Close
About Funds Services SIV Market Updates Contact

Mutual Daily Mutterings

Quote of the day…

 

“What’s new, Norm?  Terrorist, Sam.  They’ve taken over my stomach and they’re demanding beer”.…Norm Peterson (Cheers)

 

 

 

 

Chart du jour…oil vs yields

 

 

“Fossil Fuels’ Meteoric Rise…


Source: www.hedgeye.com

 

 

First things first, apologies for lateness of today’s note.  While driving in this morning the power steering on my car packed it in at an in opportune moment, which saw me almost plough through some old duck’s immaculately manicured rose garden.

 

Overviewup, down, turn-around…”

  • Ooh, look…another non-sensical up day in stocks, and by more than 1.0% on average.  And yet, bond yields punched higher on inflation fears, in turn stoked by rising energy prices with oil up another +1.9% (+14.6% over the month).  Someone needs to remind meme-traders and arm-chair experts that inflation is not necessarily good for stocks either.  And, obviously in addition to persistent inflation fears, the state of the debt-ceiling in the US is looking uncertain, and as such a source of potential untold market mayhem.
  • Talking heads…“the risk this debt-ceiling showdown roils markets like it did in 2011 is underappreciated…we mean this from the perspective of brinkmanship by both Democrats and Republicans.”  We’ve been here before, and we’ve had many a street strategist state in the last that this time (in the past) was different, i.e. the debt ceiling really is a problem and the US could actually default on its debt obligations.  Is this time actually different?  Given the year or two we’ve had, why not!
  • As to the catalyst for last night’s move, not sure.  The offshore narrative is dragging out the old-time favourites such as “investors assessed the state of the economy” and for some reason they came away with a rosier outlook than they did during the prior session.  Assisting this view I guess, US ISM data came out better than expected, particularly services sector activity. It’s pretty thin to peg that as the cause of the >1.0% rally in stocks, especially given the raft of other headwinds blowing through markets.  But, that’s the world we’re in.
  • A different perspective…”while some parts of the stock market have declined more than others, we still have a ways to go before reaching an actual correction in the major stock indexes…it is impossible to get overly worried about these incredibly modest market declines, which are mostly concentrated in highly overpriced technology stocks.”  Impossible, hmmm, not so sure, I’ll just sit in the corner and worry if it’s all the same to you.
  • As I smash away at the keys like a chimpanzee writing Shakespeare, APRA has tabled new macro-prudential requirements.  ADI’s will be required to assess new borrowers’ ability to meet loan repayments at an interest rate that is at least 3.0% above the loan product rate vs previous requirement of 2.5%.  The aim being to curtail growth in household leverage.

 

Details….

  • Offshore Stocks – a broad rally, following on from Friday’s broad sell-off, in turn following a broad rally…you get the drift, markets are flapping around like a thunder box door in a hurricane.  Overnight we saw all core indices across the US and Europe advance strongly.  Within the S&P 500, almost three-quarters of stocks advanced and only two sectors were in the red, REITS (-0.9%) and Utilities (-0.2%).  At the top of the pile, we had Financials (+1.8%), buoyed by steepening curves, followed by Telcos (-1.6%) and Tech (+1.5%).  An up day always leaves you with a warm glow in the tum-tum, but given the day-on-day volatility over recent weeks, I’ll wait to see a stretch of up days before I break out the bubbly.  The market is just as likely give it all back tonight – and then we have US payrolls on Friday, a potential market mover.  T’would be a brave soul to make a strategic overweight allocation to equities under these conditions.
  • Local stocks – modest down day in local markets, weighed down initially by weak offshore leads the prior evening.  As with offshore markets, Tech (-3.0%) led the downers, followed by Telcos (-14.0%) and Discretionary (-0.9%).  Again, similar to offshore themes, Energy (+2.4%) continued to fight the good fight, assisted by Utilities (+0.7%) and Staples (+0.4%).  With oil up again overnight, and offshore energy stocks running rampant, we can expect Energy again to have a good one today.  Strong broad leads see futures up +0.5%.

