Mutual Daily Mutterings
Quote of the day…
“One tequila, two tequila, three tequila, floor.” – George Carlin
Rolling weekly spread change…
“Treading water ahead of the Fed…”
- Overview – and again the narrative swings as market bipolarism flares up….that’s probably overly dramatic, moves were modest all things considered, across both bonds and stocks. Nevertheless, bond yields eased back from recent highs, while stocks, in the US at least, advanced a touch. The lazy narrative stating tech stocks led US markets higher as “investors weighed the budding economic recovery and progress on vaccines against the risks of rising inflation”, and that’s the thematic and narrative du jour, or even de l’année (yes, I did two years of French at high school). Realistically, on the eve of the FOMC meeting, markets were in a cautious mood, with no meaningful swings in risk appetite…although markets of late have shown general contempt for Fed commentary and guidance. Within a data vacuum and a general absence of other potentially market moving events, headlines swung back toward the COVID pandemic, remember that little drama bubbling away in the background? Firstly, a third-wave is forming / has formed across parts of Europe, with Italy again going into lockdown, while Germany and France are reporting spiking infection rates. Secondly, said countries have suspended use of the AstraZeneca vaccine “amid a growing health scare that’s creating yet another delay for the EU’s inoculation campaign. The moves come after additional reports of blood clotting issues.”
- Offshore Stocks – European markets were sporting a modestly nervous shade of red as a third COVID wave takes hold across several countries, causing some to go back into lockdown. Ahead of the FOMC, US markets didn’t deviate too far from the ‘unchanged’ line for much of the trading session, but then displayed a sharp boost of positive energy in the last half hour of trading, and closed at new all-time highs (S&P 500) with 73%. Tech stocks have been up and down like a toilet seat at a chili eating contest, and last night they were up. Within the S&P 500, Tech stocks were the fourth best performing sector (+1.1%), but the largest contributor to the broader index’s gains by virtue of weight (27%). Value stocks performed best on the day in an absolute sense, with Utilities (+1.4%) and REITS (+1.2%) friskier than usual. Financials (-0.6%) and Energy (-1.3%) were the only two party-poopers. Despite all the hand-wringing around bond yields, and the impact on borrowing costs, volatility with stocks has actually fallen to post pandemic lows, with the VIX at 20.0% vs a 12-month average of 30%.
- Local Stocks – a very narrow and very small rally in the ASX 200 yesterday with the index bumping along its 50-day moving average since the beginning of the month. REITS (+1.1%), Healthcare (+1.1%) and Energy (+0.8%) did their bit on the day, but were almost completely offset by falls across Tech (-1.9%), Materials (-0.6%) and Discretionary (-0.3%). Around 59% of stocks advanced, while sector split between the winners and losers (sorry, participants without medals) was almost evenly matched. Futures are pricing modest gains for the local index (+0.4%), as well as the NIKKEI (+0.4%) and Hang Seng (+0.6%), while the Shanghai Comp looks like with will be taken to the cleaners (-2.1%). While the S&P 500 VIX has hit 12-month lows, the ASX 200 VIX is at 13.5% vs a low of 10.2% (December), but down on the pandemic average of 20.9%.
- Offshore Credit – reasonably active in US IG primary with just under US$8bn priced across six deals. Spread compression from launch to printing averaged around 15 – 20 bps. In European markets, just under €10bn priced across ten issuers, including Verizon who are spreading themselves around a bit to raise coin to fund their 5G spectrum investment. The deals tabled were well supported, with spreads 23 bps tighter on average, from launch to print, while books were 2.4x oversubscribed. Spreads in secondary were largely unchanged.
- Local Credit – the yanks took centre stage yesterday with Verizon coming to market with a new 7-year, 10-year and even a 20-year A$ fixed rate structure. Also coming to the primary fountain of hopes and dreams, Stockland and BWP Trust (Bunnings warehouses) both mandated lead managers for potential 7-year fixed rate deals. Traders are reporting that secondary activity was muted with credit desks, both buy side and sell side, looking to get limits where needed, and assessing the merits of the new deals. The first update on the Verizon book build came late in the day with bids of $440m (+115 bps guidance) for the 7-year, $400m (at +140 bps) for the 10-year, and they were able to rustle up $170m (at +175 bps) for the 20-year. Verizon is a global name, so will attract decent interest out of Asia. Not for us though, too long, and too fixed. Looking to the banks, no change in the major bank senior curve again, while tier 2 was able to eke out another basis point of tightening across the curve.
- Bonds & Rates – the ACGB yields followed their US counterparts yesterday, rising by as much as +10 bps in the 10-years (to 1.81%), before closing +9 bps wider at 1.80%. The same themes as every other day when bond yields rise, markets are pricing in higher growth, but with an accompanying and unsavoury boost to inflation, at least that was the thematic yesterday. Later this week bond trader and investor focus will be on the two-day FOMC meeting (starts tonight). The likely key for all parties is the trajectory officials pencil in for their policy rate over the coming few years. In December, they projected holding rates near zero through the end of 2023. Obviously recent yield increases suggest markets have little patience for this scenario, or “the market has no patience for the Fed being patient”. If Fed Chair Powell “pushes back on the current pricing, the markets will likely think he is in denial and therefore accelerate the timing and the magnitude of the Fed’s first-rate increase.” US 10-year treasury yields touched 1.64% late last week, a 12-month high. There was also a notable surge in 5-year rates as markets pulled forward expectations on when the Fed would shelve its ultra-loose monetary policy stance.
- Macro – still on the Fed, the upcoming meeting is expected to include tabling of updated quarterly forecasts for growth and unemployment. Nevertheless, market consensus indicates most punters expect the Fed will continue to project that it’ll hold rates near zero through 2023…this is in contrast to the RBA, which is also indicating a rates policy on hold (no official rate hikes) for three years, so through to 2024. Is Powell in denial? Possibly, possibly even probably. He hasn’t “pushed back against the bond market’s views. He’s acknowledged that the sell-off had caught his attention, but he stressed that overall financial conditions are more important, and by that measure rising yields have yet to scare off investors. He also said he’d be concerned if the yield surge was accompanied by disorderly markets” (Bloomberg).
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907