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Mutual Daily Mutterings


Quote of the day…

”I told my wife a man is like wine, he gets better with age.  She locked me in the cellar”…Rodney Dangerfield





“Stand With Ukraine…




“Boys and their toys…”




Overview…”evolving narrative…”

  • Moves: risk off … Stocks ↓, bond yields ↑, credit spreads ↑, volatility ↑ and oil ↑….
  • Another messy session in risk markets overnight as the conflict shows no sign of letting up.  Energy risk is beginning to dominate the narrative, which is in turn fuelling already elevated inflation concerns and then obviously monetary policy.   Oil surged to US$140/bbl in early overnight trading on the prospect of a ban on Russian oil supplies – a thought floated by the US, although European nations are loath to fire that bullet, particularly Germany given their reliance on Russian oil and gas.
  • A third round of talks between Russia and Ukraine went ahead, but nothing good came of it, which is not surprising.  Russia offered safe passage for civilians to escape the carnage, but the path was toward Russia and Belarus.  Yeah, nah!  Russian forces destroyed an atomic-physics lab under international safeguards in the Ukrainian city of Kharkiv…how stupid are these people?  Thankfully, monitors have detected no radiation leakage.
  • Talking heads….“the defence official also said Russia has committed almost 100% of its troops that were massed around Ukraine into the conflict. Russian attacks have increasingly hit civilian infrastructure, but the official, who spoke on condition of anonymity, said it was unclear whether such attacks were deliberate.”  Or what, incompetence?
  • Risk of Russian defaulting on its debt continued to grow.  Putin signed a decree allowing the government and companies to pay foreign creditors with roubles, seeking to stave off defaults while capital controls remain place.  May as well be Monopoly money…either way, I’m pretty sure that’ll trigger default anyway.  Russian sovereign CDS is quoted around 550 bps (+400 bps YTD).
  • Talking heads…”the longer oil prices and inflation remain elevated – and thereby threaten an early demise of this economic expansion and bull market – the more investors will trim their exposure to equities…investor uncertainty should elevate the angst.”  For what it’s worth, I spoke to a father of one of the kids my son plays water polo with over the weekend, he’s an energy trader.  He reckons oil will be back to ‘normal’ within six months as the supply and production complex adjust to the changing global conditions.


The Long Story….


  • The war impact so far….


Fixed Income…

Source: Bloomberg, Mutual Limited




Source: Bloomberg, Mutual Limited


Source: Bloomberg, Mutual Limited


  • Offshore Stocks – modest falls in European markets, with markets down -1.0% – 2.0% on average.  As for why so modest downside on the day, “sentiment began to turn around midday London time on reports that Russia would halt military action if the Ukraine would change its constitution to enshrine neutrality, acknowledge Crimea as a Russian territory and recognise the separatist regions. While many believe that the likelihood of this happening is low, it did result in a correction in equities and bonds.” (NAB).  US markets opened weaker, and stayed that way as US lawmakers across both sides of politics announced they “have a deal on a bill that would ban imports of Russian energy products and open the door to higher tariffs on other imports from Russian and Belarus” (Bloomberg).  By day’s end, the DOW and S&P 500 were down -2.4% and -2.9% respectively, while the NASDAQ was smacked even harder, down -3.6%.  Any stock with exposure to Europe is being belted, obviously on the back of the economic blow back from the war, specifically rising energy and food costs which will bite into household disposable income and therefore consumer spending.  Consumer discretionary stocks are the worst performers among S&P 500 sectors this year, dropping -4.6% on the day and shedding -20.2% YTD (vs -11.6% YTD for the broader index) – only Energy (+36.9% is up YTD).  Financials, Telcos, Materials, and Tech were all down over 3.0% on the day.  Only Utilities (+1.4%) and Energy (+1.1%) gained ground as 86% of the broader index retreated.
  • Local Stocks – the ASX 200 capitulated yesterday, dropping -1.0% with 77% of the index in the red.  Only Energy (+5.3%) and Materials (+1.0%) were able to advance.  At the bottom of the stack, we had Tech (-4.7%), Healthcare (-3.3%), and Telcos (-2.7%).  Not surprisingly given the bloodshed in offshore markets, futures are flashing red also, albeit moderately so at this stage.  Forward PE’s are down to 16.0x (vs 18.7x at the end of Dec-21), below pre-pandemic averages (16.1x).  Still too early to call markets ‘cheap’ given inflation and growth uncertainties.


