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Mutual Daily Mutterings

 

Quote of the day…

“When Chuck Norris tells a joke about Will Smith’s wife, Will Smith slaps himself” – random meme

 

Dashboard…

 

 

“Beauty Is In The Eye Of The Beholder…


Source: www.hedgeye.com

 

 

“The Ride Of Your Life…”


Source: www.theweek.com

 

 

Overview…”light on data and headlines…”

  • Moves: risk on … stocks , bond yields , credit spreads , volatility and oil ….
  • Modest moves to start the Northern Hemisphere trading week as investors assess and digest Fed expectations and developments within the geopolitical sphere.  Basically, not a lot of new data or headlines emerged, with markets drifting across stocks, bonds and credit.  US reporting season is the next road marker to focus on, kicking off in earnest next week.  Stocks advanced in general over the session, and bond yields were mixed.  EU bond yields rallied, while the US treasuries front end rallied a touch and the back end closed unchanged to a basis point higher.  No meaningful developments on the war front – Russia and her troops adding to their shopping list of war crimes.  More sanctions and restrictions from the west to come.  Oil advanced as Saudi Arabia raised prices for customers in all regions.
  • The inversion of US treasuries is garnering more attention and hand wringing – the modest overnight steepening notwithstanding.  Financial Markets 101 suggests curve inversion = heightened recessionary risk.  Within the prevailing backdrop, the concern is rampant inflation will force the Fed to jack up rates aggressively (more aggressively than currently priced), threatening the growth outlook.  The Fed minutes later this week will hopefully provide some colour on the odds of +50 bps rate hike in May (the growing consensus call), and provide details on what they plan on doing with their US$8.9 trillion balance sheet.  For context, that’s equivalent to c.39% of annual US GDP (vs c.15% pre-pandemic) or c.41% of M2 money supply (vs c.27% pre-pandemic)…that’s a shed load of cash pumped into the system.
  • Talking heads…”we’re left hoping that talks continue to make progress toward a ceasefire and exit of Russian troops but if the process so far is anything to go by, that may not happen soon. While progress has been positive for risk assets so far, they remain vulnerable to setbacks in talks which continue to take place against the backdrop of ongoing attacks….” and apparent atrocities.
  • The AUD advanced ahead of today’s RBA meeting, although the troop at the top of Martin Place in Sydney are not expected to change its target cash rate, despite mounting pressure to do so.    Focus will be on chosen language, specifically use of the term ‘patience’.  No patience = a bond sell-off

 

The Long Story….

  • Offshore Stocks – modest gains across the board on little news or data, just flow of funds with investors likely petrified of being exposed to bonds as the Fed is forced to go hard in sucking the monetary marrow from markets.   European markets gained +0.5% to +0.8% across core markets, which provide positive leads for US markets.  The DOW was sluggish initially, but got a wriggle on eventually, closing up +0.3%.  A surge in tech stocks, driven by Elon Musk taking a 9.2% stake in Twitter, sending shares up +27%, which in turn drove the S&P 500 higher, up +0.8%, and the NASDAQ more so, up +1.9%.  Outside of these moves, it was actually a weak day when you look under the hood.  An equal number of stocks (S&P 500) advance as retreated, and outside of Tech (+1.9%), only three sectors gained ground: Discretionary (+2.3%), Telcos (+2.3%) and Energy (+0.1%).  At the other end of the spectrum, Utilities (-0.8%), Healthcare (-0.8%) and Financials (-0.5%) were the main underperformers.
  • Local Stocks – modest gains across the ASX 200 (+0.3%) with two-thirds of stocks advancing.  Utilities (+1.1%), Materials (+1.0%) and Tech (+1.0%) dominated performance tables, although Materials was the primary driver by virtue of its weight in the index (26%).  Down the back of the plane we had Discretionary (-0.9%), Financials (-0.3%) and Staples (-0.2%).  The ASX 200 (7,514) is now just -1.5% below its long run peak (7,628), which was hit mid-August last year.  Relative strength indicators are running hot, approaching overbought territory, however while the war in Ukraine persists, ongoing sanctions against Russia and other supply chain disruptions etc will provide a tailwind for commodity prices, which will support the resources heavy ASX 200.  Futures are suggesting modest gains this morning.

