 2.0% – 2.5%, while in the US, stocks had some wild intra-day swings, oscillating between gains and losses before closing with their beaks marginally underwater. European yields rose, while treasuries dropped (yields) a touch, only a few basis points in it. Oil traded a wide range, but in the end halted its surge on the possibility of an Iran nuclear deal (potentially freeing up oil production).
- The Fed’s Powell was before a Senate panel, spruiking his wares. He noted surging energy prices will likely spill into inflation, which is not really a fresh nugget of information, markets had figured that out for themselves. He reaffirmed that the rate hike revolver was cocked, locked, and ready to rock (not his choice of words). A +25 bps is the base case, with a new rate hike cycle beginning anew. Powell indicated a conviction to go harder and faster as required – although the Ukraine situation does add some spice, which will be monitored carefully.
- Talking heads…”rising commodity prices are a big concern for the market, prompting fears of stagflation…the economic clinch point of this war is commodity prices. Higher energy prices, slowing growth, and surging inflation are not a good outlook.” And…”there has been a lot of daily volatility which I don’t expect to subside…even if volatility will remain heightened, we are not worried for a recession. I believe there will be a growth slowdown, specifically because of heightened global commodity prices.”
- Given the narrative around Putin’s intentions to not stop until he’s taken the whole country – as broken as it will be, and the citizens of Ukraine effectively saying “up ya bum, Putin”, there is no off-ramp to this conflict. It’ll get uglier and uglier, but in time I think markets will begin to de-weight it. The war itself, that is, not the impact on oil, that’ll remain central to market’s focus for a while yet.
The Long Story….
- War Impact…so far – here’s some interesting observations on market reaction to the Russian vs Ukraine conflict. Russia formally invaded Ukraine on 24 February, although the signals that something sinister was probable were plain to see. Either way, since the actual invasion kicked off, the ASX 200 has actually rallied +2.5%, and the S&P 500 is up +3.4%. And this one is crazier again, the Euro STOXX is up +9.2% since the start of the invasion. Oil is up +14.2%, which should surprise too many people, Russia is a significant oil producer. Treasury yields have fallen 9 – 11 bps across the 2’s and 10’s respectively, while ACGB 3’s are -7 bps lower and the ACGB 10’s are largely unchanged. Credit spreads are wider in US IG, +5 bps, but tighter in EU IG, Financials at least, -7 bps. Corporate are +2 bps wider. AU spreads are +4 bps wider in fixed and unchanged in FRN’s. CDS are +2 bps wider.
- A week into the war, and while the human cost is tragic and difficult to comprehend, the market reaction thus far has been reasonably measured. Leading into the war, however, it’s another story, particularly for risk assets. YTD stocks are down as much as -14%, probably averaging -8.0%, while yields are still up +30 – 40 bps, both reflecting the inflationary / policy tightening thematic. Rising oil prices and the impact on inflation creates a quandary there, with talk of stagflation back in the narrative, which is a headwind for valuations and yields.
- Offshore Stocks – the S&P 500 was down -1.0% at one stage overnight, but clawed its way back to positive territory, only to give up the ghost again and head south into the final hour of trade. The index closed down -0.5% with a relatively even winners vs losers split at the stock level, but with more sectors winning than losing, 7 to 4. Utilities (+1.7%), REITS (+1.1%), and Staples (+0.7%) headed up the winners table, while Discretionary (-2.3%), Tech (-1.2%) and Telcos (-0.8%) were at the losers table, by the kitchen door.
- Local Stocks – modest gains once again yesterday, the ASX 200 closing up +0.5%. Winners and losers on the day were reasonably balanced, 50:50 at the stock level and 40:60 at the sector level. Again, with surging commodity prices, Materials (+2.6%) and Energy (+2.6%) did the bulk of heavy lifting, with a cameo performance from Utilities (+1.3%). Staples (-2.3%), Healthcare (-1.3%) and Tech (-0.7%) were the main headwinds. With a late sell-off in US markets, and offshore futures in the red, the local index will likely face some considerable downforce today, futures are down almost -1.0%. If I really had strong conviction in my view that the war will matter less to markets as long as it drags on, I might be inclined to add risk here. But I won’t…Putin is too unpredictable and looking increasingly maniacal and desperate. Who knows what he’ll do next?
- Offshore credit – spreads continue drift wider in secondary, while primary markets seem relatively unfazed. In US IG markets, nine companies tapped the market for US$24bn, the busiest session by dollar volume this year…the previous record was yesterday. This takes weekly issuance to US$54bn, more than double initial forecasts. CDS closed higher, with CDX (US) +1 .2 bps, while MAIN (*EU) was +2.3 bps. Senior Financials were +1.8 bps and Sub Financials +4.1 bps.
- Local Credit – traders…”a quiet day, though we saw signs that a number of domestic investors are returning to the fray. Volatility remains elevated but the onset of primary in USD overnight has likely reassured a few local investors.” Major bank senior paper closed unchanged across the 3Y, 4Y, and 5Y, part of the curve, at +49 bps, +62 bps, and +73 bps respectively, while 1Y and 2Y spreads drifted a basis point wider. In the tier 2 space, no flow of note reported, but spreads drifted nonetheless. The 2026 callable cohort of paper closed +1 – 2 bps wider at +153 – 157 bps, while the 2025’s drifted a basis point to +139 – 140 bps. CBA went offshore for some senior and tier 2 paper, pricing US$1.25bn of 10-year bullet tier 2, US$1.9bn of senior Mar-25’s (3-year) and US$1.25bn of senior Mar-27’s (5-year). The deal hasn’t priced yet, but by my calculations, but at guided levels the 3-year swaps back at BBSW+77 bps, the 5 year at BBSW+107 bps and the tier 2 at BBSW+231 bps…don’t hold me to those figures, I’m a little rusty.
Source: Bloomberg, Mutual Limited
- Bonds & Rates – to paraphrase Homer Simpson “yields go up, yields go down, yields go up, etc.” A sell off yesterday for reasons I can’t really explain other than local markets followed offshore markets, which in turn clung to the hope and dreams that the Fed has the whole inflation and rate hike cycle – amidst a war and surging oil prices – all in hand…pause for breath. Hard to pick direction today, but if I had to guess, I’d say we’ll grind a little lower (yields), reflecting the general risk off tones from offshore.
- Macro – “Growth in the U.S. services sector retreated in February to a one-year low as orders softened along with business activity, an indication supply constraints remain a hurdle for the economy. Jobless claims fell by more than forecast to the lowest level since the start of the year, as Covid-19 cases decline and restrictions ease. The data came ahead of the government’s monthly employment report, which is currently forecast to show the U.S. added 415,000 jobs in February.” (Bloomberg). US non-farm payrolls are scheduled for tonight, with consensus expecting +420K jobs added through February vs +476K in January. Unemployment is expected to dip from 4.0% last month to 3.9%, almost back to pre-pandemic levels (3.5%, Feb-20) with average earnings growing +0.5% MoM and +5.8% YoY.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907