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Mutual Daily Mutterings

Quote of the day…

 

“Don’t join the book burners.  Don’t thing you’re going to conceal faults by concealing evidence that they ever existed.  Don’t be afraid to go in to your library and read every book” – Dwight D. Eisenhower

 

 

 

 

Guest table of the day… commodities…

 

 

“Knowledge is power…


Source: random website

 

 

Overview…”waiting on US CPI…”

  • Stocks up, yields up…but no real change to the narrative with a very quiet news and data day.  Across US markets, tech firms and financials dragged markets higher with core indices rising +1.0% – 1.3%.  Cyclicals and small caps also played their part, signalling perhaps improving investor confidence that tightening monetary policy (a given) won’t derail growth.  Chinese state-backed funds stepped into their markets in a bid to staunch some of the blood letting with the market down -2.4% midway through the session.  By days end losses were modest at -0.6%.  Gotta love those ‘market’ forces…
  • There was no respite in the rout in bonds.  Treasuries extended their losses with 10-year yield hitting 1.97% intra-day, 18-month highs (1.96% as I type).  European bond, especially GILTS (+8 bps), copped another pasting.  Credit spreads continue to drift wider in offshore markets, while local spreads are stubbornly unchanged as technicals remain highly supportive over the near term. Oil was off (-2.0%), while gold advanced (+0.4%).
  • Where to from here for stocks…this snippet from JP Morgan suggests higher.  JPM strategists have by all accounts “identified a sure-fire sign to support their call that stock markets are poised to rally.  The buy signal is triggered when the VIX rises by more than 50% of its one-month moving average, which it last did Jan. 25. The indicator proved 100% accurate outside of recessions over the last three decades. The VIX signal has been triggered 21 times since 1990, with the S&P gaining an average 9% in the six months afterwards”. (Bloomberg).  As for credit direction, we’ll drift wider.
  • Talking heads…”the primary market trend appears higher aided by an economy on solid footing and resilient earnings…we are also encouraged that the market is already pricing in a great deal of rate hikes, that investor sentiment has reset sharply, and that valuations have pulled back.”
  • Another…”we had modest expectations for returns for stocks coming into the year — I don’t think that’s changed, but I think from here, we could certainly see a constructive recovery.” And “Every market, not just the equity market, is digesting a relatively rapid pivot from the Fed. I’d say it’s gone relatively well, all things considered.

 

The Long Story….

  • Offshore Stocks – the S&P 500 recovered some lost ground (+1.1%) overnight, led by Financials (+1.4%) and Materials (+1.4%), while dip-buying in some big tech names like Apple (+1.9%) and Microsoft (+1.2%) helped lift the NASDAQ.  Energy (-2.2%) dragged the chain on weaker oil prices (Brent down -2.0%).  The RUSSELL 2000 (small-caps) outperformed, rallying more than +1.5%, perhaps suggesting confidence about economic re-openings as the pandemic fades.  The rise in bond yields should support some sectors, specifically banks (+7.5%) and value stocks, amid generally solid earnings.  On US earnings season…”US stocks’ problem this earnings season isn’t that they aren’t beating estimates. The issue is the beats are fading, signalling the peak of the pandemic recovery is past.  With about 299 S&P 500 firms having reported, 4Q EPS is on track for a 6% beat against consensus estimates, according to Bank of America. The strong EPS beat is ahead of the historical average of 2.5% but it is the smallest since the pandemic, and 40% is due to Amazon.com, according to Bank of America, adding corporate sentiment further deteriorates to reach the lowest levels since 3Q20, signalling decelerating earnings growth ahead. S&P 500 EPS growth is projected to slow from almost +29.0% in 4Q21 to +5.6% in 1Q22 and +4.2% in 2Q22, according to Bloomberg Intelligence data.  Then there’s the inflation, supply chain and margin bogeymen hanging over stocks. Only 25% of companies missed consensus for net income margin, while 43% were below expectations on operating margin (by more than 1%), according to Bloomberg Intelligence. Both consumer sectors are on track for a y/y drop in operating margin.” (Bloomberg)
  • Local Stocks – a robust day for local stocks yesterday with 68% of ASX 200 stocks advancing and only two sectors really letting team-bullish down.  The broader index rose +1.1%, up +5.4% from YTD lows, but still -6.1% below YTD peaks.  REITS (-1.6%) and Staples (-0.8%) were the two class clowns who didn’t get the memo to advance.  The move lower in REITS is not surprising given the spike in local bond yields yesterday.  In an accounting sense, higher bond yields place downward pressure on property valuations, which in turn impact book profits (a very simplified explanation, but it’ll suffice for here and now).  Top of the pops were the two heavy hitters of the ASX 200, Materials (+2.2%) and Financials (+1.4%).  The two sectors accounted for the vast majority of the ASX 200’s gains.  BHP (+3.7%) and Fortescue (+3.3%) were the star performers within Materials, while within the Financials it was Magellan (+7.2%) experiencing some fleeting happiness after what has been the firm’s annus horribilis (management disruption).  The firm is still -68% below 2021 peak (and -78% below its 2020 peak).   Suncorp (+5.5%) gained strongly on the back of a good first half earnings announcement, and Macquarie (+3.9%) had a solid session following release of comments on its Q3 results. Futures are indicating a modest down day.
  • CBA released 1H’22 results this morning, reporting cash earnings (continuing ops) of $4.75bn (+23% YoY), a solid result and well ahead of estimates ($4.5bn).  CBA enjoyed strong lending growth at 1.2x – 1.7x system across its core businesses, with business lending performing best (+12.5% YoY).  Home lending grew +8.5%.  Deposit growth remains strong at +12.2% YoY, or 1.1x system, with deposit funding at 73% of total funding.  The NSFR printed at 115% (ex CLF and TFF) and LCR was 113% (ex CLF). Despite cheap funding from the TFF (admittedly rolled off mid-term), NIMs dropped 14 bps YoY, from 2.06% to 1.92% – driven mainly by a volume of customers switching to low margin fixed rate loans.  Loan impairment expenses dropped (-2 bps) and arrears continued to trend lower.  Capital dropped with CET1 of 11.8% (vs 12.6% in the pcp), but still well ahead of regulatory requirements.  The bank announced a $2bn on market buy-back, which will represent ~42 bps of capital.

