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Mutual Daily Mutterings

Quote of the day…


“Here’s my strategy on the Cold War: we win, they lose” – drop the mike….Ronald Reagan





Chart du jour …US PPI vs CPI..



“Please VIX…




Overview…”the devil is in the details…”

  • An apparent de-escalation of geopolitical risk was enough to put a rocket under stocks, shrugging off a US PPI print that came in at double consensus estimates.  In a few words (and symbols): stocks ↑, oil ↓, yields ↑ and spreads ↓.  The geopolitical stuff is complicated, with conflicting commentary and evidence of what is really happening vis a vis whether Russian troops were withdrawing or not.  The first headlines say they are, but there is little tangible evidence to support the headline.  Stocks went with the headline, evidence be buggered!  Bonds were more focused on the macro (PPI)
  • Mad-Dog Putin also said he hopes a diplomatic solution to the current impasse can be found.  I’d be calling for a judge’s ruling on his definition of ‘diplomatic’ to be honest.  Also, he doesn’t appear to have changed his demands that former Soviet states be banned from joining NATO – which would give him carte blanche to re-sovietise the region without meaningful consequences.
  • Talking heads…”speculation around the Fed’s action plan, which goes hand-in-hand with inflation, has no doubt been driving market volatility, but so have geopolitics…and with tension between Russia and Ukraine seemingly cooling, at least for now, the market could welcome some certainty. So, while the PPI read is hotter than expected, heightened inflation may already be priced into the market.
  • Geopolitical risk will keep day-traders occupied, while the longer-term focus will remain on inflation and central bank actions.  If history serves a guide, a military conflict doesn’t have to be bad for stocks. Even with all of the uncertainty around the annexation of Crimea back in 2014, the stock market was able to bounce back, and the impact on bonds was negligible.
  • Supporting this above point, the Bank of America Fund Manager’s Survey indicates that hawkish central banks were seen as the main tail risk – for the third month in a row.  Inflation and asset bubbles rounded out the podium of key risks. The ongoing bruhaha on the Russian / Ukraine border came in at 5th most concerning risk.  Makes sense, the Fed will hike rates regardless of what is happening with Russia – unless its outright and open conflict.  Note: the note survey was dated 4 – 10 February, so the most recent headlines not factored in.


The Long Story….

  • Offshore Stocks – offshore stocks latched onto initial headlines that Russian troops were drawing back from the Ukrainian border and ran with it, largely ignoring subsequent evidence that conflicted with initial headlines.   that such may not have been the caseIn the S&P 500 almost 80% of stocks gained, led by Tech (+2.7%), Discretionary (+2.1%) and Materials (+1.9%).  With oil selling off on the prospects of peace (bahahaha!), Energy (-1.4%) was the main drag on the index, followed by Utilities (-0.6%).  The situation in Europe really hasn’t changed, and the risk of conflict hasn’t really de-escalated, it’s just on pause for now.  We’re still at DefCon 3 in my book (level of military readiness), which is described as “increase in force readiness above that required for normal readiness.” And the state of readiness “air force ready to mobilise in 15 minutes.”  There are five levels of Defcon, 1 through 5.   It’s a US military thing for anyone whose never watched a Michael Bay movie.  DefCon 1 is basically Armageddon, i.e. nuclear war is imminent or already begun, down to DefCon 5, where we’re all singing kumbaya together in peace, love, happiness and harmony.  The actual real world DefCon level is 3…which I didn’t know before I typed it…honest.
  • Fund managers haven’t been so bearish on tech stocks in almost 16 years as they brace for Fed tightening, the latest Bank of America survey shows. Net allocation to the sector fell to the lowest since August 2006. Most participants sent responses before the inflation print, though. While long U.S. tech remained the most crowded trade in the survey, a trend that’s persisted for more than two years, conviction is on the wane, at 28% in February compared with last month’s 39%.” (Bloomberg)
  • Local Stocks – a subdued day for stocks, with the ASX 200 down -0.5% with 59% of stocks retreating.  Financials (-0.9%) and Materials (-1.0%) did all the damage on a handicap basis, although Energy (-3.1%) took lines honours on the race to the bottom.  Tech (+1.0%), REITS (+0.8%) and Staples (+0.8%) were the better performers on the day.  Local markets remain subject to the whims and fancies of offshore markets more often than not, with geopolitical risk driving the tactical bus and inflation risk and central bank policy setting in charge of the strategic bus.  Local reporting season (interim) is a factor also.  Still only around a third reported thus far, with aggregate revenues growth of +12.6% on the pcp and aggregate earnings growth at +287% on the pcp.  Against market estimates, sales have beaten by +2.9% and earnings by +185%.





