Mutual Daily Mutterings
Quote of the day…
“An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today…” – Lawrence J Peter
Chart du jour… US break evens, 10s5s
Source:Bloomberg, Mutual Limited
Overview…”it’s just a sniffle, I’ll be fine…”
- Modest moves across most asset classes as markets wait on US inflation data – apologies, it’s due out tonight, not last night as I indicated in previous commentaries. This working from home stuff has my internal calendar all over the place. Energy stocks underpinned market strength, in turn driven by a solid rebound in oil prices after a few weeks of softness. Bond yields drifted higher, mainly on the back of another heavy day of primary corporate issuances (because of hedging activities), but moves were modest. The market’s narrative continues to be littered with ‘Delta variant concerns’ (and growth worries), with infection rates in the US averaging 100,000 a day again, levels not seen since last winter (theirs), and China is riddled with the new strain.
- In US stocks, Materials and Industrials received a shot of good news as the US Senate passed a US$550bn bipartisan infrastructure plan that could represent the biggest burst of spending on US public works in decades – anyone who is a frequent traveller to the US will know, their roads are terrible, and in much need of some TLC. It’s not a done-deal however…”thanks to competing interests from Democratic moderates and progressives. Lingering bipartisanship may quickly evaporate as the Senate turns its focus to the Democrats’ $3.5 trillion budget resolution that Republicans oppose in lockstep” (Bloomberg).
- Talking heads….”while there’s been plenty of narrative angst generated by the resurgence in the pandemic, it’s been rather strange to see investors and analysts get worried that a worsening of the pandemic would suddenly start to matter to stocks. That hasn’t happened since the initial wave of lockdowns in March 2020, so why would the current increase in case rates cause risk assets to sputter? Especially with death and hospitalization rates staying down in many places thanks to vaccines”…and here’s the kicker…”the more important role delta has played is to reveal just how determined the Fed and its peers are to start returning to more normal monetary settings even in the face of stronger pandemic headwinds”. Policy needs to normalised in order to provide the necessary tools to fight the next inflationary cycle, one not triggered by a pandemic.
- Offshore Stocks – a modest up day with the old guard, the DOW (+0.5%), outperforming the new guard, the NASDAQ (-0.5%), while the bastard child of the two, the S&P 500 (+0.1%) eked out a very modest gain. Just under two-thirds of the S&P 500 advanced with eight out of eleven sectors sporting some seasonal green (advancing). Energy (+1.7%) wore the most vibrant shade of green, followed by Materials (+1.5%) and then Industrials (+1.0%), sporting more a relatively subdued shade of green, pistachio, or olive perhaps. Rocking the red we had REITS (-1.1%), Tech (-0.7%) and then Healthcare (-0.2%). The main indices, globally, continue to set new all-time highs (again). Forward PE’s are elevated at 22.0x for the S&P 500, around 40% above long run averages and RSI’s are in the 60’s and edging higher. I’m still cautious of a modest correction and wouldn’t be adding risk here.
- Local stocks – modest gains across the ASX 200 yesterday with 58% of stocks advancing and the index closing again at a new all-time high. Tech (+1.6%) led from the front, with AfterPay in the vanguard. Telcos (+0.9%) and Discretionary (+0.8%) rounded out the top three performers. On the downside, Industrials (-1.1%) dragged their feet, with Aurizon and Transurban the two worst performers. Energy (-0.8%) and Health (-0.3%) also had down days. Similar valuation themes in the ASX 200 as mentioned above, forward PE’s are rocking elevated numbers, earnings growth has probably (Iikely) peaked, and the Delta variant is all but guaranteeing this. RSI’s are on the cusp of ‘overbought’ territory. Futures are pointing to modest gains this morning.
- Offshore Credit – another red-hot day of primary action in US IG markets, with 15 more borrowers tapping markets for US$18.7bn of ‘flash money’ (aka spending money). This takes weekly issuance to US$36bn in just two days, already through the high end of street estimates for the whole week. Secondary spreads continue to drift wider in the US, +3 – 4 bps, in the face of supply as the market suffers some degree of indigestion.
- Local Credit – another ‘meh’ day and nothing insightful from me, so again hijacking some trader’s comments “a lacklustre day for the secondary market here locally, neither domestic nor offshore accounts looking to move risk in size. The focus lay almost solely on primary as UOB Sydney Branch printed a $750m tap of the May 2024 notes and ING Bank mandated for a 5Y covered bond in FRN and/or FXD format.”
- Bonds & Rates – nothing really doing in local bonds yesterday, very much range trading, looking for a new catalyst to determine the next trend. US treasuries are tactically at the hands of tonight’s CPI print. There is a growing sense that event a sizeable miss to the upside (consensus range is 5.1% – 5.6%, average of 5.3%) will not shake the bed too much. This relative calm is being telegraphed by markets, which are focused more on how inflation will evolve rather than what the current numbers are showing. A good example of this is the spread between 10Y and 5Y breakeven rates, which is around -20 bps, suggesting markets expect inflation is rising, but it’s not “running up, up and away, out of the Fed’s control over the longer term relative to an intermediate period”. This is not to say inflation risk isn’t present, it obviously is, but if markets reflect consensus views, then consensus doesn’t see debilitating inflation on the horizon, which is the view the Fed is spruiking also.
- Macro – nothing here…waiting on US CPI.
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Scott Rundell, Chief Investment Officer
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