 


(Source: Bloomberg)

 

  • Offshore Credit – we don’t play in offshore credit as we feel it introduces unnecessary volatility to our AUD focused clients.  Nevertheless, I’m an old and crusty credit guy, this is not my first rodeo.  Accordingly, I know full well that local credit markets are correlated to offshore markets.  So, with that in mind…”climbing Treasury yields are the primary threat that may saddle high-grade corporate bonds with an additional 2.0% of losses in the next three months”…according to Bloomberg research.  No arguments here – but would highlight, the bulk of offshore credit markets are fixed rate, so duration is your main bogey at the moment.   As for the path of yields, and I’m jumping ahead a bit here, “the 10-year Treasury yield could linger below 2.0% until the Fed starts to raise the fed funds rate. As the central bank’s asset-purchase taper approaches and the market reprices for a new supply/demand dynamic, Treasury yields may retest this year’s high in the fourth quarter”.  So that’s an additional 25 bps to 10-year yield from current levels, which would translate to “losses of roughly 1.65%-2.37% on the Bloomberg U.S. Corporate Bond Index on top of a year-to-date decline of 1.27% through September.“  Rising yields also represents an increase in the marginal cost of debt funding, which is fundamentally an earnings headwind – and in its own right a spread widening influence.  Within in this backdrop, FRN’s are a steady alternative.
  • Local Credit – traders…. “a quiet but constructive day in local credit markets with little reference made to the recent deterioration in global risk sentiment…”the timing, pricing and volume of forthcoming A$ primary will need to be carefully managed with sentiment likely to remain fragile.”  Speaking of primary, Bendigo & Adelaide Bank popped up with a tier 2 deal – quite fortuitously supporting my comments from yesterday’s daily note.  I’m sure that was front of mind when they made the call to pull the trigger.  BEN are looking to print the bog-standard 10-NC-5, with deal size to be around $150m, which is a guess based on past deal sizes and the fact they have a Dec-21 call coming up, $125m and a smaller $21m ASX-listed deal due to be called next month).  Comps…BEN has a Nov-25 call, $150m, which is pricing per Bloomberg at +141 bps.  Rule of thumb, we add +10 – 15 bps for a year’s extra tenor, which takes us to say +150 – 155 bps.  Cross checking this against the major tier 2 curve, NAB Nov-26 is at +130 bps, so +20 – 30 bps is the average spread between regionals and majors in tier 2 space, which gives us +150 – 160 bps.  So, initial guidance will likely be around +155 – 160 bps, with final pricing around +150 bps give or take a basis point or two.  I’ve seen some commentary indicating fair value around +165 bps.  Obviously as a buyer of this paper I wouldn’t object to that level, but I think strong technicals will override fair value.  Away from this deal, some modest drift wider in major bank senior, around the 2 and 3-year mark, +0.5 to +1.0 bps.  No movement in major bank tier 2.
  • Bonds & Rates – apologies, but the Bloomberg table below has this morning’s opens, with no movement noted.  On the day, the 3’s were +1.5 bps to 0.347% and the 10’s +2.5 bps to 1.515%Three-year yields are +15 bps higher over the past couple of weeks, back to levels last seen in July as the transitory inflation narrative loses supporters.  Similarly, ten-year yields have risen +31 bps over the same period, giving us a +117 bps 3s10s curve – four-month highs.  The curve peaked (30-year peak) in March, the height of the reflation trade, at +180 bps.  Can we get there again? If the transitory theme continues to jettison supporters and oil prices continue to climb, there’s a good chance it can, damn straight.

 

(Source: Bloomberg)

 

  • Macro – RBA meeting yesterday came and went, no surprises, carry on.

 

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: 0.26%
MIF – Mutual Income Fund
Gross running yield: 1.40%
Yield to maturity: 0.78%
MCF – Mutual Credit Fund
Gross running yield: 2.62%
Yield to maturity: 1.70%
MHYF – Mutual High Yield Fund
Gross running yield: 5.49%
Yield to maturity: 4.24%