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Mutual Daily Mutterings

Quote of the day…

 

“The Cats should have played Dan Andrews…only person who knows how to shut down Melbourne.”…random Tweet

 

 

 

 

 

 

Chart du jour……US PPI vs US 10-Year

Source: Bloomberg, Mutual Limited

 

“Employing New Tactics…

Source: www.hedgeye.com

 

 

Overviewcrash helmets at the ready…maybe”

  • A softer end to the week for global markets with growing concerns about the state of the global economy and continued spread of COVID.  Since the recent US payrolls data missed heavily to the downside, sentiment has showed its fragile under-belly, with US markets putting in their worst weekly effort since June.   The tone hasn’t been helped by the insistence from various Fed speakers that tapering should begin sooner rather than later.  And, on Friday, US inflation data (PPI) came out ahead of consensus expectations, posting its highest year on year figure since 2008, rekindling the debate over when the Fed will ease back on the gas.
  • Despite the softer risk tone in stocks, bond yields rose, treasury curves steepened (flat’ish in AU yields), and credit spreads inched a tad tighter on the day and week.  Volume of issuance across US IG primary markets was elevated, the heaviest week by deal count on record, and fifth heaviest by volume issued.
  • Fedspeak…” FOMC member Mester said that there might be moderation in growth in H2’21, but that inflation pressures were more persistent than previously anticipated. She said that prices should move lower in 2022, but risks were to the upside”.
  • The bear’s are getting restless…”Deutsche Bank warned of the risk of a hard equity sell-off, citing high valuations and an advancing earnings cycle.  High valuations alone don’t always augur a large correction, but downdrafts tend to be more pronounced when the cycle is further along, strategists said. At similar valuation levels, five-year forward returns have historically been slightly negative”.
  • The week ahead, thanks to NAB…”on Tuesday RBA Governor Lowe speaks to the Anika Foundation (speech titled Delta, the Economy and Monetary Policy) while on the data front there is the NAB Business Survey for August, WMI consumer confidence measure and the August Labour force report.  On the US calendar is CPI data, Empire manufacturing report, Philly Fed index and University of Michigan consumer sentiment report

Details….

  • Offshore Stocks – global markets closed Friday on a weaker footing, the S&P 500 closing lower for a fifth straight day, a first since late February.  Volatility also spiked (VIX), so combined it could be a warning of trouble ahead for stocks, a theme I’ve been banging on about for over a month now.  Equities face a bevy of options expirations this week.  These monthly occurrences have attracted attention recently because they’ve been linked to bearish and volatile trading conditions during the mid-period.  So, this week VIX options expire on Wednesday, index/equity options expire on Friday and quarterly index options cease trading on the last business day of the month.  And, to boost the excitement even further, we have the September 22 Fed meeting.  The combination of all of these party -poppers raises the prospects of the S&P 500 tickling its 50-day moving average this week (just 0.76% away), which it’s done mid-month in each of the last four months.  On each occasion dip buyers have piled into the breach, putting a floor under markets.  The S&P 500 has also tested these levels some eight times in the last year, and each time the index has bounced.  No doubt the accommodative monetary back drop and abundance of liquidity has underpinned markets in these circumstances.  However, as the index approaches the 50-day moving average, market resilience will be tested (again).   It has been about a year since the S&P 500 (and other markets) had its last 10% correction.  MTD the index is down 1.4%, and while a 10% correction might not be on the cards, a 5% or so pull back is looking feasible.

 

(Source: Bloomberg)

 

 

  • Local stocks – despite weak leads, the ASX 200 closed on a firmer footing on Friday, +0.5%.  Around 70% of stocks advanced on the last day of the week, led by Materials (+1.7%), Tech (+1.0%) and Energy (+0.9%).  Only Healthcare (-0.7%) failed to get out of the gate.  Despite the decent gains on the day, the index closed the week down -1.6% and -1.70% month to date.  The index remains below its 50-day moving average and will likely trend lower if offshore markets pan-out as expected.  Futures are signalling the trend lower will continue this morning, -0.4%.

