Mutual Daily Mutterings
Quote of the day…
”I do not know with what weapons World War III will be fought, but World War IV will be fought with sticks and stones”…Albert Einstein
“Over the Cuckoo’s Nest…”
“The good ol’ days…”
Overview…”calmer…it’s all relative…”
- Moves: risk mixed … Stocks ↔, bond yields ↑, credit spreads ↑, volatility ↑ and oil ↑….
- The war continues to rage on, and it was a choppy day in markets. European stocks oscillated between modest gains and losses, with some markets closing up (FTSE) and some down (STOXX)…but more down than up. The S&P 500 was down initially, as low as -1.0% at its worst, but also up as much as +1.8% at its most optimistic. The US announced a ban on Russian energy imports, while the UK announced a phasing out approach. Oil spiked initially, but then settled, still up on the day. US stocks whipsawed every which way but loose, finally ending the day in the red. Yields surged and spreads widened…eat, sleep, rave, repeat!
- The story of the night, or at least one of them, was LMI nickel pricing, which hit a record US$100K a ton, more than double on the back of a ‘mega’ short squeeze. “The extreme moves hit a niche leveraged product betting against nickel, wiping it out. Issuer WisdomTree Investments said the Nickel 3x Daily Short ETF, which aims to deliver three times the inverse performance of the commodity, will be redeemed.” (Bloomberg). Nickel is a key component in batteries, with demand expected to grow on the back of strong take up of electric vehicles.
- I’m hearing that a China billionaire punter had built up bearish positions of c.100,000 tones and is staring down the barrel of losses in the billions. Volatility in commodities markets is exerting even more pressure on funding markets, which has been reflected in the US$ FRA-OIS spread, which has gone from ~10 bps to ~33 bps rapidly. According to Credit Suisse’s rates gurus, this spread can go further, up to 50 bps, stating “today’s Russian supply crisis is much bigger, much more broad-based, and much more correlated than the 1973 OPEC supply crisis.” JPMorgan’s trading head also warned that a lot of clients are under “extreme stress.”
- Talking heads…”I don’t think the market’s ignoring anything at the moment, to be honest with you…in fact, everything is hyper-sensitive as to what may happen. It’s so fluid and we will see what happens. It’s really tough to predict day-to-day.” And…” we have a combination of soaring inflation and tightening financial conditions, and that is putting all of us in a bit of a bind, but it’s really putting the Fed into a bind…I think the risk is more tightening than expected rather than less.”
The Long Story….
- The war impact so far….
Source: Bloomberg, Mutual Limited
Source: Bloomberg, Mutual Limited
- Offshore Stocks –- a very volatile and choppy day in the trenches with European markets oscillating between gains and losses throughout the day. The Euro STOXX change lead two or three times, while the FTSE 100 changed at least four times. US markets had two distinct green periods, but by days end, the reds dominated with the DOW, S&P 500 and NASDAQ all surrendering late leads to close lower. Around 60% of the S&P 500 stocks lost ground, and all but two sectors closed in the red. The two battlers were Energy (+1.4%) and Discretionary (+0.1%). The worst of the worst was headed up by Staples (-2.6%), followed by Healthcare (-2.1%) and Utilities (-1.6%). The S&P 500 is now down -13.0% from its January peak with relative strength indicators slipping into the mid-30’s, inching closer to the magical ‘overbought’ indicator (<30). Given recent trends in volatility, markets are just as likely to drop another 5% as they are to rally 5%…it’s a crapshoot. Short of something changing on the geopolitical front, the next catalyst for meaningful change is any potential surprises out of the FOMC next week. Markets are pricing a +25 bps rate hike as a given, however, one cannot completely discount the possibility that the Fed hold’s fire because of the strains being placed upon financial conditions by the Russian vs Ukraine war?
- … so, are we there yet…“an equal-weight index of cyclicals (financials, energy, materials, industrials and consumer discretionary) has fallen to the lowest versus defensives (utilities, consumer staples and real estate) since November 2020. While the ratio is nowhere near the lows of the pandemic two years ago, it is yet another measure suggesting that US stocks may not have reached a bottom yet….so far in March, the S&P 500 has dropped, led by consumer discretionary. Besides energy, only utilities and real estate have risen as bond yields have dipped. Stocks may be back in the green but the uncertainty from the war and higher inflation has not seeped through enough to put cyclicals firmly back in charge.” (Bloomberg).
