Mutual Daily Mutterings
Quote of the day…
“By the time a man realizes that his father was right, he has a son who thinks he’s wrong” – Charles Wadsworth
“Urgh, getting sea-sick now…”
- Overview – and the roller-coaster, well….rolls on. After tech stocks took a swift and brutal kick to the jubblies earlier in the week, they came back with interest overnight as dip-buyers poured into the breach and kept the tech-bull’s dreams alive. For today, the rotation from growth to value stocks did a complete and somewhat violent 180, while the rising yield trend abated for a session, in fact the trend in yields also reversed course with yields 3 – 7 bps lower globally. News flow was modest, some upgrades to OECD growth forecast (yawn), and that’s about it. Given the way markets have been over the past month, we could just as likely see a reverse of this reverse tomorrow…with a double summersault in the tuck position and a cherry on top. With no apparent catalysts, sectors or stocks that benefit from the stay-at-home economy surged after being left bruised and bloodied in the gutter earlier in the week. Rising vaccinations and the imminent approval (almost 100% likely) of the Democrat’s $1.9 trillion adrenaline shot to the economy dominated the overnight narrative trying to justify why the bulls are all bulled up again. Funnily enough, the same narrative had the bear’s all geared up for a massive spike in bond yields and resulting derailment of the post pandemic recovery…in turn casting doubt over valuations…either way, the market doesn’t know whether its Arthur or Martha! To quote Cameron Crise from Bloomberg “one of the challenges of navigating through a narrative-rich environment is to distinguish between noise and signal. Just because there are a lot of talking points doesn’t mean that all of them matter; that’s particularly the case when volatility is rising”
- Offshore Stocks – European stocks were less vigorous than the prior session, but they nevertheless added some cream on top their recent run of gains. US markets bounded out of bed full of fervour, rocketing to +2.0% gains before traders had finished their morning bagel and Grande Americano (truly a terrible cawffee!). It was a reasonably broad rally, with 61% of stocks up on the day and only two sectors in the red, the old-fashioned Energy (-1.3%) and equally old fashioned, Financials (-0.1%). The new, hip-cool-groovy-dude Tech stocks, which represent 27% of the S&P 500, gained + 4.0%, the dominant driver of the broader index gains on the day. Tech was ably supported by Discretionary (+4.4%), representing 12% of the index. Could be some retail FOMO money flows there, i.e. ooh, look, $1.9 trillion into the economy, people will use that to buy things (insert sarcasm emoji here). Never mind the fact that stimulus cheques have been a given for several months now, and should be baked into valuations. For all the hand-wringing and consternation around bond yields and the threat to the recovery, the S&P 500 is still just less than 1.0% below its all-time highs….and up +15.5% from pre-pandemic peaks.
- Local Stocks – local markets shrugged off the weaker lead, as narrow as it was, with most sectors up on the day and around 57% of the ASX 200 stocks gaining on the day. Utilities record the strongest gains, +1.2%, but at just 1.3% weighting in the index, did little for the broader market. Industrials (+1.1%), Discretionary (+1.0%) and Healthcare also put in some solid gains, but each individually represents between 6.7% and 9.5% of the index. Financials had the most impact, up +1.0%, and at 30% weighting in the index, is a heavy hitter. At the other end of the spectrum, the small tech sector performed worst, -1.9%, followed by Energy (-0.5%) and Materials (-0.1%), so only three sectors in the red. Valuations are still toppy with all the good stuff priced in and still not much of the potentially bad stuff. Gains in equities over coming months will be through picking the timing of sector rotations, value vs growth etc, in turn driven by your views on the pace of growth and in turn inflation.
- Offshore Credit – reasonably active in the EU IG space with €15.2bn priced with an average covered ratio of 2.6x and average spread compression of 17.5 bps. Again, green or ESG flavoured bonds attracting strong interest. In secondary, minimal change to EU spreads – ECB buying helping here. In US markets, primary remains active, but for now my eyes are drawn to the change in USD Financial spreads, which are +14 bps higher over the week, up from +70 bps to +83 bps, a significant underperformance to USD Corporates, which themselves have shown a widening bias also, +99 bps to +108 bps, or +9 bps (per Bloomberg indices). Interestingly, the move in high yield spreads over the same period has been relatively muted, +350 bps to +366 bps, up +16 bps…I say relatively muted, because in the context of relative moves, it was or is muted…for now. If yields continue to rise, HY could come under pressure…or it could just trigger more dip buyers. Really hard to gauge right here, right now. A quick comment on the Greensil saga that is playing out across markets – Mutual Limited has zero exposure to this company, or any of its ABS structures.
- Local Credit – to paraphrase the traders, liquidity is looking stretched, but not dysfunctional. My take is all the swings in the offshore narrative is causing some caution amongst credit investors. Also, realistically there isn’t a lot to buy in secondary, so investors are probably loath to trade. Flows have been light with a modest bent to selling, which has caused some modest spread widening. Not in major bank senior though, the curve remains moribund, while in tier 2 space some movement, modestly wider. Across the major bank tier 2 complex spreads are +2 bps, with the finger being pointed at a weaker credit environment in Asia as the culprit. A short-term blip most likely. Investors will have another $700m of cash to deploy today given the WBC Mar-26 call. Some primary in the Kangaroo space (that’s an offshore entity issuing a bond into A$) with Toronto Dominion (‘AA-/Aa3’) mandating banks for a 5-year TLAC deal (senior non-preferred). Initial guidance is at +65 bps, which is attractive on the surface, offering +25 bps pick-up to where a major bank 5-year would likely price here and now – TD and the local Big Four enjoy the same ratings. So why the premium? Firstly, the deal is TLAC eligible, so the underlying bonds are bail-in-able, which is worth a notch. Also, the deal is a Kangaroo, so the bonds are not repo-eligible, which changes the liquidity dynamics.
- Bonds & Rates – starting with US treasuries…a solid start to auction week the US$58bn sale of three-year notes, which drew the highest yield in a year at 0.355%, showing solid demand in the first such offering since last week’s disastrous 7-year auction. Ten-year yields fell -5 bps to 1.54%. The outlook for US 10-year is broadly bearish with some strategists predicting 2.0% by year end, although consensus is still at 1.66% (average) and a range of 1.0% – 2.2% across 50 interest rate punters. The range of forecasts highlight how divergent the views are on inflation. Looking at the more bearish views, the size, duration, technical patterns and momentum of the previous trends somewhat support view that there’s still risk to the upside on yields. Closer to home, the RBA announced a change to how the YCC bonds would be accessed in the official lending programs. In short, “the price for accessing the Apr 24 changed from 25 bps to 100 bps (more expensive to short the bond). The bond rallied in response and the bonds near it rallied too” (source: CBA Daily Wrap). Keep an eye out for RBA Guvna Lowe’s speech on “The Recovery, Investment and Monetary Policy” at 9am this morning.
- Macro – the OECD upgraded its growth forecasts overnight with the Biden/Democrat fiscal adrenaline shot expected to provide a boost not just to the US economy, but the world in general. Rough and dirty the US economy accounts for around a quarter of world GDP, so if the US economy is fit, fat and firing, then by extension the rest of the world would benefit. So, according to the OECD boffins, who in my mind have a habit of stating the obvious, and usually late in the process, world growth is now expected to reach pre-pandemic levels by mid-2021. So, world growth to be +5.6% in 2021 vs previous forecast of +4.2%. The US economy is expected to grow two-times more than the OECD originally expected, so +6.5%, while the EU will lag with +3.9% growth and China to surge ahead with +7.8%.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907