Mutual Daily Mutterings
Quote of the day…
“Well, it’s one louder, isn’t it? It’s not ten. You see, most blokes, you know, will be playing at ten. You’re on ten here, all the way up, all the way up, all the way up, you’re on ten on your guitar. Where can you go from there? Where?” – Nigel Tunel, “This is Spinal Tap”
“Rocking the boat…”
- Overview – and we’re back with Martha today as markets again rotate toward value stocks, away from growth, specifically the tech sector – a reversal of yesterday’s thematics where markets had an off-piste fling with risk assets…basically markets are displaying bipolar tendencies (a disorder associated with episodes of mood swings ranging from depressive lows to manic highs). The broader thematics remain unchanged, although inflation has probably lost its position of key risk at the top of the ‘what could go wrong’ tables, at least for now with US inflation data softer than expected for February (more details below). Consequently, bond yields dropped a touch. The next can of fiscal Red-Bull is chilling (figuratively) in the Oval Office bar fridge, just waiting for President Biden to rip the top off, i.e. add his signature. All the legislative hurdles have now been passed, despite push back from the Republicans. Nevertheless, it is President Biden’s first legislative win of his presidency…helps when you have the weight of seats in both layers of the legislature. The only obstacle now for the bill is potentially crippling arthritis in Joe’s hands, preventing him from signing the bill…I’m sure they have contingencies for that, don’t they. Once signed, the IRS will begin sending individual payments of up to US$1,400 to each man, women, and child…if said man and / or women earned less than $75K a year each, and the child was in fact their dependent. I’m betting Play Station, iPhone and TV sales are set to spike. The more you earn, the smaller the size of the cheque. The stimulus bill also extends unemployment benefit programs.
- Offshore Stocks – a broad based rally across US markets with all sectors bar Tech flashing green, and even then, Tech is only just in the red…by a bee’s bum hair (aka -0.1%). In reality, its more accurate to say Tech stocks, whose valuations look stretched in an era of higher yields, were flat after rebounding from weeks of selling on Tuesday. Just under 80% of the S&P 500 closed higher and across the sectors, Energy (+2.4%), Materials (+1.9%), Financials (+1.9%) and Staples (+1.6%) all topped the tables. Financials at 11.7% of the index and with +1.9% gains on the day had the biggest impact on the broader index. The S&P 500 is now just 0.7% below its all-time highs, laughing in the face of inflationary concerns. Despite the fiscal kicker, I’m still wary of the underlying fundamentals – especially the scale of sales and earnings expectations being baked into analyst views. Forward sales estimates for the S&P 500 are now flat to where they were this time last year, and so are earnings expectations. Yes, the economy is rebounding. Yes, the US government is pumping a lot of stimulus into the system, however I’m dubious about the fiscal rubber hitting the road, i.e. how the proceeds will be spent and will it be enough to kick-start a broader return to ‘normal’ spending behaviours…I’m yet to be convinced, I see risk of correction in coming months – around 10%, nothing more, but enough to take some froth out of valuations.
- Local Stocks – a down day for local markets, with Financials (-1.3%) and Materials (-2.5%) the primary culprits – both sectors combined, carry a 50% ASX 200 weight. Only Tech (+3.2%) really put the dukes up, but at just 3.9% of the index, it was out of its league. Industrials (+0.9%), Health Care (+0.6%), and Discretionary (+0.3%) also fought for the right to party. At a stock level it was pretty even directionally, almost 50:50 for the ups vs downs. YTD the ASX 200 has been trending loosely in a sideways pattern, between 6600 – 6900, give or take a few points. To see a break out of this range, say to the upside, we really need to see something seismic change, and for mine, I don’t see it. Valuations are stretched with risk to the downside rather than the upside. If you’re starting point is here, you’d be inclined to be neutral at best, possibly marginally overweight on the expectation of technical support, but I’d urge caution moving too far off-piste (yep, two ski references in one day….). E-mini’s are up and ASX 200 futures are pointing to modest (+0.5%) gains.
- Offshore Credit – primary conditions in the US are, or have, softened with a handful of potential issuers “halting issuance plans after a slew of borrowers were forced to pay some of the heftiest premiums in months to sell debt”. High-grade offerings in recent days are meeting weaker levels of over-subscription, less spread compression and rising new-issue concessions as investors push back on deals that yield next-to-nothing while Treasury rates are rising. The two issuers that stood down overnight follow at least one other on Friday that backed away from a new bond sale (Bloomberg). Less of a concern for EU markets with positive issuance momentum maintained, 13 borrowers tapped the market for €8.3bn.
- Local Credit – first things first, mea-culpa, I made a blunder yesterday. I incorrectly said that the new TD Kangaroo bond was not repo-eligible. A former colleague politely pointed out the error of my ways, my thinking was stale. So, Kangaroo bonds can now be repo-eligible provided it is senior unsecured, not structured and not structurally subordinated in any way. Bail-in-able bonds can be repo-eligible provided they are the highest ranking senior unsecured bonds an issuer has on issue. Canadian banks only issue bail-in-able senior bonds now, however they grandfathered their old holdings. Once all of the old bonds have matured the Canadian TLAC issues should qualify as repo-eligible. As for the market yesterday, unchanged to slightly tighter. Major bank senior paper between the 2Y and 4Y maturities eked out a -1 bp grind tighter. In tier 2…from the traders “two-way flow with some cash making its way back into the secondary market following Westpac’s call today. Better buying from a number of domestics and late news that CBA will be tendering some of their outstanding EUR and USD lines. A statement indeed and with the premia already attached to CBA paper in domestic senior it would appear that we may start to see a similar dynamic in T2. Quarter end looming large which precludes (though does not prevent) market makers from warehousing inventory for fear of onerous capital charges. As such we may see a tapering of liquidity provision in this space as we head towards month end”. A couple of the deals were a basis point tighter, the rest unchanged.
- Bonds & Rates – US treasuries advanced (yields lower) after a 10-year auction was a tad soft. The US$38bn sale tailed by a single basis point, in a sign of tepid demand, while the 2.38x bid-to-cover ratio was a fraction below the 2.41x average over the past six offerings. Ten-year yields inched lower to around 1.51% vs a month to date range of 1.39% – 1.59% and average of 1.50%. The short-term easing of US inflationary pressure, and the impact on yields will likely bleed through to local bonds. Yesterday we saw the ACGB10’s close at 1.72%, down -7 bps. The RBA’s Lowe gave a speech at the AFR Business Summit, titled “The Recovery, Investment and Monetary Policy” (copy here). Nothing really new stated. Lowe did re-assert the RBA’s stance that regardless of market pricing, the RBA would not be raising rates until inflation is sustainably within the 2% – 3% range. So not just a print in the range, but back to back prints with evidence to indicate the trend is sustainable and to get there, the RBA believes wage inflation needs to get to 3.0%…it was last printed at 1.4% and wasn’t even near 3.0% prior to the pandemic…in fact it was last around 3.0% in 2012 – 2013.
- Macro – US treasuries have risen over 50 bps YTD, from 0.84% to 1.51%, almost double, the primary cause being fears the combo of masses of fiscal go-go juice and the Fed’s magical liquidity machine being set to 11 (because it’s higher than 10) would cause the US to overheat, inflation to explode and the landscape to resemble something from Mad Max 2. Overnight US inflation data should have eased those concerns, at least temporarily. Core inflation slowed in February to +1.3% from +1.4% (January), showing underlying pressures remain muted. Consensus was for no change. The headline price gauge rose as expected to +1.7% from +1.4% in January, driven by energy costs.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907