 

  • ASX 200 Relative Strength Indicators


Source: Bloomberg

 

  • Offshore credit – not a lot done in secondary markets overnight, spreads largely unchanged.  Primary was pretty active with six-deals for US$7.4bn priced.  After dropping to low single digits last week, concessions ticked higher with issuers paying +12 bps on average. Some names paid elevated new issue premiums.  Order book oversubscription rates also dipped to less than 2.0x covered vs 3.5x last week.
  • Commentary from Goldman Sach’s strategists…from current levels, we think spreads have likely reached the low end of their range. Negative real yields, relatively stable commodity prices, and lower volatility appear to have given investors enough visibility to push risk premia lower.  Still, with risks from the Russian conflict, a less friendly mix of growth and inflation, and higher expectations for short-term US yields this year, Goldman strategists are taking a more cautious approach to credit, particularly for shorter notes. Given the rise in short-term interest rates, holding cash in money market and short-duration US Treasury funds has undermined the “value proposition” offered by comparable investment-grade credits, they wrote.”  

 

  • Offshore Credit Indices – Spread Changes WoW & YTD…


Source: Bloomberg

 

  • Local Credit – traders…”yesterday’s interest was fairly typical of a Monday with traded volume relatively modest. SSA’s performed on the back of a strong bid from both clients and the street and T2 similarly caught tailwinds from better buying.”  No change in major bank senior paper on the day with 5-yr at +84 bps and 3-yr at +66 bps.  Traders again…”short-end stock is better offered and the long end well sought after, in reality 5-year stock is being bid closer to DM+80 bps however this feels to be a function of dealers covering shorts as opposed to a natural clearing level. In terms of flow today we saw better selling of short end FXD/FRN paper as a number of real money players looked to raise cash.”  Major bank tier 2 paper continues to grind tighter, -1 bps across the curve.  The 2026 callable cohort is quoted +167 – 172 bps, well inside recent peaks of +180 – 185 bps.  The 2025’s are quoted around +153 – 153 bps, and the 2024’s at +121 bps.
  • Curious as for the reason for real money raising cash – per trader’s comments above.  Is there sniff of a new deal (unlikely) or are they fearful of post quarter-end redemptions (plausible / probable)?  March and Q1 was tough for all in the market, but fixed income markets took it worse than others – and I mean fixed rate with duration risk, not floaters.  Within this back drop, and other cyclical and strategic considerations, some accounts may be either facing actual redemptions, or fearing such.  We are aware of some fund managers out there who have soiled the bed by carrying either too much leverage, complex derivative structures, or just straight out called it wrong on duration. Or, all of the above.  And some of these characteristics have been found in ‘cash’ or ‘income’ type funds, funds marketed as conservative options.  Names withheld to protect the incompetent
  • Bonds & Rates – local bond markets went the quiet route yesterday.  They could have sold off in line with US treasuries on Friday night, but instead they decided to largely sit pat, minimal change in yields or the curve in general ahead of today’s RBA chinwag.  Markets will do little until the RBA speaks, so it’ll be quiet until after the statement comes out at 2:30pm.  Offshore markets were pretty tame, a modest steepening of US 2s10s, but the curve remains inverted, most pronounced between 3s and 10s, 2.6% vs 2.4%, so -20 bps.
  • There is increasing talk in the broader bond market narrative around curve inversion and what this portends this time around.  In the past it has been a precursor to recession at some subsequent stage, although this time around the circumstances are reasonably unique – i.e. scale of monetary accommodation, scale pandemic related fiscal support, and of course the pandemic itself.  Pimco, one of the world’s largest bond managers, has opined on curve inversion and prevailing back-drop…for what it’s worth…”a yield-curve inversion should never be dismissed just because the backdrop has changed. The curve’s signal may be less clear than in the past, yet some current inversions are signalling caution, rather than recession.”  And…”Pimco is calling for above-trend growth and a gradual easing of inflation pressures from higher peaks in developed market economies. However, the risks of higher inflation and lower growth have increased, along with the risk of recession in 2023,”

 

  • RBA Rate Hike Pricing…change since the last RBA meeting

 


Source: Bloomberg

 

  • Macro – “….insurance execs who oversee more than $13 trillion in assets expect the U.S. to enter a recession in the near future, according to an annual survey by Goldman. Of 328 CIOs and CFOs polled, more than 60% anticipate the economy will experience a downturn in the next two to three years. The results indicate “a clear shift in outlook globally,” Goldman said.”  (Bloomberg)

 

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: 0.40%
MIF – Mutual Income Fund
Gross running yield: 1.44%
Yield to maturity: 1.39%
MCF – Mutual Credit Fund
Gross running yield: 2.80%
Yield to maturity: 2.29%
MHYF – Mutual High Yield Fund
Gross running yield: 5.81%
Yield to maturity: 5.73%