 

(Source: Bloomberg)

 

 

  • Offshore Credit – the US IG primary market completed its busiest week in history after an eyebrow-raising 54 high-grade companies sold debt in just four days to break the record for number of deals.  Weekly volume of US$77.8bn ranks fifth all time, trailing only four weeks in 2020 when issuers rushed to the capital markets in search of liquidity.  Despite the strong volume of issuance, markets had no troubles absorbing supply.  US IG spreads (Bloomberg indices) were -2 bps tighter on the week, across both financials and corporate.  EU IG spreads were unchanged to a basis point tighter.  Offshore spreads are now back to levels last seen on the eve of the pandemic, in Jan/Feb last year.  Consensus estimates are for US$35bn of issuance this week.
  • Local Credit – main focus on Friday was APRA announcing that it would be phasing out the Committed Liquidity Facility (‘CLF’) that ADI’s use to meet their Liquidity Coverage Ratios (LCR) gradually by the end of 2022.  Importantly, the facility won’t be cancelled, rather just put on ice until its needed again.  Broad implications are the announcement is mildly negative for bank senior paper and mildly positive for semi’s, but I expect the banks will manage the transition (from CLF to HQLA’s) in an orderly fashion.  While the timing of the announcement may have been a bit of a surprise, the phasing out of the CLF has been planned for.  Shortly after the announcement traders moved major bank senior curves +2 – 4 bps higher, although they reported no meaningful flow on the day.  For context, the most recent major bank senior issuance, the NAB Aug-26, widened back to reoffer levels, +41 bps (after lows of +38 bps), but with not actual trading (as far as we can tell).  The new SUNAU 5yr was also back above reoffer levels of +48 bps.  Some selling interest being reported in BEN and BOQ, but nothing actually traded.
  • Bonds & Rates – a decent rally in ACGB’s on Friday, again following offshore leads. Treasuries sold off on Friday despite weaker risk sentiment, which should see local bond yields higher this morning.  Key factors to influence the near-term path of yields will be the option related downside risk for stocks, growth concerns (peak behind us), which has been growing, and then on the flip side (upside pressure on yields), there is potential tapering announcements from the Fed (next week), and the latest US inflation data (CPI) in a couple of days.  ACGB 10Y yields are 5.5 bps inside consensus end of Q3 expectations, and 32 bps inside end of Q4 expectations.

 

(Source: Bloomberg)

 

 

  • Offshore Macro – another month, another above-expectation inflation print. Final demand PPI rose +8.3% YoY vs +8.2% YoY consensus and accelerating after a +7.8% YoY print in July.  Talking heads…”you cannot just blame it all on energy prices.  Services pricing also rose by +0.7%, probably reflecting labor supply shortages. I’d suspect that this will nudge the “whisper expectation” for next week’s CPI reading slightly higher”.  US CPI is due out tomorrow night, with consensus expectations at +5.3% YoY vs +5.4% YoY last month, levels not seen – and only briefly – around the GFC in Jul-08.

 

 

(Source: Bloomberg)

 

 

  • Local Macro a pretty busy week on the data front, with house price growth out tomorrow.  Consensus is expecting +6.2% QoQ (vs +5.4% QoQ last) and +14.0% YoY (vs +7.5% last).  Also out tomorrow is NAB Business Conditions and Confidence indices, followed by WBC consumer confidence data on Wednesday.  The most watched data however will be labour figures on Thursday.  Consensus are expecting -80K fall in jobs, no prizes for guessing why, while the unemployment rate is tipped to rise to 4.9% from 4.6%.

Cheers,

 

 

 

Click here to find the full PDF from our Chief Investment Officer’s daily market update.

 

Contact:

Scott Rundell, Chief Investment Officer

T: +61 3 8681 1907

E: Scott.Rundell@mutualltd.com.au

W: www.mutualltd.com.au

Mutual Limited Daily Update

Mutual Funds

MCTDF – Mutual Cash Fund
Gross running yield: 0.26%
MIF – Mutual Income Fund
Gross running yield: 1.40%
Yield to maturity: 0.74%
MCF – Mutual Credit Fund
Gross running yield: 2.51%
Yield to maturity: 1.59%
MHYF – Mutual High Yield Fund
Gross running yield: 7.33%
Yield to maturity: 5.51%