Mutual Daily Mutterings
Quote of the day…
“Christmas at my house is always at least six or seven times more pleasant than anywhere else. We start drinking early. And while everyone else is seeing only one Santa Claus, we’ll be seeing six or seven.…” – W.C. Fields
Chart du jour… AU 3’s vs 10s…
Overview…”Omicron vs the Fed…”
- A bit of a rock ‘n roll week with markets displaying elevated day-to-day volatility. Two broad themes drove investor’s markets. The ongoing development and news flow around the evolving omicron COVID variant, and the noticeably hawkish turn from the Fed. One day the new variant was akin to the bubonic plague, and the next, well, it’s just a flesh wound. The net effect of these two growth headwinds was weaker stocks and a bull flattening of yield curves (where the back end falls faster than the front end). A weaker than expected US payrolls number on Friday night added to the softer sentiment.
- The VIX reached intra-day highs of 35.0 Friday before ending they day and week at 30.7, levels not seen before last week since January. Particularly unsettling was South Africa confirming that cases almost quadrupled from Tuesday as the omicron variant spreads, showing how contagious the new strain may be. Some solace in the fact is the continued evidence that symptoms appear mild for the vaccinated.
- ”Jerome Powell lobbed a truth bomb in the Senate this week when he finally abandoned the use of the word “transitory” to describe inflation. That fanned speculation — fuelled by FOMC members — that the central bank might accelerate tapering its bond purchases in order to give itself more flexibility to bring forward rate hikes. The Fed’s hawkish pivot provoked two simultaneous reactions in the market — speculation that rate hikes would come sooner, coupled almost immediately by concern the Fed would hike too far and have to cut.” (Bloomberg).
- Near term, the likelihood of a hawkish FOMC policy shift amidst the potential for a negative global growth shock from Omicron will continue to weigh on risk assets…at least for another week until we gain greater clarity around the efficacy of vaccines against the new variant. Most headlines over the weekend on omicron were positive – milder symptoms despite being more transmittable, and vaccines being effective, which should add some stability to risk markets. Still too early to rule a line through omicron as a risk variable though, tread warily.
- Note, no Morning Mutterings on Wednesday or Friday this week, I’m on the road marketing.
The Long Story….
- Offshore Stocks – volatility was the word of the week. Over the past seven sessions, daily moves in the S&P 500 (at close) have been greater then ±1.0% six times. Friday gone was the only day where the index didn’t gain or lose more than 1.0% on the day. The two somewhat diverging influences of omicron and a hawkish Fed are contributing to this volatility, but so is market liquidity, or lack thereof…”the upshot is that stock market liquidity can get a heck of a lot worse — and given the time of year, it probably will. That implies a greater market move for each dollar traded than we’ve seen recently. Given the gut-wrenching price action that’s already emerged in some popular stocks, it seems that investors might need some Dramamine before this is all said and done.” (Bloomberg). If you don’t know, Dramamine is used for treating motion sickness. On the day, just under two-thirds of stocks in the S&P 500 retreated and only three sectors gained ground, Staples (+1.4%), Utilities (+1.0%) and Healthcare (+0.3%). Discretionary (-1.8%), Tech (-1.7%) and Financials (-1.5%) did the damage on the downside. On the week, only Utilities (+1.0%) and REITS (+0.1%) gained ground, all others in the red. Telcos (-2.8%), Discretionary (-2.4%) and Financials (-2.0%) drove the losses.
- Local Stocks – modest gains on Friday, driven mainly by a rebound in financials (+1.0%), which was only a matter of time given the belting the banks have been receiving over the past couple of weeks…dip buyers had to step in at some stage. The ASX 200 Bank index is still down -10.4% from its peak in October with the majors coming in for some particularly brutal roughing up. WBC was hospitalised with its injuries, down -21.0% since the end of October. CBA has fared a little better, down -12.0%, while NAB (-7.3%) and ANZ (-6.2%) have fared best. The regionals haven’t necessarily escaped unscathed, far from it in fact. BEN (-23.3%) started its decline early, in August, while BOQ (-21.0%) commenced its fall around the same time as the majors. NIM pressure and heightened competition, plus valuations Beyond the banks, Energy (+1.6%) and Materials (+0.5%) contributed most on the upside on Friday. Healthcare (-1.7%) and Staples (-1.0%) were the main detractors. Over the week the index lost -0.5% with all bar Materials (+1.3%) and Financials (+0.6%) in the red. Main weekly detractors were Healthcare (-3.2%), Staples (-2.8%) and Tech (-2.5%). ASX 200 futures are up a touch, while US futures are in the red.