Source: Bloomberg


  • Offshore credit – increased market volatility seems to be driving European corporate borrowers back into the arms of their banks, shunning markets for their near term liquidity / debt funding needs.  “Corporate lenders are back in the limelight after saving global firms by providing at least $430 billion of liquidity lines during the pandemic. This may not be the pandemic, and borrowing may not run as high as hundreds of billion dollars (yet), but the story is similar. War is affecting the whole supply chain.  European companies are turning to their corporate lenders, who typically hold debt till maturity and are thus not swayed by rate hikes or wider investors’ sentiment, for money to weather increases in material costs and energy prices. These are companies’ so-called relationship banks who are ready to disperse urgent funding to borrowers, provided the issuers still display sound financials and relatively high-grade ratings.” (Bloomberg).  Cash spreads are +4 – 11 bps wider across IG markets overnight, while CDS pricing is +2 – 5 bps higher across CDX and MAIN, while Senior Financials are +6 bps and Sub Financials are +15 bps higher.
  • Local Credit – traders…”headwinds persist and illiquidity prevails. We close having seen spreads leak wider on very little flow…financial curves closed steeper with the likelihood that CBA’s US $ print has reset new issuance expectations for the local market.  The flow underlying this move was light and we continue to see low levels of participation from both local and offshore investors.” From another trader…”as the tragedy in the Ukraine continues to unfold, flows and enquiry are dominated by client sellers. That said, we continue to see pockets of demand in the <3yr maturities as a place to park safe haven cash.”
  • Major bank senior 5-year is out to +80 bps (+3 bps), which is closing in on long-run averages (+80 – 90 bps) and generally levels we expected at the beginning of the year when formulating our forecasts.  While I’ve been right on direction, I can’t claim bragging rights for calling the catalyst.  War was not my base case, or my worse case scenario for that matter.  For the record, normalising issuance dynamics was my base case.  Major bank 3-year paper is +2 bps on the day, at +54 bps.  In the tier 2 space, similarly +3 bps wider across the board, albeit on little actual flow.  The 2026 callable cohort is quoted around +157 – 161 bps, while the 2025’s are +143 – 144 bps, and 2024’s at +108 bps, all up around +20 – 30 bps wider in the 2026’s from YTD lows.


Source: Bloomberg, Mutual Limited


  • Bonds & Rates – another volatile (ish) session in local bonds yesterday with ACGB bonds rallying 6 – 7 bps at one stage on initial safe haven demand, but then closed largely unchanged.  Nevertheless, the MOVE index (measure of bond volatility) is up 14% to start the week, reaching two-year highs.  I suspect with oil prices surging, inflation risk is beginning to bite hard and dominating sentiment.  Brent crude hit US$140/bbl at one stage overnight (+18.0% on the day), before pulling back to US$123/bbl (still up +4.6% on the day).  The inflationary consequences drove yields higher, trumping any safe-haven demand, with European bond markets +4 – 10 bps higher (yields), while US treasuries are +2 bps higher (yields).  On inflation pricing, “the US 10-year BEI briefly broke above the highs recorded back in 2005 (reaching an intra-session high of 2.79%) while the Eurozone 10-year BEI surged higher to a new record high.” (NAB).  Locally, markets are still pricing a Jul-Sep lift off for RBA rate hikes.


Source: Bloomberg


Source: Bloomberg



  • Macro – “data flow overnight was limited but the reality of the potential economic implications of the current situation in Europe was reflected in a Eurozone survey of economic confidence which fell sharply in March. The economic confidence index fell to -7, from +16.6 in February – the lowest reading since November 2020 – while the expectations index (measuring economic sentiment six months out) fell by 34.75pts to -20.8, its largest monthly fall on record.” (NAB).







Source: Bloomberg, Mutual Limited


Steak Knives…What Oil Prices Mean For The (US) Economy, by Cameron Crise

The new week kicks off with the oil market in focus, and it’s bound to kindle a few memories. Depending upon your age, the surge in crude hearkens back to 2008, 1990, or even the 1970s. In truth, the current backdrop resembles the earlier episodes much more than the 2008 experience, given the role of an exogenous supply shock in driving up the price.


