Mutual Daily Mutterings
Quote of the day…
“Stupidity got us into this mess, and stupidity will get us out.”…Homer Simpson
Chart du jour…ASX 200 Equity Premiums…
Source: Bloomberg, Mutual Limited
- The risk off tone persisted overnight. European stocks closed with a wet sail and some positive sentiment, which was picked up by US markets, but then the tone shifted and we saw markets turn south as this week’s flight to safety continued. Mixed economic data (US jobless claims) kept investors on edge about the timing of stimulus tapering even as the relentless spread of the COVID Delta variant undermines global growth. Treasury yields fell, while oil dropped, credit has proven resilient.
- There is the view that investors are concerned that consumers may push back on price increases without wage gains, which could depress earnings and equity valuations. Companies like Kraft Heinz have announced it is introducing even bigger price hikes as commodity and transportation costs surge. Kraft Heinz also said it is raising prices on two-thirds of its portfolio.
- The positive turn in sentiment across European markets (intra-day trend wise, still down on the day), likely stems from the overnight ECB meeting and outcome. The ECB slowed the pace of its bond buying program slightly, in what Christine Lagarde insisted was a “recalibration” that doesn’t herald a wind-down in stimulus. The bank will conduct purchases at a “moderately lower pace” than roughly €80bn a month, citing the economic rebound. Officials left rates on hold and raised forecasts for 2021 growth and inflation to +5.0% and +2.2%, respectively.
- Latest Fedspeak…from Bloomberg…”Charles Evans said “challenges abound” for the U.S. economy, including supply chain and job market bottlenecks. New Covid variants have created “high uncertainty,” he added. Robert Kaplan warned that the labor supply-demand imbalance “is going to be with us for some extended period of time,” so price pressures will increase going into next year. Raphael Bostic told DJ that the Fed will be able to taper this year, but probably won’t make that decision this month.
- Offshore Stocks – US stocks fell across the board, with just under two-thirds of the S&P 500 falling. REITS (-2.1%), Health (-1.2%) and Staples (-0.6%) were the worst of the bunch, while Financials (+0.3%), Materials (+0.1%), and Materials (+0.1%) put up a valiant, albeit fruitless, effort. With option expires next week, a monthly event that has over the past four-five months caused mid-month pull backs, there are further near-term impediments to markets. While markets have declined over the past four sessions and sentiment is displaying some fragility, the S&P 500 is still just -0.9% off its record highs, and forward PE’s are at 22.0x vs a pre-pandemic 5Y average of 18.0x.
- Local stocks – I’ve been wary of stocks in general for the past month or so, not quite banging the table with frothing bearish gusto, but rather pointing out with some modicum of dignity the quandary of historically elevated valuations in the face of lingering COVID infections, imminent tapering, and likely our position within a post-peak growth environment. Yesterday my narrative met reality with the ASX 200 taking a rusty fish-fork to the neck, tumbling -1.9% (down -2.2% at its worst intra-day) and 95% of stocks retreating. The worst of the worst optically were Tech (-2.3%), Telcos (-2.3%), and Industrials (-2.2%), but it was Financials (-2.0%) and Materials (-2.1%) that did the real damage, collectively accounting for 50% of the ASX 200’s fall. No specific catalyst that I can see to trigger the dummy-spit. Offshore leads were moderately weak, but local markets just ran harder with the theme on the day. MTD the ASX 200 is lagging offshore peers, down -2.2% vs losses of -0.7% for the S&P 500. The fall yesterday took the index well through its 50D average and is tickling the 100D moving average, which could be at risk today given weak leads again from offshore – having said that futures are actually up a touch, suggesting yesterday’s action was an overreaction. Momentum indicators are pushing toward ‘oversold’ territory as well. For mine, it was a pull-back we had to have.
- Offshore Credit – the issuance spree in US IG primary markets slowed a bit overnight, at least in relation to the absurd pace of the prior two days, but 14 borrowers still came forward with over US$15bn set to price. The three-day total of 52 deals and US$76.2bn reflect pent-up investor demand and ideal financing conditions.
- Local Credit – traders…”local credit displaying solid resilience despite global equity weakness. Busy offshore primary markets seem to be weighing on those secondary credit curves but we have not seen any material widening in local secondary spreads, indeed we are starting to see a modest creep tighter as primary is well absorbed and performing well. We anticipate further supply next week, with a few deals looking to get away before the run into major bank FYE.” Despite the stated resilience, we did see major bank spreads drift wider, a basis point here or there with the Jan-25’s +1 bp at +26 bps and the 1 – 3 year curve also +1 bps wider. The recent NAB Aug-26’s closed unchanged at +38.5 bps. In the tier 2 space, the 2026 calls widened a basis point (except the recent CBA line) with the cohort at +123 – 129 bps. Unchanged elsewhere.
- Bonds & Rates – despite the rout in stocks, moves in bonds were relatively modest (-3 bps in the 10’s), reflecting the leads from US treasuries the night before. This tone should continue again today. Some near-term outlook comments from NAB…”the uncertainties and potential economic damage from the current delta variant surge continue to dominate sentiment in markets, though worries are beginning to ease as vaccination rates are on target to hit mid-October goals. With this and optimism from the RBA regarding a strong rebound post lockdown, we are beginning to see slowing of the ‘low beta’ of Australia relative to global growth. However, with the estimated size of the extended QE at $130bn – $170bn, we will see negative net issuance of ACGBs for longer which should keep yields within their recent ranges in the near term and the AU-US 10yr spread should remain inverse for now”.
- Having a squiz at market expectations into year end, there is reasonable downside risk in being long duration, if you believe in the efficacy of consensus expectations. The average forecast for 10-year yields is 1.55%, with a wide 0.80% – 1.90% range. The distribution of forecasts (14 of them) indicates the most popular view is 10-year yields ending somewhere in the 1.60% – 1.84% range by year end, or +34 – 48 bps higher than current levels. Rough and dirty, if you buy a 10-year bond today, say the ACGB Nov-31 at 1.26%, and you assume consensus expectations are realised, then you’re looking down the barrel of a capital loss on that position somewhere between -3.4% and -5.4%. Then again, if you’re in the bullish-outlier camp, where yields drop to ~0.80% – 0.90% area, then you’re looking at gains of around +4.5%.
- Offshore Macro – US jobless claims (below), fell more than expected, but attractive little attention from markets.
- Local Macro – some jobs data yesterday, payrolls, which in its own right wasn’t really market moving. The ASX 200 was already in a rout when it was released, although the rout did seem to accelerate post the release …commentary pilfered from NAB…”weekly ABS payroll jobs fell 0.7% in the fortnight to 14 August 2021. The largest falls in payroll jobs were in NSW (-1.2%), QLD (-1.0%), the ACT (-0.7%) and VIC (-0.6%). Payroll jobs in NSW have now fallen by 8.4 % since the lockdown began on 26 June, a similar fall to that seen during the first stage of the pandemic back in March 2020. Note further falls in payroll jobs are likely for VIC given they only re-entered lockdown on 5 August.” Nothing of note today.
Have a good weekend, go Dee’s I guess.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907