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Mutual Daily Mutterings


Quote of the day…


“Political language is designed to make lies sound truthful and murder respectable” – George Orwell






“The Fourth Circle (Turning)




“Word Of The Day…”





  • Moves: risk off, off, off!… stocks , bond yields , curve , credit spreads , volatility and oil ….
  • Markets are still digesting whether the Fed can orchestrate a soft landing (avoid a recession) with its inflation busting policy actions.  No real data or news of note last night, instead investors continue to navigate a perfect storm of inflation risk, supply chain disruptions, war, China’s COVID lockdowns, which is only exacerbating supply chain issues, and lastly tightening monetary conditions.  All headwinds for risk appetite and valuations, and nary a tailwind to be found.  Concerns surrounding Russia doing something stupid (stupider?) on their Victory Day (yesterday) proved unnecessary.
  • The S&P 500, and peer indices, continue to make lower lows, a clear sign of a downtrend with the index now down -16.8% YTD.  Assuming the Fed’s desire to get the inflation genie back in the 2.0% bottle, and assume further that global supply constraints do not improve, lower valuations is what has to happen.  Oil plunged on growth (and therefore demand) concerns.
  • In his morning note, David Rosenberg’s he asked: “how bad can it get?”  The average trough price-to-earnings multiple back to 1950 is 13.0x, “which means we still have a lot of work to do.”  The S&P 500 is currently trading around 17.5x.  Talking heads…”the big question is if inflation can head below 3% without the Fed causing a recession.  Until that question is answered, financial conditions are biased tighter, and markets will struggle despite oversold conditions.
  • Bonds rallied (yields lower) and steepened – which is what I’ve been expecting for a few weeks now.  But, let’s not pop the bubbly just yet.  We haven’t reached the point of thumping the table with rabid conviction that yields have peaked.  “The US curve might have steepened but it arguably wasn’t with any help from Fed officials; Atlanta Fed President Bostic said several 50bp hikes were possible, but he didn’t see 75bp moves as likely.  There’s very slightly more than 50bp of tightening priced for the Fed’s June meeting and 45bp for July.” (NAB).
  • Another tough day for local fixed income markets yesterday.  Month to date and year to date losses are mounting, although offshore leads today should staunch the bleeding for a moment.  The ACGB index is down -2.34% MTD and -9.83% YTD, followed by Semi’s (-2.10% & -9.52%), and fixed credit (-1.31% & -7.14%).  Floating rate credit continues to outperform, -0.06% and -0.39% respectively.


The Long Story….

  • Offshore Stocks – carnage across the board, but with no new catalyst to drive it…the same stuff that has been weighing on investor’s minds for a few weeks now, just again it takes time for investors to digest, analyse, decide, act.  The DOW dusted -2.0%, the S&P 500 gave back -3.2%, and the NASDAQ puked -4.3%.  The latter is down -27.6% YTD.  European bourses were down more than -2.0% also overnight.  Within the S&P 500 some 86% of stocks went backwards and no sector gained any meaningful ground.  Staples closed +0.05% higher, but that’s negligible.  Elsewhere, it was a sea of red.  The second-best performer was Utilities (-0.8%) followed by Industrials (-2.4%).  The worst of the worst included Energy (-8.3%, ouch!), followed by REITS (-4.6%) and Discretionary (-4.3%).  S&P 500 RSI’s are on the cusp of ‘oversold’, which could entice some dip-buying, but probably not unless enough players expect tomorrow’s US CPI data to print lower than consensus (wishful thinking).


  • S&P 500 Relative Strength Indicators…

Source: Bloomberg


  • Local Stocks – a weaker session yesterday with the ASX 200 giving up -1.2%.  It was a broad based sell off with 83% of stocks lower and only three sectors firing off any shots in anger, Energy (+0.5%), Staples (+0.2%) and Healthcare (+0.1%).  Key troublemakers were REITS (-4.1%), which took line-honours (fell the most), but it was Materials (-2.1%) the won on handicap (impact to the ASX 200).  Tech (-3.2%) also had a day to forget.  The index is well through its 50D, 100D, and 200D moving average with relative strength indicators at 34.8, approaching oversold territory.  Offshore leads are weak again, and meaningfully so.  Futures are flashing red, down -1.4%, but we’ll likely drop more than -2.0% by day’s end, which would likely have RSI’s flashing oversold.


  • ASX 200 Relative Strength Indicators

Source: Bloomberg


  • Offshore credit “all seven potential issuers that were looking to sell investment-grade bonds on Monday stood down due to volatility and downward pressure on asset prices. The issuance backdrop on Monday is not very accommodating and a most would-be borrowers will take another look on Tuesday.” (Bloomberg).  In secondary markets spreads are +3 – 6 bps wider across the board, while in CDS markets the cost of protection is +1 – 2 bps higher.
  • Bloomberg published a piece yesterday titled “Everything that Could Go Wrong”, in which the author discussed the four main things that could trigger a US recession, let’s call them the Four Horseman of the Apocalypse.  The first one being “an upside-down bond market”, that is inverted yield curves, which I’ve discussed in the past – i.e. within 6 – 18 months of inversion, a recession has occurred – not always, but regularly enough.  Number two was “disruption to the flow of credit.”  The best gauge of risk here is the average spread within a given index.  Bloomberg note the index (US IG Corp) spread was +135 bps (at the time of the article, now +146 bps).  Their research suggests that “when the spread rises above +150 bps, it’s a warning sign that credit markets could seize up, making borrowing a lot harder, according to analysts and investors informally polled by Bloomberg. The metric has proved a reliable red flag in the past after crossing +200 bps in the volatile years after the global financial crisis and during the pandemic fallout.”  Bloomberg noted that when the credit spread hit +200 bps, they witnessed a subsequent and meaningful contraction in loan growth.  There is a direction and strong correlation between nominal growth and credit growth, so subdued credit growth = weaker nominal growth.
  • The other two horseman were “The Junk Penalty”, i.e. junk bond credit spread, and “Short-term money market cracks.” On the latter, the article notes “the Fed’s massive pandemic stimulus program caused excess liquidity in the financial system to balloon, with banks flush with record cash in the form of reserves. Now, as the monetary authority begins to pare a $9 trillion balance sheet, a process known as quantitative tightening, Wall Street is on high alert for any resulting logjams in the financial plumbing.