- Offshore Credit – “Blue-chip companies are expected to sell around $25bn of bonds in the US this week, even as sharp yield movements make it harder to find buyers some days. That could make this week similar to last. Corporations sold around $28bn of investment-grade bonds, but some opted on Monday to delay sales, and the primary market stopped entirely on Tuesday as traders assessed the latest developments on the omicron variant and hawkish comments from Fed Chair Powell. Average risk premiums on the Bloomberg US Investment Grade Index rose to the highest-level of 2021 last week, at 101 bps. For now, many investors who complained of expensive valuations all year see the backup in spreads as a buying opportunity.” (Bloomberg)
- Local Credit – not a lot to report for Friday itself, with volumes light with spreads largely unchanged on the day. Over the week, major bank senior spreads drifted wider with the Aug-26’s at +63 bps (+2 bps), and the Jan-25’s at +44 bps (+1 bps). A little friskier in the tier 2 space with spreads +3 – 4 bps wider on the week. The 2026 callable cohort is hovering around +145 – 148 bps and the 2025’s at +135 – 136 bps. The 2024’s are at +103 bps. As we close in on Christmas, liquidity will lighten up, so spreads could be susceptible to drifting wider again if the news flow takes a turn for the negative (over and above what’s already in the mix).
- Bonds & Rates – a solid rally in local markets on Friday, with a prevailing sense of caution because of the omicron variant. Despite continued inflation concerns, markets put in quite a show over the week with a -11 bps flattening of the 3s10s curve. We’ll likely see more flattening today on the back of similar leads in US markets on Friday night. On the week there was a noticeable 21 bps flattening of the curve with two-year yields +9 bps higher on the week, while ten-year yields fell -13 bps. These moves reflect the Fed’s acceptance that inflation was stickier than first thought (about 6 months behind the market), which will not only accelerate the likely pace of the tapering agenda, but also mo0ve forward the timing of rate hikes. The back end of the curve on the other hand is reflective of growth concerns around the omicron variant.
- Offshore Macro – US headline payrolls number came in below expectations on Friday (+210K vs +550K consensus), with the unemployment rate back at 4.2% (versus market forecast of 4.5%) this report was seen to be strong enough to keep the Fed on track to fasten bond tapering at the December FOMC meeting (on 16th December). Average hourly earnings fell to +0.3% vs +0.4% in October, or +4.8% YoY vs +4.9% YoY prior. Both figures were below consensus (+0.4% and +5.0% respectively). Week ahead, curtesy of NAB…”an important week where we should get the first updates around the severity of omicron and the efficacy of vaccines. If preliminary lab testing finds vaccines are effective, then expect the wariness around global growth to ease and for more nations to pivot towards encouraging vaccinations. As for the data, the top tier pieces are: US CPI and University of Michigan Consumer Sentiment and then in China Aggregate Financing and CPI/PPI . Finally the Bank of Canada meets. As for US CPI it is expected to remain punchy with core CPI expected at 4.9% YoY”
- Local Macro – borrowing NAB’s week ahead summary again here…”the RBA’s December meeting on Tuesday is the only item of note in the week ahead for Australia. Even that is likely to be a less-interesting-than-usual affair after Governor Lowe’s expansive remarks in mid -November. An optimistic tone is expected given the smaller than expected hit to Q3 GDP from recent lockdowns (-1.9% QoQ vs. the RBA’s expectations of -2.5% QoQ) and the subsequent sharp rebound (payrolls are 0.8% above pre-lockdown), though the omicron variant adds some uncertainty.”
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907