Mutual Daily Mutterings
Quote of the day…
“All I ask is the chance to prove that money cant make me happy” – Spike Milligan
“Double Red Bull…”
“And the music plays on…”
- Overview – no change to prevailing market themes – fiscal stimulus expectations amidst abundant market liquidity trump all concerns for now…except inflation. All up, a modest risk-on session across markets with some mixed signals across asset classes. Stocks inched higher generally, reaching new highs across several US indices, while bond yields were mixed – some up, some down. More fiscal stimulus is fuelling the market lust. Treasury Secretary Yellen helped the bull’s cause, commenting that the US can return to full-employment in 2022 if it enacts a robust enough relief package. She shrugged of any inflation concerns, which is a little concerning. Commodity prices were on board the risk trade, crude (Brent) is back above $60/bbl for the first time in two years, and is now over ↑200% above its 2020 lows. The vaccine rollout continues globally with vigour, with evidence suggesting it’s working. For you hipster investors who invest in or follow the ‘coins, Elon Musk pumped a solid $1.5bn of spare change into Bitcoin and announced that Tesla would accept the funny money as payment for cars. True story, I looked at Bitcoin a few years ago, when it was at $25.00 and thought about putting a lazy $1,000 into it for fits and giggles, as a hedge just in case it did work out. Apathy got in the way and I didn’t…that $1,000 today would be worth $1.8m…bugger!
- Offshore Stocks – US stocks recorded their sixth day of gains, with MTD gains of ↑5% – 6.5% across key indices, while European markets are equally buoyant. Overnight, it was a relatively broad-based rally, albeit modest in quantum with two-thirds of stocks closing higher. Tech, Energy and Financials contributed the bulk (~87%) of gains in the broader index. Low beta sectors, such as Health, REITS, and Utilities failed to join the party, closing marginally in the red, but were only modest headwinds for the index (S&P 500). Volatility ticked up a touch despite the favourable tone. Momentum and relative strength indicators are drifting closer to ‘overbought’ territory, with RSI’s at 64.5, although I’m not seeing any obstacles tactically to derail the current run of positive momentum. Just watch, markets will pull back tonight just to spite me!
- Local Stocks – modest gains in the local index, lagging regional markets on the day, although MTD we’re holding our own. It was a pretty narrow rally, a smidge over half of stocks up and Materials (↑0%) accounting for two-thirds (66%) of the ASX 200 gains. Consumer Discretionary (↑1.5%) was the next major contributor, accounting for 20% of gains. Similar to offshore markets overnight, yesterday saw REITS (↓1.0%) and Utilities (↓2.1%) in the red. Local reporting season today with a handful of REITS releasing interim results for the six months to December. I’m keen to see what the pandemic has done to occupancy rates, especially for the retailers and office. According to some commentary from Citi this morning “Sydney and Melbourne utilisation rates in Sydney and Melbourne remain low at 45% and 31% respectively in January”, with reference to a Property Council report.. So far just 20% of the ASX 200 has reported with aggregate sales growth down ↓1.7% HoH, while aggregate earnings are down ↓36%. Over the same period, i.e. six months to December, the ASX 200 gained around ↑11%. Despite the firmer offshore lead, futures are pointing to a modest drop at the open.
- Offshore Credit – a solid start to the week for US IG, US$6.7bn priced across six issuers. Books well covered and spreads continue to compress from launch to final pricing. Minimal movement in secondary spreads. In Europe, a similar volume of issuance with €6.8bn priced. Books were 2.6x covered and average spread tightening was a respectable ↓20 bps. Secondary spreads also doing very little. Not a lot happening in CDS markets, half a basis point tighter across CDX (↓5 bps to 50.5 bps) and MAIN (↓0.2 bps to 47.5 bps), despite little action on the day, CDS markets are at their three-month tights.
- Local Credit – really dull at the moment, but that’s good…right? Hopes of some primary action built yesterday with Defence Bank announcing a 10-NC-5 tier 2 deal, but upon looking at the size of the balance sheet, hopes faded….a token $15m deal. Seagull, meet hot chip! Once dealt and printed, that paper won’t see the light of day. According to the trading fraternity on the mean streets of Sydney, “credit markets remain solidly bid…the hunt for yield is relentless…and the lack of primary issuance is now evidently biting”. Another day, another day of no movement in major bank senior paper. The Jan-25’s are stuck in the mire at +24 bps, while the three-year part of the curve is sporting an un-appetising +18 bps. The grind tighter in tier 2 continued, a basis point here or there. The 2026 calls are pricing +146 – 149 bps and the 2025 calls are around +143 – 145 bps. Technicals will keep the market bid for a while, the only let up will come if we have a systemic shock of some kind.
- Bonds – the recent bear steepening kicked up a gear yesterday, pedal to the metal as they say. Local ten-year yields punched wider straight out of the gates, ↑5 bps within the first hour of trading and then drifting a few more over the day to be 1.27%, or ↑7 bps against Friday’s closed. Amongst the fourteen interest rate strategists tracked by Bloomberg, only two were remotely close to these levels (by the end of March). Beyond those two, the average was 1.00% – 1.10%, so a big miss by consensus…unless there is a decent rally over the next seven weeks. Although those rates were as at 28 January, so a week old. By year end the median consensus expectation is 1.25%, but there is a sizeable gap between the high (1.9%) and low (0.70%) point. Why the moves? Bond yields are being fuelled by the seemingly well entrenched reflation trade, and once that genie’s out of the bottle, he / she is very hard to contain. Overnight the sell-off (yields ↑) in US treasuries continued with the 10’s within a bee’s bum hair of 1.20% before pulling back to around 1.16%, still a smidge higher on the day. Further out the curve, the 30’s breached the 2.0% level briefly, levels not seen since before the pandemic.
Macro – markets are all bulled up on expectations of the next round of US fiscal stimulus, which is expected to have some hot-sauce on it (i.e. it be big). On the logistics of the stimulus package, and pilfering some commentary from my old alma-mater, CBA…”the Democrats seem set on passing the legislation through the Senate with a simple majority through ‘budget reconciliation’ rather than the usual route of 60 out of 100 votes. The main risk to the President’s package is a few Democrat senators (Manchin and Sinema) may want a smaller package. Even a package half the size of President Biden’s proposal would be very large, particularly on the heels of large package as recent as December. The bottom line is a large stimulus is highly likely to pass soon”
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907