The European economy, exposed as it is to both crude and natural gas prices, looks vulnerable to a negative growth shock — and perhaps a significant one. In the U.S., meanwhile, the rise in energy prices clearly is going to put a damper on household spending power … but for now it seems to fall well short of threatening significant growth consequences.


Perhaps Sunday evening’s high in crude prices will prove to be a blow-off top. Even if that’s the case, it’s hard to avoid the conclusion that financial markets and the global economy are confronting an energy shock. It remains to be seen just how widespread — and significant — the removal of Russian supply proves to be, and that uncertainty is likely to engender even more volatility in prices and expectations as the next few days unfold.


Western Europe’s reliance on external sources for most of its energy goods naturally leaves it particularly vulnerable to a price shock. Add in the financial consequences of sanctions for European banks (both directly via exposure to Russia, and indirectly via exposure to those exposed to Russia, as well as a paring-back of rate-hike expectations), and it’s small wonder that the euro has plunged over the last couple of weeks. It’s a somewhat ironic counterpoint to the oil rally of 2008, when higher crude prices begat a higher euro.


For better or for worse, the granularity and history of U.S. data on consumers’ exposure to energy prices is far superior than that for Europe. Given that the Fed is set to embark upon a tightening cycle next week, it is worth checking in to assess just how much the recent run-up in energy prices leaves the economy exposed.


On an aggregate basis, the U.S. economy is in a much, much better place than it has been during prior energy price rises. The shale boom and the consequent increase in oil production has eliminated the country’s trade deficit in petroleum products, rendering the economy more resilient to an oil price shock than it was during previous cycles.


That said, the benefits and costs are obviously not evenly distributed, with higher energy prices cutting into the real disposable income of all households. Meanwhile, the current rig count is less than a third of the peaks in 2008 and 2011, so it will take some time for supply to come online and contribute to growth.


Obviously, headlines of $4 gas is not going to do consumer confidence any good, and it poses another downside risk to the next UMich consumer sentiment reading. But paying that much for a gallon today is not quite the same as doing so 14 years ago, given the increase in wages and income over the intervening period.




The chart above shows household spending on energy goods and services as a percentage of wage income. The official data only goes through January, so I included an estimate for February and March based on recent oil price developments through Monday morning’s price levels. As you can see, there has been a sharp spike higher in households’ likely energy burdens, though ultimately that’s from an all-time low base of less than 5% of wages.


How likely is it that this sort of rise is going to lead to a recession? I had a look using a similar framework to my market-implied recession probability model, except this time I used the energy spending/wages ratio, and the y/y change in that metric. With only two related independent variables, it’s a pretty blunt approach, and the results are lumpy. Rather than a probability continuum like we see with the market-based model, the output here is binary. And sifting through the data, it looks like the model pegs energy spending of 10.5% of wages as the threshold that causes an energy-led recession.


Obviously, this is far from a perfect metric, and there are arguably false negatives via the early 1973-4 and 1990-91 recessions. That being said, in both of those cases energy spending as a percentage of wages was well above current estimated levels, and there were ancillary headwinds as well (such as the aftermath of the late-1980s S&L crisis.)


Still, it is reasonable to think that the rise in energy prices will represent a headwind to real consumption spending, one that will not be offset by increased energy production — particularly in the near term. It is going to be a thorny problem for a “nimble” Fed to navigate as it tries to assess the competing threats posed by a supply-driven negative income shock and an even further broadening of inflation pressures. Hindsight is always 20/20 of course, but it seems as if today’s Fed is starting to understand why previous central bank committees have been loathe to invite the inflation fox into the economic henhouse.



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Scott Rundell, Chief Investment Officer

T: +61 3 8681 1907





Mutual Limited Daily Update

Mutual Funds

MCTDF – Mutual Cash Fund
Gross running yield: 0.29%
MIF – Mutual Income Fund
Gross running yield: 1.45%
Yield to maturity: 1.15%
MCF – Mutual Credit Fund
Gross running yield: 2.73%
Yield to maturity: 2.00%
MHYF – Mutual High Yield Fund
Gross running yield: 5.33%
Yield to maturity: 4.72%