Mutual Daily Mutterings
Quote of the day…
“Sometimes I’ll start a sentence and I don’t even know where it’s going. I just hope I find it along the way.”.…Michael Scott (The Office)
Chart du jour…inflation vs yields
- Markets continue to whipsaw from one extreme to another… maybe ‘extreme’ is a little extreme. Either way, they’re bobbing around all over the place, optimistic one day, pessimistic the next. In the past fortnight, the S&P 500 has closed higher or lower by more than 1.0% half of the time, compared to just 10% of the sessions over the remainder of the year. Last night we saw another down session across stocks, with tech names particularly in the cross-hairs. Elsewhere, oil continued its march higher, fuelling inflation / stagflation concerns, which in turn saw bond yields drift a touch higher – although they closed off their intra-day highs, and below last week’s recent peaks. Credit drifted a touch wider.
- The main catalyst for investor angst last night appears to be OPEC’s failure to agree to any production increases beyond the 400K already on the whiteboard. Given the evolving ‘energy crisis’ heading into the European winter, OPEC were expected to boost supply. Brent crude is now at three-year highs and thermal coal at new record highs. Add to this Us debt ceiling issued and stalled fiscal stimulus plans and you have heightened uncertainty.
- Talking heads…”there’s a wall of worry that markets are trying to climb at the moment, we have an energy crisis, supply chain issues, higher inflation, signs of weaker growth, and lots of talk about stagflation.” Stock valuations are well above historical norms (touched on that yesterday), and bond yields well below their long run historical averages, even medium-term averages for that matter – US 10-year yield average (5 year) is 1.97%, almost +50 bps above current levels. And credit spreads, yep…tighter than their historical norms too.
- More talking heads…”technology stocks are most likely getting hit the hardest because higher interest rates means higher discount rates for future earnings….I would expect this dynamic to continue as long as inflation expectations remain at the higher end.”
- Offshore Stocks – a dour day for stocks with all key indices sporting injuries of some kind. The NASDAQ had the biggest shiner, down -2.2% as tech stocks were signalled out for some roughing up. Amongst the Americans, the DOW performed best, down -0.9%, while the S&P was midway between the old school and new school, down -1.3%. With less weighting to tech and growth stocks, the EURO STOXX performed better than all, down just -0.5% – although European markets did start the day on a positive footing, but that all changed once US markets came online. Within the S&P 500 a smidge over two-thirds of stocks retreated, led by Tech (-2.4%), Telcos (-2.1%) and Healthcare (-1.5%). Three sectors put on a show of defiance at the top of the tables, with Energy (+1.6%) gaining ground on higher oil prices. Utilities (+1.4%) and REITS (+0.1%) rounded out the top three. Some colour on the nature of flows across the S&P 500 and consequences…”algorithms and large speculators appear to be running the show today amid higher volumes in stock futures while cash trading is light. The S&P 500’s dance below the 100-DMA may test the resolve of investors in the days ahead. The S&P 500 closed below the 100-dma for a third consecutive session today. That’s something that has not happened since the pandemic. If buyers do not emerge, stocks are likely in store for more weakness. Moreover, the market is contending with long-and-wrong positioning among large speculators. They now hold the biggest net long in E-mini S&P 500 futures since mid-July.”
- Local stocks – the ASX 200 bounced back from Friday’s shellacking, led by Financials (+2.6%), REITS (+1.7%) and Discretionary (+1.7%). Apart from firmer leads from the US (on Friday), there were no real catalysts of note to explain the rebound – perhaps a decent chunk of the market things the recent sell-off is unwarranted. That’ll be short lived! While the ASX 200 has a relatively low exposure to tech / growth stocks, futures are nonetheless pointing to another tough day in the trenches, down -0.9%
- Offshore Credit – just two deals from a couple of Canadian banks, hey, for a total of US$4bn priced. Issuers remain a tad gun-shy amidst broader market volatility. The new issues came with 5 bps new issue concession with order books well below average at just 1.4x. In secondary markets, US corporate spreads drifted a couple of basis points wider. European markets were a little friskier with syndicate desks talking a big game for the week ahead.
- Local Credit – Sydney had a public holiday yesterday, which is where the vast majority of traders are based. Accordingly, no meaningful moves in spread to comment upon. With three of the four majors in reporting season black out mode, I’d be very surprised to see any flow from that corner of the market for at least another month now. Maybe something from the regionals, if we’re lucky.
- Bonds & Rates – quiet in local bond markets yesterday, likely on account of NSW having a public holiday. If memory serves, the state government a number of years ago moved Labour Day to the day after the NRL Grand Final in a bid to stave off absenteeism (aka hangovers). A practical solution, unlike the Victorian government’s decision to make the Friday before the AFL Grand Final a public holiday…again, no consideration for the commercial impact of the decision on local businesses. I wonder who was Premier when that was announced, hmmm…yep, captain of the fun police himself! Off my soap-box and back to bonds, US treasuries drifted higher overnight (yields), a theme we’ll likely witness today as well in local markets – all other things being equal.
- Macro – talking heads…”we have moved from a world in which central banks promise to keep policy rates lower for longer to one in which inflation is transitory for longer, as supply-chain disruptions continue. ‘Transitory for longer’ is a threat to asset prices from stocks to high yield to government bonds”. On US inflation, there is growing concern amongst Fed members that the higher prevailing inflation could take longer to subside than expected – according to the Fed’s James Bullard…“the acceleration could be creating a new pricing psychology where both businesses and consumers are getting used to rising prices, according to the St. Louis president, who said he’s concerned about the “relative freedom” with which businesses feel they can pass on increased costs” (Bloomberg). And that is my concern, price increases will become sticky. On broader global issues, “the WTO raised its projection for global trade growth in 2021 and 2022 to +10.8% and +4.7%, respectively, citing the resurgence of economic activity in the first half of this year. Should the 2021 forecast be met, it would mark the biggest year-over-year jump since 2010” (Bloomberg). Locally, the RBA meeting is today…should be a non-event.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907