Mutual Daily Mutterings
Quote of the day…
“What did moths bump into before the electric light bulb was invented? Boy, the lightbulb really screwed the moth up didn’t it? Are there moths on their way to the sun now going, It’s gonna be worth it!.”…Bill Hicks
Chart du jour…oil vs US PCE Deflator
- A quiet night in offshore markets with US markets closed for Independence Day, and as the ‘Merican’s say, Happy “Hear-Fireworks-All-Day-And-Night-Set-Off-By-Drunk-People-You-Wouldn’t-Trust-With-A-Glow-Stick” Day. European markets (stocks) closed up a touch, while OATS, BUNDS, and GILTS yields sold-off a few basis points…they’re all European bonds in case you weren’t up with the lingo, French, German and British respectively. Locally, the ASX 200 scraped together a very modest gain, while bond yields continued to fall, reaching new three-month lows. Very quiet in credit markets, both globally and locally. S&P 500 futures ended little-changed after the benchmark index notched up another record on Friday.
- On the oil front, tensions between Saudi Arabia and the United Arab Emirates persist, which resulted in the OPEC meeting being abandoned, again, without a deal on production volumes reached. In the absence of an agreement OPEC and its allies will not increase production for August. And, Economics 101, when supply remains constant while demand increases, what happens, anyone? That’s right, prices rise. Demand growth is obviously being fuelled by rising demand as economies globally open up from the pandemic. Oil (Brent) prices are up +25% YTD, while production has only increased +3.9% YTD. The onset of the COVID pandemic resulted in crude production falling -26% and it has only partially regained lost ground with production still -19% below 2015 – 2019 averages.
- Of note yesterday in the corporate space, Sydney Airport (SYD) announced it had received an unsolicited, indicative takeover bid from a consortium of investors including IFM, QSuper and Global Infrastructure Management for A$8.25 p/share, a +42% premium to Friday’s close. Consequently, the stock surged over 30% yesterday. The Board is assessing the proposal. It won’t likely be a short process, there’ll be some wrangling, with the board already noting the indicative price is below where the airport was trading pre-COVID, i.e. between A$8.44 and A$8.92 in Q4 2019.
- RBA meeting today, strap in, QE and YCC in focus.
- Offshore Stocks – with the US shut, I’ll focus on the STOXX Europe 600, an index of Europe’s largest companies (600 of the in case it’s not obvious enough). On the day two-thirds of the index gained, with the index itself up +0.3%, buoyed mainly by headlines on corporate deals. Solid gains in Financials (+1.3%) were noted, along with modest gains across REITS (+0.6%) and Utilities (+0.6%). At the other end of the performance tables, Utilities (-1.1%), Healthcare (-0.5%) and Telco’s (-0.2%) were the under-performers on the day. Relative to the US markets, say the S&P 500, the STOXX 600 has underperformed over the past 12 months, up +24.2% vs +36.9%, but has outperformed the ASX 200 (+21.5%). Much of the difference in performance is likely a function of each index’s respective weight to Tech stocks. The S&P 500 is ~27% concentrated in Tech, while the STOXX and ASX 200 are +8.4% and +4.1% weighted respectively. The NASDAQ, very tech heavy, is up +43.4% over the past 12 months, while the Tech sector within the STOXX is up only +27.0% over the same period, and up +29.5% in the ASX 200. If you’re wondering why I usually focus on US markets each day, and spend very little on European markets. It’s mainly because of time differences. The US market close is closer to our open, so a more immediate guide on global risk sentiment, although correlation between the three indices is very close, ~92% – 93%. US futures fluctuated through the day and are mixed, with the DOW up a smidge, and the S&P 500 and NASDAQ down a smidge.
- Local stocks – very modest gains in the ASX 200 yesterday, on a slightly more subdued volume day than usual. It was virtually even-stevens between stocks that advanced and stocks that fell. And, roughly the same sector-wise. Industrials (+4.9%) were top of the pops on the back of the take-over bid lobbed at Sydney Airport (SYD) late on Friday with SYD closing +33.9% higher yesterday. Auckland Airport also benefited, caught in the jet-stream, up +5.5% yesterday. Elsewhere, Energy (+2.0%) continues to benefit from fractious OPEC talks, and subsequent upward pressure on crude. Utilities (+1.0%) rounded out the podium. At the other end of the spectrum, Tech (-1.0%), Discretionary (-0.9%) and Telcos (-0.8%) were stuck in the corner, staring gormlessly at the wall. Futures are up a touch.
- Offshore Credit – obviously nothing done in the land of the free, and home of the brave. In European markets, a modest day with three deals and €3.5bn priced. Nothing to add on spreads in secondary, muted moves.
- Local Credit – absolutely nothing to add, very little happening, flows reportedly light, and spreads pretty much unchanged.
- Bonds & Rates – not sure what really drove yesterday’s rally in local bonds, other than treasury yields dipped into the long weekend in the US on Friday. The outcome of the RBA July meeting today will be required viewing (published at 2:30pm). As per previous notes, no change in official rates priced in. An updated on the path and magnitude of QE is likely, with a common view being we’ll see a tapering of buying from $100bn (set to expire in September) down to $50bn over the subsequent six-months. Yield Curve Control is also likely to be tapered, with the bank not extending its buying from the Apr-24 (0.10%) maturing bond to the Nov-24 (0.38%) bond. Potential flies for the consensus ointment? The state of lockdown across some states, principally Sydney/NSW, and what this does for the path of recovery.
- Offshore Macro – very light, plenty of PMI data in Europe, but they were all final prints, so nothing materially new or market moving.
- Local Macro – some data out, but hardly market moving. First up, dwelling approvals fell -7.1% MoM in May, weaker than the market forecast of a -5.0% MoM decline. From NAB….”the detail was more in line with our thinking with clearer signs that the unwinding pull-forward associated with the Federal HomeBuilder scheme is starting to come through. Approvals remain at a very high level, up +52.7% YoY and +24% above their pre-pandemic peak. However, more steep declines can be expected as the unwind continues in coming months”. Also, the Melbourne Institute inflation gauge rose +0.4% MoM and +3.0% YoY to June. ANZ job ads grew at a much slower pace (only +3.0%), but there’s some base effects there – i.e. strong absolute gains already. Retail Sales came in much stronger than expectations, +0.4% MoM vs +0.1% MoM consensus.
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Scott Rundell, Chief Investment Officer
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