Mutual Daily Mutterings
Quote of the day…
“The nine most terrifying words in the English language are “I’m from the government, and I’m here to help.”…Ronald Reagan
Chart du jour…ACGB’s
Source: Bloomberg, Mutual Limited
Overview…”RBA takes an each way bet …”
- Global stocks slipped amid renewed worries that the economic recovery was peaking. Friday’s weaker than expected US non-farm payrolls continued to be digested, contributing to a growing sense of unease. And there won’t be much by way of data this week to ease the hearts and minds of investors about the road ahead (Q3), with growth estimates already having been reduced recently. Add to this the still accelerating Delta variant cases in the US, and there is scope for further easing in stock levels and risk assets in general. I’m still calling a -10% easing at some stage to stocks. European markets also slipped, in this instance on speculation that euro-zone policy wonks maybe preparing to roll back stimulus measures (monetary).
- Narrative du jour…”Mega-tech is emerging as the big winner in the flight-to-growth as delays in the pandemic and economic recovery make investors look for some sure things. FANG and friends have room to run, even if profit and analyst expectations don’t quite match up”.
- Talking heads…”the delta variant concerns are weighing down on overall third-quarter growth…the next couple of weeks are going to be pretty rocky. We’re seeing investors become more-picky with their stocks not only because of the Delta concern but also because of fading fiscal stimulus, legislative policies and an overall slowing recovery in some sectors.”
- Bond yields pushed higher overnight, with this narrative via Bloomberg…”ten-year Treasury yields rose to the highest since July 14 ahead of the sale of US$120bn of debt starting Tuesday. German 10-year yields surged to a seven-week high before Wednesday’s sale of a new green security. And in the U.K., benchmark yields rose to their highest since June after the government sold four- and 50-year debt in an auction”.
- Yesterday, the RBA stayed the course on its tapering plans, putting $1bn less a week into bond markets (from $5bn down to $4bn a week), but extending its planned review from November to February on account of the lingering lockdown / Delta.
- Offshore Stocks – most offshore markets eased off the throttle overnight as growth concerns linger. NASDAQ, the home of the new-era safe haven stocks, was the only sector to advance (+0.1%), and only just with seven out of every ten stocks in that index actually declining. Apple, Amazon and Netflix did the heavy lifting for the NASDAQ. Within the S&P 500 it was a pretty broad-based pull-back with over 80% of stocks retreating, led by Industrials (-1.8%), Utilities (-1.4%) and REITS (-1.1%). Only Telcos (+0.5%) and Discretionary (+0.4%) put up any real fight.
- Local stocks – the ASX 200 spent most of the day yesterday underwater, down -0.5% at its worst, but as the day wore on the index clawed its way back to the surface and closed with the smallest of small gains (+0.02%). Within the mix of intra-day movement, the index dropped -0.2% within minutes of the RBA policy meeting outcome, but then as the market had time to digest the statement, the climb to the surface commenced. Around-half the index gained, so a very narrow rally, if you can really call it that. More sectors gained (7) than retreated (4), led by Telcos (+0.9%), Energy (+0.8%), and Healthcare (+0.7%), while at the other end of the spectrum, Materials (-0.8%) was under the pump again despite iron ore prices halting their recent decline (-33% since mid-July). Staples (-0.2%) and REITS (-0.1%) had modest down days.
- Offshore Credit – US IG primary markets roared back to life during the historically busy post-Labor Day session. At least 21 companies came to the market, making it one of the busiest days ever by deal count, with Caterpillar, Home Depot and the financing arm of American Honda among those marketing sales. The session is expected to account for half of the $40 billion to $45 billion of high-grade volume syndicate desks are calling for this week.
- Local Credit – trader talk…”RBA the focus for many and yesterday’s update is generally favourable for credit markets. Local primary markets will resume unhindered and we expect demand to remain robust. The warm reception given to aforementioned primary issuance has provided a very welcome improvement in secondary market flows and liquidity conditions, though we fear that this may be short lived.” Some modest grinding tighter in major bank senior paper, with the new NAB Aug-26 in half a basis point to +38 bps and the Jan-25’s also in half a basis point to +25 bps. In the tier 2 space, NAB issued a £600m line, which priced at GILTS+140 bps, with a coupon of 1.70%, which per my calculations swaps back at around BBSW+125 bps. CBA’s most recent tier 2 deal, an Aug-26 call, is quoted at +127 bps in secondary, which would suggest a new NAB deal in A$ would price somewhere around +132 – 135 bps (roughly).
- Bonds & Rates – little done yesterday in local markets on an end-to-end basis, yields largely unchanged despite the RBA affirming its tapering plans (suggesting that’s what markets had expected). Yields did lift intra-day, by around +3 bps, but closed unchanged in the end. Consensus outlook for bonds (1o-year) is for yields to end the quarter at 1.28% (+1.5bps to closing levels) and 1.55% by year end (+29 bps). In US treasuries, despite Friday’s weaker than expected nonfarm payrolls, which implies or suggests potential prolonged monetary accommodation, ten-year yields rose to the highest levels since July 14. This likely reflective of US$120bn of new debt supply kicking off last night. Consensus estimates for 10-year treasuries are for yields to hit 1.47% by month end (+10 bps to last close) and 1.64% by year end (+27 bps).
- Offshore Macro – some data yesterday indicated that Chinese exports and imports had grown faster than expected through August, easing some concerns that lingering (and growing) Delta cases were delaying economic re-openings and creating global supply-chain bottlenecks. But, one drink doesn’t make a summer, so we’ll see if this is in fact a trend in coming months. Investors remain nervous over the prospects for a growth slowdown and tapering of support outside the US, especially in Europe, which could cause some wobbles across risk assets.
- Local Macro – the main event yesterday was the RBA Board meeting, which resulted in no change to RBA’s tapering plans as expected (and no change to cash rates). The board extended their commitment to buy bonds at a pace of $A4bn per week until February 2022 (the Board had in July committed to buying bonds at a pace of $A4bn per week from early September to mid November 2021 and this commitment was reaffirmed at the August Board meeting). So, the tapering will go ahead, but they won’t review it until February. A hawkish and dovish tilt all in one. With lockdowns lingering and likely not to end until November (i.e. greater freedoms), it makes sense to push any review beyond that date…per the statement, the new review date “reflects the delay in the economic recovery and the increased uncertainty associated with the Delta outbreak”. On the impact of lockdowns, “the Delta outbreak is expected to delay, but not derail, the recovery.”
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Scott Rundell, Chief Investment Officer
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