Mutual Daily Mutterings
Quote of the day…
“Be careful about reading health books. You may die of a misprint” – Mark Twain
“Here we go again…”
- Overview – greetings from cell-block four of Chairman Dan’s penitentiary for the third time frustrated! In solidarity, our Kiwi brothers and sisters across the ‘dutch’ have also gone into lockdown, very sporting of them. Overall, it was a positive end to the week with risk assets stronger across the board and no meaningful change to themes driving markets. Stocks closed the day and the week up, while bond yields were generally higher. Credit continued on its merry way, closing tighter across both cash and CDS. On the news front, over the weekend Trump’s impeachment trial ended with an acquittal with a 57:43 split in the vote, indicating 7 Republicans ‘crossed the floor’, but unfortunately for those wishing to see Trump formally impeached, it wasn’t enough (needed a 67-vote majority). Trump is free to run for president again, although he also faces numerous state-based cases against him for various alleged offenses. Bitcoin is also gathering some pace, breaking through the US$50K price point for the first time as more ‘main-stream’ trading shops add the ‘coin to their investment strategies.
- Offshore Stocks – a relatively narrow rally across US markets on Friday night, which was the start of a long weekend, just a third of stocks up on the day. European markets also sporting some decent gains on the week. All bar two of the S&P 500 sectors gained, but again gains were modest with Tech stocks contributing most of the index’s gains. On the week, the main index closed +1.2% higher and once more has hit new all-time highs. Tonight, it’s Presidents Day in the US, so bond and equity markets will be closed. The S&P 500 is now +76% above its 2020 pandemic lows and is +16% above its pre-pandemic peak, also at the time a historical high. I remember at the time banging the table somewhat loudly, exclaiming incredulously that stocks were over-valued. A fortuitous pounding of said table, but by no means do I claim to have predicted the -35% – 40% rout that would quickly follow the pandemic outbreak. Almost at the same time this year, I’m pounding that table again, but I also accept a repeat performance of the 2020 correction is unlikely over coming months given the extent of ‘artificial’ support sloshing around the system – see the Steak Knives sector below for more details.
- Local Stocks – Chairman Dan announced a new snap 5-day lockdown for Victorians, the third lockdown since the start of the pandemic, and once again caused by quarantine failures of the state’s ‘Gold Standard’ systems and processes. If I’m back in the office on Thursday, I’ll run through the office in my birthday suit! Despite the snap lockdown, the impact on markets was hardly noticeable. The ASX 200 was heading south on Friday before everyone caught whiff of their impending incarceration, and the formal announcement didn’t really change the trajectory on the day. The local index has underperformed offshore markets on the week, down -0.5%, with all but Telcos (+2.2%) and Materials (+1.5%) bloodied. Some meaningful losses on the week, with the lead-underperformer being Industrials (-3.8%), followed by REITS (-2.9%), Utilities (-1.9%), and Energy (-1.6%). Regional markets, including China, Hong Kong, Taiwan, and Vietnam are closed for Chinese New Year. Another busy week of reporting also, with over twenty issuers announcing interims or quarterly updates. Names of note for us include BEN (interims, today), NAB (Q3 update tomorrow), WBC (Q3, Wednesday), and ANZ (Q3, Thursday).
- Offshore Credit – a muted session in US IG on Friday, being the eve of a long weekend – par for course. Secondary spreads were steady. High Yield issuance has been running hot over recent weeks as yields drop below 4.0% for the first time, kick-starting more issuance. Last week saw US$14bn of HY paper price. In the IG space, US$16bn priced last week, falling short of expectation (US$20bn). Consensus expect US$20bn will be priced this week despite the shortened week. Interestingly, more ESG bonds are being issued in the U, with the big boys and girls getting in on the action. Goldman Sachs is the latest Wall Street bank to sell ESG bonds and have said the debt will become a “core part” of the bank’s strategy. JPM also priced a US$1bn social bond last week. Research from BNP Paribas predicts a 40% rise in US ESG bonds this year, boosted in part by expected policies of the Biden administration
- Local Credit – no ESG bonds issued last week, in fact no bonds issued at all…at least not of interest to us. It’s now well over a year since the major banks have been active in issuing A$ senior paper. There last offering, the Jan-25’s are now firmly and stubbornly entrenched at the +24 bps level, over 50 bps tighter vs issuance levels (+76 – 77 bps). Trader’s speak…”Lunar New Year holidays resulting in a subdued end to the week. Slightly better buying from domestic real money across corporates and financials…in tier 2 spreads another 1-3 bps tighter Friday as dealers continue to mark bonds tighter in response to continuing interest by domestic real money to buy bonds. Whether they are finding the required stock is another matter. On the week spreads 9-13 bps tighter. Little flow to report”
- Bonds – from NAB….”US 10yr yields closed above 1.20% for the first time in almost a year as markets continue to price reflation and hedge for inflation risks. Around half of the +4.5 bps move in the 10yr yield came in the wake of the 1yr inflation expectation reaching a 6½ year high out of the Uni Michigan Consumer Confidence survey, highlighting the market’s wariness of inflation lifting on the back of aggressive stimulus. Importantly, such as aggressive stimulus may become more widespread with Treasury Secretary Yellen urging G7 countries to “go big ” on fiscal support on Friday”. And then this last week from Westpac ….”the domestic market has slightly outperformed its US counterparts in recent sessions, with the AU-US 10yr spread now around the 5.5bp level. While we still believe the market will trade AU bonds as a “high beta” reflection of the global reflation trade, the market has sufficiently re-calibrated its inflation expectations for now and may have even got itself a bit short in recent weeks. If so, our view is that once the market settles global yields into a new trading range, then the “value” in AU bonds be seen as attractive in a yield constrained world, will have even more credence”.
- Macro – Australia’s labour force data for January will be the macro-highlight of the week, due out on Thursday. Hopefully we can analyse the data from the comfort of our office. Consensus is expecting a 50,000 rise in employment (36K FT, 14K PT) and the unemployment rate to drop from 6.6% to 6.5%. The RBA Board Minutes are released tomorrow, although we’re not expecting any surprises. Since the last meeting the RBA governor has spoken and the Statement on Monetary Policy was released.
- But wait, there’s more…the steak-knives – the ‘Sage of Omaha’, Warren Buffett likes to use a particular measure to gauge whether the US stock market is overvalued, fair, or undervalued. It’s the market capitalisation of the share market relative to nominal US GDP. I’ve charted these two data points back to 2000 below. The left hand chart is the Wiltshire Index, which is the market cap of all listed stocks, and nominal GDP. The right hand chart exhibits the ratio between the two, with the shaded zone considered ‘fair’ value. Safe to assume we’re not in Kansas anymore Toto, markets are at nose-bleed valuations. Of course, we know why we’re at these levels, it’s the red-dotted line in the left hand chart, it’s Dr Feelgood, also known as the US Federal Reserve. As they’ve pumped liquidity into the system, we’ve seen market asset values reach new highs at an unprecedented pace. This is nothing new, this has been entrenched in the narrative for approaching a year now…and realistically longer, back to the GFC, which is when fundamentals realistically ceased to matter….
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907