Mutual Daily Mutterings
Quote of the day…
“Fishing is for sport only. Fish meat is practically a vegetable…” – Ron Swanson, “Parks and Recreation”
Chart du jour… periodic spread changes…
Source:Bloomberg, Mutual Limited
Overview…”slow news day…”
- Stocks globally drifted higher and again new all-time highs set for a third day in a row, although the S&P 500 Index has settled into the narrowest trading range since before the COVID pandemic kicked off. US treasury yields (10Y) also drifted higher, nearing one-month highs as reflation trades received a boost post the auction of 30-year bonds, which received a tepid response. Oil dropped as consumption outlook was cut by official agencies (IEA) for the rest of 2021, concerns underpinned by COVID flare ups. It was a relatively slow news day, although US jobless claims did come out on or around expectations, exhibiting a modest improvement.
- Globally, key themes remain largely unchanged. Investors are continuing to evaluate the implications of an expected Fed tapering announcement in coming months (biggest weight), the spread of the COVID Delta virus variant (a closed second) and China’s regulatory clampdown (a distant third). Global stocks are up about +90% since the worst of the pandemic market impact (March 2020), triggering questions, in my mind at least, about how much further can we go…it can’t go too much higher, can it?
- Talking heads…from a bull’s perspective…“equities become the proverbial term – there is no alternative – and that’s ultimately a money-flow story. From a valuation perspective, equities are reasonably valued in the context of interest rates”. This from GS who recently expressed a strategic view that the S&P 500 still had upside into the end of 2022, by +10.0% – 13.0%. I get their rationale, but at the same time given the breadth of retail money flooding into stocks, I’m cautious on the resilience of these investors in the face of a correction. Do they average in (which they have been doing), or do they capitulate?
- JPM strategists are also constructive on risk, cyclicals at least, and with regard to bond yields, they’re humming along to Yazz, “the only way is up, baby” (see here for reference, sorry) “We believe that bond yields and cyclicals bottomed last week and are now on an upward trajectory for the rest of the year. The risk of a broad market sell-off driven by tech-bond correlation is not high and can be mitigated.
- Offshore Stocks – yep, another day, another new record high in the S&P 500, with relative strength indicators inching closer to overbought territory. On the day, a very modest and very narrow rally, with less than half of the S&P 500 stocks advancing, although more sectors gained than retreated. Health (+0.8%) was the best performer on the day, followed by Tech (+0.6%) and REITS (+0.4%). Energy (-0.5%) had the largest dunces hat on for the day, followed by Industrials (-0.2%) and Materials (-0.2%). E-mini’s are up in after-market trading.
- Local stocks – new record highs yet again yesterday with the ASX 200 closing at 7588, a distance above its 50-day moving average not seen since Q4 last year when the success of the COVID vaccines hit the airwaves. On the day itself it was a very modest rally, almost unchanged, and also a narrow rally with a smidge over half of stocks advancing, and similar across the sectors. Telcos (+2.3%) led the way as the stand out performer, with Telstra (+3.7%) and Nine Entertainment (+3.3%) key contributors. Discretionary (+0.7%) and Staples (+0.6%) rounded out the top three placegetters. At the other end of the performance gene-pool, Utilities (-1.7%) took out the daily Darwin Award, ably supported by Tech (-1.3%) and Healthcare (-0.9%). Relative strength indicators have breached the magical (supposedly) 70.0 level, signalling the market is technically overbought, which I wouldn’t disagree with. I’m as cautious on adding risk today as I was yesterday, and the day before that. Futures are pointing to modest gains at the open, +0.4%.
- NAB’s Q3’21 trading update showed revenues fell 1.0% vs the prior corresponding period (pcp), with markets the main drag. Cash earnings rose +10.3% vs the pcp, assisted by a $112m provisioning write-back. Asset quality improved optically – although NAB, like their peers are not required to record deferred mortgages (because of COVID) as impaired assets, so take any improvement here with a grain of salt. Home lending growth was +2.0%, while SME lending grew +4.3%, both ahead of system. Expenses fell -1.0%, mainly through technology enhancements. NIMs were stable. Key ratios: LCR at 129% (vs 100% regulatory minimum), NSFR 123% (vs 100% min), CET1 ratio at 12.6%, up +20 bps on the pcp. NAB’s purchase of Citi’s Australian business will see a pro-forma 85 bps drop in CET1. Lastly, NAB fully utilised its TFF allocation, $32bn, which is in excess of their average wholesale funding requirement.
- Offshore Credit – “weekly high-grade bond sales have eclipsed US$40bn for just the seventh time this year, but the supply onslaught may start to slow amid signs that investor demand is waning. Investor fatigue seemed to finally set in Wednesday after 30 bonds were sold in the U.S. high-grade primary market on the first two days of the week. Pricing outcomes were mixed as three borrowers paid high single- to double-digit concessions and two deals barely moved from initial price thoughts” Bloomberg.
- Local Credit – our focus was primarily honed in on the new CBA tier 2 deal yesterday. As you may recall, it launched with guidance of +140 bps for a 10-NC-5 and yesterday I said it was likely price at +130 – 133 bps…bingo, it priced $1.5bn ($1.9bn book) at +132 bps, or +17 bps to CBA’s Sep-25 call (+115 bps), which itself closed a basis point wider on the day. The rest of the 2026 call cohort was marked +3 bps wider yesterday at +126 – 129 bps, with traders reporting modest switching. With CBA in the tin, that leaves ANZ and NAB as absentee issuers YTD (WBC printed in January). With NAB reporting Q3 results yesterday and ANZ scheduled to report Q3 next week, there is scope for either to potentially issue post reporting, but before financial year end. Maybe. Something to consider. While on the majors, some observations post conversations with my friendly neighbourhood DCM contacts, as things stand there is a structural shortage in the major bank senior space. In 2019 there was c. $130bn of A$ senior paper outstanding. After next Monday’s ANZ maturity, there will be just over $70bn outstanding. So, even if the majors all start issuing back to normal levels it will take several years for the volume outstanding to recover. Over the past year or so foreign ADIs have picked up some of the slack, RMBS is obviously on fire, and corporates have printed a goodly amount also. But, when it comes to the most liquid names and inventory to trade, i.e. majors, it’s going to remain a lot less for a reasonably long time. Upshot is, spreads should remain tight.
- Bonds & Rates – local bonds followed the lead of US treasuries yesterday with yields retreating a few basis points. Treasuries overnight drifted higher with 10-year yields +3 bps to 1.36%, suggesting yesterday’s moves in ACGB’s will be given back this morning.
- Offshore Macro – US initial jobless claims edged down to 375K last week, in line with consensus, from a revised 387K, thanks to a combination of labour shortages and the looming end to augmented benefits. Factory-gate headline inflation picked up more than forecast to +7.8% and the core rate also accelerated more than expected.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907