Mutual Daily Mutterings
Quote of the day…
“I could use a drink. A pint of Bourbon will do…” – Cary Grant in “North by Northwest”
Periodic spread changes…
Source: Bloomberg, Mutual Limited
“Can’t bear it…”
- Overview – a modest risk on session with stocks (indices) up across most markets, although volumes were below average (↓20%) while bond yields fell. Fed chair, Jerome Powell, spoke to a virtual IMF panel, upon which he expressed his views that rising COVID infection rates were more of a concern than rising prices (inflation), and that “the recovery here remains uneven and incomplete.” The old bad news is good news play, i.e. it implies the punch bowl will remained stocked for the foreseeable future, allowing the party to kick on that little bit longer. Powell is of the view that the world won’t be able to fully resume economic activity until the virus is controlled everywhere, that’s not a short-term fix. Markets have latched onto Powell’s relativity comments, i.e. infection rates vs inflation rates, with market sensitivity to rising infection rates seemingly numb. Talking heads….“many economists and market participants have been worried about a surge in inflation, but the Fed doesn’t seem to be….so far, it seems we are in a goldilocks situation. Expect US stocks to continue outperforming non-US stocks at least in the short term, equities to outperform bonds and, if corporate earnings surprise to the upside, this would pave the way for more record highs”
- Offshore Stocks – relative strength indicators (RSI) for the S&P 500 are on the cusp of ‘overbought’ territory, 69.6 (vs 70.0 for ‘overbought’) after a strong couple of weeks (+7.5% since the beginning of March), likely underpinned by announced US fiscal stimulus packages, with the associated (proposed) corporate tax hikes largely shrugged off, and further jaw-boning from the Fed that it will keep the monetary party going. I read the term ‘TINA’ the other day, it’s like FOMO (‘fear of missing out’) or BTD (‘buy the dip’), and with regard to stocks, it is ‘there is no alternative’. With all the fuel in the world being thrown into the US economy, and ergo the global economy, risk appetite is pretty buoyant…but that buoyancy is set to be tested next week with US CPI data (for March) due out on the 13th Consensus is expected a +2.5% YoY vs +1.7% YoY a month earlier. Obviously, any print north of consensus could spook investors, especially coming on the tail of a strong runup in prices. Any-hoo, back to last night…new all time, ding-dong, ring the bell, highs for the S&P 500, although gains on the session were modest and reasonably narrow. While half of the index constituents closed up on the session, half also closed in the red. Tech (+1.4%) drop the bus for the bulls, following distantly by Discretionary (+0.5%) and Industrials (+0.2%), but then the gainers fell away. Still only five sectors in the red, and only two of those with any venom, Energy (-1.45%) and REITS (-0.6%). Futures are showing modest gains.
- Local stocks – US equity futures gained through the local trading session, along with European stocks as evidence of the Fed’s commitment to supportive policy helped boost sentiment…apparently, that’s the narrative du jour. Locally, a solid day in the trenches with the ASX 200 closing a bee’s bum fluff shy of 7,000. Three stocks rose for each stock down and all sectors closed sporting a greenish tinge. Materials (+1.8%), Telcos (+1.2%), and Financials (+1.1%) ruled the top of the leader board, while REITS (+0.3%), Industrials (+0.3%) and Utilities (+0.04%) brought up the rear.
- Offshore Credit – a muted day for primary activity, just three issuers and four tranches for US$2.3bn priced. Books were 2.9x, with no new issuance concession, while spread compression was a healthy -32 bps vs YTD average of -24 bps and 2020 average of -30 bps. A little busier in European IG markets, just, with €4bn priced across seven issuers. Books well covered at 3.6x and spread compression a little lighter than recent averages, -14 bps. Only modest movement in secondary spreads (IG). In CDS, both the MAIN and CDX closed -0.8 bps tighter.
- Local Credit – trader’s commentary…”finally, a pick-up in flows with both domestics and offshore accounts active. The ongoing redemption schedule in April, particularly in financials but also Semis, will surely see some redemption proceeds redeployed and we think that this was the case today. This powerful technical can persist in the near term, despite anticipated A$ primary issuance…major bank flows remain light, yet we continue to see some sporadic buying of ‘long’ end fixed paper, this time by offshore real money.” The major bank Jan-25’s (senior) tightened a basis point to +32 bps, while across the tier 2 space a handful of lines edged a basis point wider, including the NAB-26 call (+134bps), WBC-26 (+133 bps), CBA-25 (+128bps), while the MacBank-25’s tightened a basis point to +149 bps. The rest of the complex closed unchanged.
- Bonds & Rates – not a lot happening in local bonds yesterday, minimal moves in yields. That’ll likely change today if ‘normal’ correlations play out with US treasury curves flattening overnight. Yields on US 10’s dropped -5 bps to 1.62%, while across in Europe yields dropped 2 – 4bps, again in the 10-year part of the curve. Talking heads…”the doves are in control, and today’s cautious comments from Fed Chair Powell delivered another reiteration of their ultra-accommodative stance.” Over the past week curves have flattened around -8 bps (2s10s), while much of the action was in the 5 and 7-year part of the curve, with yields 12 – 14 bps lower. Movements reflect the ongoing debate around growth benefits vs inflationary risks, and the broader question of whether the Fed has a) the will power and b) the capability to manage the coming inflationary backdrop, in whatever form it takes. ACGB’s have flattened over the week also, although only -5 bps in the 3s10s, with the flattening more universal – ie a parallel shift rather than the 5-7 year kick in US treasuries.
- Macro – some US labour data out last night and for a second week, the data went the wrong way (vs expectations), US jobless claims rose to 744K from an upwardly revised 728K the week before, “signalling hiccups in the labour markets resuscitation”. California and New York led states with the biggest increases. Continuing claims edged down less than expected, coming in at 3.73m versus a revised 3.75m. Locally, the RBA releases the latest Financial Stability Review.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907