  • Offshore credit spreads (vs A$ FRN’s)…

Source: Bloomberg, Mutual Limited


  • Local Credit – traders…”it was an extremely muted open to the week for secondary credit as further weakness in risk did little to reinvigorate local investors. The contrast between the strength ANZ’s recent senior deal garnered and the ensuing lack of secondary participation leads us to believe liquidity is being sidelined for appropriate primary opportunities and secondary conditions will likely remain dysfunctional for some time yet.”  If true, this is not a bad thing.  It suggests capital is still committed to the asset-class, it’s just looking for better entry points and just not being deployed yet.  Given relativities (vs historical averages), spreads are somewhat attractive at current levels, so there is value.  However, broader risk uncertainties are probably staying investors hands for now.  No change to major bank senior curves yesterday, the recent ANZ 5-year is quoted at +96 bps and the 3-year at +76 bps, both mids – a smidge inside reoffer.  In tier 2, traders signalling bugger-all volumes traded and what little there was, was skewed to selling.  CBA’s Apr-27 call is at +205 bps, unchanged, while the 2026’s are +1 bp wider at +192 – 196 bps, and the 2025’s are at +182 bps, also a basis point wider.  Nothing sinister in the moves wider, just reflective of broad deterioration in risk sentiment.  With prospects of tier 2 supply dwindling post reporting season (our take), technicals should provide some protection to spreads and cap most widening pressures.  I’m not sure if I called the top recently in tier 2, I know I did in senior, but if not, I’d say we’re approaching cyclical wides in tier 2.  Maybe a few more basis points to go, to reflect the lingering weakness in overall risk sentiment, but the bulk of widening risk is behind us.  Murphy’s law suggests we’ll see spreads blow wider now!


  • A$ Major Bank tier 2 spreads…

Source: Bloomberg, Mutual Limited


  • Bonds & Rates – another sell off in ACGB’s yesterday with 10-year yields closing at 3.57% (+9 bps CoD), while 3-year yields were a couple of basis point higher at 3.03%.  Long bond holders will likely get some respite today with US treasury yields pulling back overnight.  UST 2-year yields dropped -14 bps to 2.59% and 10-year yields dropped 9 bps to 3.03%.  Expectations of yields easing back today aside, local rates strategists in the market have been revising their forecasts for peak 10-year yields.  CBA nailed their view to the mast at 3.65%, which was almost hit yesterday, while ANZ has set their levels at 3.95% (by Sep-22), with underlying cash rates at 1.35% by then.  Historically 10-year yield to cash spreads have averaged ~90 bps, although the bell-curve is pretty flat.  The spread has been as high as +520 bps in the early 1990’s and inverted in 2011-12.  At around +304 bps at the moment, the spread is at its post financial crisis peak.


  • ACGB 10-year to RBA Cash Rate…post financial crisis…

Source: Bloomberg


  • Macro“the Reserve Bank of Australia’s (RBA’s) May Statement on Monetary Policy (SoMP) paints an optimistic picture for 2023-24 real gross domestic product (GDP) growth despite aggressive hikes. But the Bank also projects steep declines in the terms of trade, resulting in weak real gross domestic income (GDI) growth. Over a 2-year horizon, the RBA’s real GDI forecasts are consistent with downgrades to Australian market (ASX 200) earnings. On this outlook, the ASX 200 looks expensive relative to bonds. All of this said, if bonds rally or commodity prices surprise to the upside of forward curve pricing, the outlook could easily improve. But we do have lingering concerns about housing.” And….“the RBA’s analysis suggests that 200 bps of rate hikes could trigger a 15 % real decline in house prices over a 2-year period. History tells us that when real house prices drop, dwelling approvals also drop below completions, consistent with residential investment falling. But the Bank is projecting residential investment to rise by 5.7% in the year-to-2Q 2023 and 1.4% in the year-to-2Q 2024 as pent-up work from the past few years is completed, and as population growth lifts household formation.” (Barronjoey)


  • Charts…




Source: Bloomberg, Mutual Limited


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Scott Rundell, Chief Investment Officer

T: +61 3 8681 1907



Mutual Limited Daily Update

Mutual Funds

MCTDF – Mutual Cash Fund
Gross running yield: 0.50%
MIF – Mutual Income Fund
Gross running yield: 1.57%
Yield to maturity: 1.66%
MCF – Mutual Credit Fund
Gross running yield: 2.85%
Yield to maturity: 2.44%
MHYF – Mutual High Yield Fund
Gross running yield: 5.93%
Yield to maturity: 5.89%