Mutual Daily Mutterings
Quote of the day…
“Strange time for cats. First the dogs kept inside, now the humans. Must feel like they’ve won…” – COVID humour
Chart du jour…US reporting season, 80% done
Source: Bloomberg, Mutual Limited
“The place everyone is dying to get into…”
Overview…”welcome to cell block 6… ”
- In short, stocks up, yields up, oil up, gold down, and credit…meh, with all moves relatively modest. On the day investors balanced the remnants of the Q2 US reporting season (tailwind), US jobless claims (tailwind), and the presence of the Delta variant and its potential to kick economic growth in the soft and delicate lower regions (headwind). Jobless claims fell over the week, while continuing claims, which offer a more relevant picture of the US labour market, fell to a new pandemic low. Stock gains were broad based in what has been a choppy week, and again tech stocks have led the way.
- Talking heads…”this continues to be a favourable market for equities and will probably remain that way as long as the Fed stays accommodative and companies’ earnings continue to rebound…that being said, the market is up +17% YTD. We believe room to the upside is probably limited.” To this point, I repeat a comment from former colleague, boss and friend, James Wright, in yesterday’s AFR…”so with valuations full and uncertainty rising, perhaps it’s time to act a little more like credit professionals who focus their attention on identifying and avoiding the losers. In credit markets, you either get your capital back with a little extra interest or you get completely wiped out via a default.”. Time to bunker down.
- Fed officials were out and about last night again, Mary Daly this time. She was singing from the same hymn book as her peers in recent days, “tapering is coming (likely later this year, early next), followed by rate hikes (likely 2023-ish),” or words to that effect. Fed members are out and about preaching, telegraphing policy and the mechanisms in place to prevent any adverse market reaction when they do eventually pull the trigger. The OG (‘original gangster’) taper tantrum in 2013 was as much about the surprise element as it was the actually function of tapering. Markets thoroughly soiled the bed after then Fed Chair Ben Bernanke wondered aloud about the approaching time to taper. With so much leverage in the system at the moment, and other obvious fragilities, the Fed is keen to avoid another soiling of the market bed…too messy.
- Some observations on the current state of markets and my fear of a correction over the back half of 2021. COVID Delta hit Sydney mid-June, with the state heading into lockdown around June 26 – admittedly, not a hardcore lockdown, but a lockdown nonetheless. They’re still in lockdown, with Brisbane joining the club, and as of last night Victoria made it six of the best, Lockdowns 6.0. Consensus Q3 growth has been downgraded to a contraction as a consequence or these lockdowns. So far, the RBA is non-plussed, with a shrug of the shoulders and tapering timetables affirmed. The ASX 200 motors on, up +2.9% since the start of the Sydney lockdown and at all-time highs – and valuations stretched – YTD forward EPS upgrades have exceeded 10%. AU credit spreads also, tighter by -5 bps in floaters and -1 bp in fixed. This is in contrast to US and EU spreads, which are wider (see Chart du jour). Bond markets on the other hand, they’re worried, ACGB 10-year yield are around -42 bps lower over the same time frame. Historically, bond markets have been right more times than equity markets….just saying.
- Offshore Stocks – broad gains across offshore markets overnight, with stocks advancing steadily through the session. Both the DOW and NASDAQ posted +0.8% gains, outperforming the broader S&P 500, up +0.6%. European markets trailed these gains a touch, STOXX (+0.4%), but still up on the session. Within the S&P 500, gains were broad, with 70% of stocks advancing, and only two sectors sporting any injuries, Healthcare (-0.4%) and Materials (-0.1%). Leading the honour club, Energy (+1.3%) advanced the most, followed by Financials (+1.2%), and Utilities (+1.1%). The S&P 500, once again, closed at a new all-time high, and continues to show amazing resilience in the face of the spreading Delta variant (and associated economic baggage), increasing likelihood of easing monetary policy, peak growth expectations, and sky-high valuations. What could go wrong?
- Local stocks – with Victoria’s neck on the lockdown block (again) yesterday following a handful of new mystery cases, local stocks just went on their merry way, notching up yet another all-time high closing level. At 4pm it became official – locked down for another 7 days, although the rumour was floating around for several hours before hand, with no noticeable impact on sentiment other than resignation that we’re in a Ground Hog Day reboot. A shallow rally on the day, with winners vs losers on the day generally balance, although just four sectors closed in the red, and only two of them meaningfully, Materials (-1.3%) and Energy (-1.2%). At the other end of the tables, REITS (+1.0%), Discretionary (+0.8%), and Financials (+0.7%) shared the podium. With positive offshore leads, futures are up…just. Like its US counterpart, the ASX 200 closed at a new all-time high yesterday, and the local market has all the same headwinds as US (and EU) markets. Arguably we have one more, an inept vaccine rollout as we’re lagging pretty much every other top 30 OECD country…by a long way. But hey, it’s not a race, it’s the joy of participating that counts, right?
- Offshore Credit – not a lot to add today.
- Local Credit – focus was on primary yesterday with a new OCBC (Sydney Branch) green bond deal. From the traders…”the thirst for primary and ESG was blaringly evident in the final orderbook of +$2.25bn, even post a -6 bp tightening from IPG. In secondary, spreads closed unchanged across the credit spectrum with the yesterday’s interest mostly accounted for by primary switches and clients buying senior financials.” The strength of the deal is not that surprising, the volume of outstanding FRN’s on the market has fallen almost 20%, or c.$33bn since the beginning of 2020 given the absence of the majors and redemptions not being replaced.
- Bonds & Rates – very modest widening yesterday in recognition of the better risk tone, a theme that will likely continue today given offshore leads. Yields are nonetheless are at five-month lows. US treasury curves bear steepened overnight – back end increases faster than the front end – although moves were modest. Nothing additional or insightful to add here yet.
- Offshore Macro – given the Fed’s focus in labour markets, the main focus for markets over the next 24 hours will be US non-farm payrolls tonight. From CBA….”the consensus expects an +858K increase, though the ‘true’ consensus is likely much lower following Wednesday’s weak ADP employment report. We remind our readers the ADP is not a great indicator of monthly changes in non-farm payrolls. Jobless claims have tracked sideways recently – implying the recovery in the labour market may indeed be slowing”. Last night, jobless claims came in at 385K on the week, a smidge ahead of consensus at 383K. Importantly, continuing claims fell to 2,930K, a meaningful beat on consensus at 3,255K, and a post pandemic low.
- Local Macro – yesterday, we had payrolls data, and I’ve pilfered some commentary from WBC here…”the ABS Weekly Payrolls estimate of jobs fell 2.4% in the two weeks to 17 July, compared to a revised 0.2% decrease for fortnight ending 3 July (originally published as -1.0%). As expected, this outcome was a story of widespread lockdowns: the release overlapped the second and third weeks of the Greater Sydney lockdown; heightened restrictions across other parts of NSW; and the first two days of Victoria’s lockdown. School holidays were also in place in every state and territory during the reference period. The release did predate the suspension of construction activity in NSW (introduced July 19)”. Today, “the RBA Governor delivers his testimony to parliament today while the RBA’s quarterly Statement on Monetary Policy will present updated forecasts that account for the various state lockdowns (9.30am and 11.30am Sydney time). The lockdowns will force the RBA to cut their forecasts for economic activity and employment. But the RBA’s policy statement on Tuesday suggests the RBA will take a ‘glass half full’ spin to the new forecasts” (CBA)
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907