  • Offshore credit – no real words of wisdom today, CDS rallied in line with stocks, which is the bog-standard CDS response to a risk on session.  Nothing on cash yet, seems to continued, but modest drift wider.



EU Cash vs CDS…

Source: Bloomberg, Mutual Limited

US Cash vs CDS…

Source: Bloomberg, Mutual Limited



  • Local Credit – local stuff still generally resilient to offshore noise, but there is some drifting.  From the traders…”the domestic credit market remains in a tight holding pattern as offshore events dictate global risk sentiment. Flows were light, but constructive. As per yesterday we have reduced risk on the day through client flow and have any material selling from domestic or offshore accounts. We have fielded a number of questions on the outperformance of local spreads versus offshore markets, yet this is not unusual for our market which is high grade in nature, short in duration and unburdened by excessive primary supply.”  Major bank senior drifted again with the recent CBA and WBC Jan-27’s averaging +68 bps, +1 bp on the day, but still -2 bps inside issuance levels.  Four-year paper also drifting, +1 bps to +59 bps.  Tier 2 again drifting, +1 bp across some of the 2026 callables, now +140 – 147 bps.  Flows were reported as light “though the street seems anxious to lose paper…. Interbank liquidity poor with sensible bids hard to find. The steepening at the long end of the senior curve is unlikely to unsettle 10NC5 spreads too much, though the prolonged absence of buyers may



AU Cash vs CDS…

Source: Bloomberg, Mutual Limited



  • Bonds & Rates – higher highs in offshore bonds (yields) with treasuries selling off further despite an apparently, yet very modest, easing in geopolitical tensions.  US ten-year yields hit 12-month highs overnight, 2.04% (+5 bps on the day), while the front of the curve (two-years) saw a modest -1 bps rally, but still with a basis point of 12-month highs.   In the face of an imminently tightening Fed, liquidity is evaporating in US treasuries.  Bloomberg charts an index of liquidity in US treasuries – a gauge of deviations in yields from a fair-value model.  On Feb 10, when markets came around to the fact the Fed may unleash both barrels and hike rates by 50 bps next month, causing two-year yields to spike +21 bps (the highest 1 day move in 13 years), said index hit 12-year highs.  “As volatility has picked up, market depth has fallen…the softer Treasury market liquidity acted as an accelerant in the latest moves,” (JP Morgan).  “Market depth — derived from the sizes of bids and offers on the BrokerTec trading system — is depressed for all Treasury tenors, and worse for two-year notes than for the five- and 10-year.” (Bloomberg)





  • Macro – inflation isn’t going away with US PPI printing at +1.0% MoM for January, more than double consensus at +0.5% MoM and 5x the prior month’s print.  Annual data printed at +9.7% YoY vs +9.1% YoY consensus – levels not seen since 1980.  The peak came in 1974 around the OPEC oil crisis, +18.3%.  The long run average is +3.0% YoY.  As is obvious in the chart below, correlation between CPI and PPI is very high, around 90% – 95%.  However, a gap has opened up through the pandemic to 220 bps vs a historical average of 5 bps.  More often than not CPI is higher than PPI, which suggests producer pricing power over consumers, although optically the gap has been generally modest through time.  Since the onset of the pandemic that balance has shifted and PPI has run ahead of CPI, although the gap is tightening as CPI catches up – see chart.  For mine, the high PPI print suggest there is more scope for CPI to rise – or, and this is where I’m unsure, PPI begins to slow and merge back with a stabilising CPI.





  • Charts…






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Scott Rundell, Chief Investment Officer

T: +61 3 8681 1907



Mutual Limited Daily Update

Mutual Funds

MCTDF – Mutual Cash Fund
Gross running yield: 0.31%
MIF – Mutual Income Fund
Gross running yield: 1.37%
Yield to maturity: 1.00%
MCF – Mutual Credit Fund
Gross running yield: 2.73%
Yield to maturity: 1.90%
MHYF – Mutual High Yield Fund
Gross running yield: 5.04%
Yield to maturity: 4.23%