 

 

  • Offshore credit – both cash and CDS, has widened YTD as investor worry around inflation and resulting central bank policy action builds.  The MAIN (EU index) index has risen from 48 bps at the end of 2021 to 66 bps, +19 bps or +40%, while the CDX (US Corp index) has risen +14 bps YTD, from 50 bps to 64 bps.  CDS has outperformed cash, with EU corporates and financials +26 – 27 bps wider (+28% – 54%), while US corporates and financials are +16 – 17 bps wider (~16% – 19%).  In a longer run context, CDS prices are at 16-month highs as investor hedging continues to gather steam… but still well below pandemic highs (120 – 160 bps).  There is also a very high correlation between US and EU cash spreads against their respective CDS indices, in the order of 89% – 92%.

 

EU Cash vs CDS…

Source: Bloomberg, Mutual Limited

US Cash vs CDS…

Source: Bloomberg, Mutual Limited

 

  • Local Credit – holding fast still, despite continued drifting wider offshore.  Traders…”a messy day with ongoing rates volatility provoking some erratic flow in local credit markets which continue to outperform offshore markets. Flows remain light with investors continuing to show a clear bias towards low beta / non bail-inable structures – i.e. bank issued bonds that can be converted to equity or written off should the issuer reach the point of non-viability).  We would expect this to persist though see opportunity for certain corporate issuance in the right tenor/price point.
  • I’ve undertaken the same analysis as above on local cash spreads and CDS.  The cash vs CDS relationship in local markets is weaker than offshore, with correlation of 70% – 72%, mainly because of technical differences.  Per the shape of the chart below, there are differing liquidity dynamics (note periods of minimal change in the iTraxx).  With regard to recent trends (YTD), we can see the local cash market has thus far ignored the mover wider in CDS.  The Aussie iTraxx is +11 bps higher YTD, whereas cash spreads are largely unchanged.  As touched on yesterday, resilience in cash spreads is likely driven by prevailing technicals – there are $15bn or thereabouts of maturities over the coming week, which will likely recycle back into secondary and provide spread support.  The move wider in AU FRN evidenced below, from around September, reflects the end of the RBA’s TFF and changes to CLF usage – both of which have altered ADI issuance dynamics over the near term.  Major bank senior paper closed unchanged, while tier continued to drift, +1 bps wider across select lines.

 


Source: Bloomberg, Mutual Limited

 

  • Bonds & Rates – a pretty brutal day for anyone long duration yesterday with a +8 – 14 bps spike in yields across the ACGB curve yesterday.  Curves bear steepened around +4 bps.  Semi’s fared a smidge better, a basis point if that, so a small consolation if that’s where the bulk of your govvie like exposures is.  Ten-year yields hit 2.125% (+13.5 bps), levels not seen since pre-pandemic days (cue nostalgic background music).  Three-year yields hit 1.55% (+8.5 bps), again, levels not seen since mid-2019. There’s probably another +50 – 70 bps to go before we’re well and truly back to pre-pandemic levels.  That’s not to suggest we’ll get there anytime soon with consensus estimates reflecting just +10 – 15 bps in ten-year yields out to the end of 2023.  There remain concerns around the impact of Inflation (and COVID) on the expected path of growth, which is keeping a lid on how far long end yields can really go.  But wait, there’s more…bonds continued to sell off in offshore markets overnight, on little news or data, with US treasuries adding another +4 bps to ten-year yields (1.96%), while European bonds were +4 – 8 bps higher, led by GILTS.  There are no longer any ‘negative yielding’ government bonds in Europe.  Not that it’s restrictive by any measure, ten-year BUNDS are still only yielding 0.26%.

 

 

  • Macro – very little to really talk about.  Main focus will be on tomorrow’s US CPI print, forecasts below:

 

 

  • Charts…

 

 

 

 

Click here to find the full PDF from our Chief Investment Officer’s daily market update.

 

Contact:

Scott Rundell, Chief Investment Officer

T: +61 3 8681 1907

E: Scott.Rundell@mutualltd.com.au

W: www.mutualltd.com.au

Mutual Limited Daily Update

Mutual Funds

MCTDF – Mutual Cash Fund
Gross running yield: 0.31%
MIF – Mutual Income Fund
Gross running yield: 1.37%
Yield to maturity: 1.00%
MCF – Mutual Credit Fund
Gross running yield: 2.73%
Yield to maturity: 1.90%
MHYF – Mutual High Yield Fund
Gross running yield: 5.04%
Yield to maturity: 4.23%