- …and how bad has it really bean…”last night I was kind of curious to see how the year-to-date drop in the U.S. benchmark index stacks up versus history (Dow from 1900-1927, SPX thereafter), an so ran the numbers. Lo and behold, through 44 trading days the 11.9% was the second-worst over the 123-year observation period, trailing just 2009. The subsequent bounce observed that year perhaps offers some hope, but the backdrops remain very different in terms of the economy, policy, and indeed valuations.” (Cameron Crise, Bloomberg)
- Local Stocks – a down day for local markets with two-thirds of the ASX 200 closing in the red, and below 7000 for the third time this year. The broader index lost -0.8% on the day, driven principally by Energy (-3.6%) and Materials (-3.3%), with the latter doing the vast majority of damage by virtue of its weighting within the index, 26% vs 4% for Energy. Healthcare (+1.9%) and Staples (+1.7%) did their best to soften the blow, but collectively they only account for 14% of the index, so were always just whistling in the breeze. On a rolling 12-month basis the ASX 200 is up +3.1%, well ahead of the MSCI Asia-Pac Index, which has lost -14.6% over the same period…yay us! YTD however, performance is pretty grim for obvious reasons. Futures are up a smidge.
- Offshore credit – more of the same, spreads continuing to drift wider in cash secondary, while CDS pricing narrowed in line with the sporadic better tone in stocks. In a bid to avoid pricing carnage in senior cash markets, it appears some of the majors have turned to the European / UK covered market. This market is the major bank’s “break glass in case of market dysfunction” source of funding. ANZ printed €1.75bn 3Y, swapping back at BBSW+63 bps, while WBC did £700m 4Y at BBSW+68 bps…still more expensive than A$ senior paper (below), with 3Y paper at +55 bps, although primary would likely come much wider than that.
- Local Credit – a tough day in the trenches yesterday with offshore pressures continuing to sap investor confidence. Traders…”widespread dislocation across secondary markets as rational price formulation has quickly been replaced with risk pricing reserved for top tier accounts. The customary retreat by fair weather market makers has left just a few price makers standing with a fair probability that we are running similar positions. Liquidity conditions likely to remain constrained with increasingly elevated price dispersion.” Better selling in major bank senior paper reported, which saw spreads drift wider again, 5Y is out another +2 bps to +82 bps, while the 3Y’s are +1 bps wider at +55 bps. I can envisage 5Y major bank senior paper pricing in the 90’s if nothing changes on the geopolitical front over the immediate future. In the tier 2 space, more of the same with 2026 callables +1 – 3 bps wider, out to +161 – 163 bps. Any new primary, 5-year callable, would have to come with initial guidance around +185 – 195 bps I’m thinking. The 2025 calls were smacked around a bit, +5 – 7 bps wider, now pricing +146 – 147 bps. A tough time to be long fixed rate credit, with spreads widening and underlying yields rising. The Bloomberg AusBond Credit (Fixed) index lost -0.47% yesterday alone, and is down -1.63% YTD, marginally outperforming the ACGB Index, which fell -0.56% yesterday and is -2.33% YTD. The Bloomberg AusBond Credit (FRN) index lost just -0.02% yesterday and is +0.01% YTD….I know which pool I’d rather be swimming in.
- Where are we in a historical context? Within the AusBond Credit Fixed index, which is sitting at +70 bps, is back to where it was just over a year ago, January 2021. At +70 bps it’s still -10 bps inside its pre-pandemic levels. In the floating space, the AusBond Credit FRN Index is hovering around +51 bps, which is also around -10 bps inside pre-pandemic levels. The long run average (2014 – now) for the fixed and floating index is +94 bps and +78 bps respectively, so still scope to widen if you’re a ‘mean-reversionist’ (note, that is a made-up word).
Source: Bloomberg, Mutual Limited
- Bonds & Rates – bond markets seem to be looking beyond the Russian vs Ukraine conflict itself and focusing on the greater inflation risk that it’s kicking off. Oil continues to surge, up another +4.8% overnight, up to levels not seen in over ten years. Wheat futures are surging also, and commodity prices in general are up over +20% over the past month because of supply chain disruptions. Add to the mix the strong need, and apparent will amongst the likes of the Fed to begin hiking rates, and it looks to be only one way for yields. Local bond yields rose +9 – 10 bps yesterday with the 10’s up to 2.24% after hitting a war low of 2.08%. The front of the curve continues to ‘normalise’, although the drivers are not necessarily normal. Bank Bill Swap Rates rose another +2 bps yesterday to 0.14%, double what it was at the beginning of the year. Overnight we saw a solid sell-off in European yields, up +9 – 17 bps across BUNDs, OATs and GILTs (10Y), which was fuelled by both inflationary concerns, but also chatter around the EU “mulling a plan” to jointly issue a shed load of bonds to fund energy and defence spending in a bid to counter the fallout from Russia’s imperialism. Horse. Gate. Bolted. US treasury yields were on the tear also, +8 bps in the 2’s and 10’s. We’ll drift higher again in yields today.
- Macro – “AUSTRALIA FEB. BUSINESS CONDITIONS RISE TO +9: NAB, up 7 pts Strong numbers. Consistent with above trend growth – reopening providing momentum. *AUSTRALIA FEB. BUSINESS CONFIDENCE RISES TO 13: NAB, up 8 pts. Employment up 9 to +8 so looks like momentum for a move to 4% unemployment & below. Costs also rising for labour, but slower pace for purchase costs although still v elevated. Shows economic momentum before the global crisis.” (BAML).
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907