Mutual Daily Mutterings
Quote of the day…
“When you’re in jail, a good friend will be trying to bail you out. A best friend will be in the cell next to you saying, ‘Damn, that was fun”…Groucho Marx
Chart du jour…ACGB’s vs RBA Inflation Target
Source: Bloomberg, Mutual Limited
Overview…”RBA to ponder, to taper or not to taper …”
- US Labor Day in the US, which marks the end of the US summer vacation season. Global stocks generally rose for a seventh day in a row, with some global indices printing new record highs. US equity-index futures rallied as more investors punted that the weaker jobs data in the US may delay the Fed’s tapering decision, and ergo keep rates that little bit more accommodative for that little longer. In Europe, the STOXX Europe 600 Index rose the most in six weeks, led by technology shares.
- In the absence of US treasuries trading, European bond yields rallied a smidge, with GILTS (UK) performing best, with a 2 bps rally in 10-year yields. OATS (France) were next best with a basis point rally, while BUNDs brought up the rear for the big three, just half a basis point lower.
- Talking heads…”expectations of a delay in Fed tapering as well as a new administration in Japan is supporting equity markets and we expect this to continue…buy-on-dip is as robust as ever, taking negative news such as US nonfarm payrolls as good news which is typical of an advanced carry trade.”
- COVID update…”the US marked the end of summer with a soaring death toll, full hospitals across the South and fights over mask mandates thanks to the spreading delta variant. About 18% of Americans 65 and over still aren’t fully vaccinated, versus about 5% in the UK, contributing to a per capita fatality rate twice as high as Britain’s since June. The surge comes as millions of people lost U. federal unemployment benefits, days after payrolls data showed hiring slowed dramatically in August” (Bloomberg).
- The main focus locally today will be the RBA meeting. The key point of debate will be around the decision to taper, or not to taper as currently planned. The original plan was to begin tapering this month, from $5bn down to $4bn, and then review the pace of purchases in November, once the impacts of lockdowns on the economy and fiscal position are likely to be clearer. The policy statement will be released at 2:30pm.
- Offshore Stocks – US markets closed, so the focus turns to European markets as the most immediate (in a time sense) source of sentiment lead. Looking at the Europe STOXX 600, which as the name might suggest, contains Europe’s 600 largest listed companies, rose +0.7% on the day, with a pretty broad rally – 72% of stocks advancing. Only two sectors failed to gain ground, namely REITS (-0.4%) and Utilities (-0.4%). At the top of the leader board, we had Tech (+1.5%), followed by Discretionary (+0.9%) and Telcos (+0.9%).
- Local stocks – the ASX 200 fell out of bed early yesterday, dropping -1.0% in the first hour of trading and then spent the rest of the day clawing its way back into some state of respectability. In the end, very modest gains. Tech (+1.2%) led the winners, followed by Discretionary (+0.9%) and Telcos (+0.8%). In the loser’s circle, or participants without medals, Energy (-1.7%) and Materials (-1.1%) did most of the damage, mainly as some big swingers went ex-dividend. Fortescue being one, dropping -10.9% or $7.0bn to reflect its $2.11/per share dividend, equal to $6.9bn. Falls in iron ore prices didn’t help their cause either. September is dividend month, so we’ll likely see some down days when the bigger stocks go ex-dividend, and weigh on broader performance. In this regard, the ASX 200 has retreated seven out of the last ten Septembers. Futures are pointing to modest upside in the ASX 200 this morning.
- Offshore Credit – nothing to add here.
- Local Credit – traders…”a very quiet day for secondary flow with the Labor Day holiday in the US and the RBA policy meeting tomorrow (today)…” And, that was pretty much it. No real movement of note in spreads, although some very modest selling in tier 2 paper was noted, but only the Macquarie 2026 calls budged, +1 bps to +143 bps. First time potential issuer, People’s Choice (BBB/Baa1), have put the feelers out for a modest tier 2 line with spread expectations pretty varied (within our four walls), as low as +235 – 240 bps, and as high as +250 – 260 bps. It’s a difficult part of the market to value in an RV sense because there is only a handful of lines and they rarely trade. Given the overall constructive liquidity and technical dynamics, however, the lower range is probably more likely. Note, People’s Choice are in talks with Heritage Building Society (HBS) for a merger. HBS has a Jun-25 callable line, just $50m, which is quoted at +255 bps (mid) on Bloomberg,
- Bonds & Rates – modest yield increases across the ACGB curve yesterday ahead of today’s RBA policy meeting. The debate, in the markets at least, and I suspect within the policy meeting itself, will be whether to stall planned tapering or forge ahead. I suspect the latter, although the analyst community is somewhat mixed in their views. If you skim through the macro data releases since the last RBA meeting, most of the data has been reasonably positive and reflective of a continuing recovery. Some pockets of lockdown related weakness, with retail sales consumer confidence softer, but that is to be expected given the circumstance. Unemployment fell again (4.6% vs 4.9% last), and the Q2 GDP print was robust (+9.6% YoY), albeit it slightly redundant as a gauge for the economy here and now. Private sector credit growth is showing signs of re-accelerating, +4.0% YoY vs 3.1% YoY a month earlier, and company profits knocked it out of the park (+7.1% QoQ vs -0.3% QoQ last). I doubt the RBA would have expected the lockdowns to have ended by now, so that state of affairs shouldn’t be too much of a surprise. Vaccination rates seem to be running to schedule, so given that mix of signals, I suspect tapering will push on. Since the last RBA meeting ACGB 2-year yields are +3 bps higher, and ACGB 10-year yields are +11 bps.
- Local Macro – nothing of significance outside the RBA meeting for the remainder of the week.
Click here to find the full PDF from our Chief Investment Officer’s daily market update.
Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907