Mutual Daily Mutterings
Quote of the day…
”Whoever does not miss the Soviet Union has no heart. Whoever wants it back has no brain”…Vladimir Putin
“Might is right…?”
Overview…”oil plunges on easing supply concerns…”
- Moves: Risk on … Stocks ↑, bond yields ↑, credit spreads ↓, volatility ↓ and oil ↓….
- An improved risk tone on the back of falling oil prices, which in turn eases concerns that perhaps the Fed has to pump the breakers harder than markets expect Oil fell over $8.0/bl to $98.8/bl on easing supply concerns, specifically renewed hopes about an Iranian nuclear / oil deal getting inked. Bond yields were mixed, falling in Europe, while US treasuries saw a modest bear steepening as the FOMC meeting teed off, with a +25 bps rate hike expected. Credit spreads tightened a smidge on the better risk tone, but its very tenuous. Markets are pricing inflation risk more than war risk, which is as expected – it’s a terrible tragedy, but now the focus has switch firmly to inflation (and oil) and monetary policy.
- Nothing achieved in the war front, nothing positive at least. Bombs continue to rain down on Ukrainian cities, while talks between Russian and Ukrainian officials about a possible cease-fire proved fruitless. Putin accused Ukraine of not being “serious” about resolving the war, which is obviously said in the context of how he wants to resolve it, i.e. complete Ukrainian capitulation and disarmament. President Biden is heading to Europe for face-to-face discussions with NATO allies to discuss the crisis. Russia has placed sanctions on Biden in response, and other western leaders. Concerns Russia will stage “false-flag operations” involving chemical weapons continue to linger.
- Talking heads…”tentative optimism about Ukraine cease-fire talks and tumbling energy prices have shifted focus away from growth concerns back onto inflation and central bank policy… while the war in Ukraine adds to the uncertainty, we expect the Fed to signal a strong commitment to getting inflation under control.”
- Investor optimism is understandably in the toilet at the moment. “Most investors expect global stocks to slump into a bear market this year as the growth outlook has tumbled to the lowest level since the financial crisis – according to the latest Bank of America global fund manager survey. Cash levels have surged to the highest since April 2020, and allocation to commodities jumped to a record. Exposure to equities have fallen to the lowest in almost two years. Stagflation expectations jumped to 62% of responses.” (Bloomberg)
The Long Story….
- The war impact so far….
Source: Bloomberg, Mutual Limited
Source: Bloomberg, Mutual Limited
- Offshore Stocks – European markets did little by day’s end, a bit choppy intra-day, but no great advance or retreat when all said and done. US markets opened on a firmer footing from the get-go, closing comfortably in green territory. The DOW gained +1.8%, the S&P 500 +2.1% and the NASDAQ +2.9%. It was a broad-based rally with 88% of S&P 500 stocks gaining, while only one sector failed to launch. Not surprisingly, it was Energy (-3.7%). At the other end of the performance tables, Tech (+3.4%) and Discretionary (+3.4%) led the charge, followed by Telcos (+2.3%) and Staples (+2.2%). Even the second worst sector performed well, REITS (+0.7%). Given the state of markets, this rally could just as easily reverse tomorrow. The Iranian nuclear / oil deal hasn’t been signed, we’ve been here before and something has tripped the process up. Caveat emptor.
- Local Stocks – modest losses yesterday in the ASX 200, down -0.7% with 57% of the index retreating. Materials (-3.7%) did most of the damage, ably supported in the race to the bottom by Energy (-2.9%). At the other end, fighting the good fight was Financials (+1.0%), followed by Telcos (+0.7%), and Healthcare (+0.5%). Futures are up (+0.6%) this morning, but I’d be sitting on my hands today. As the old saying goes, one drink doesn’t make a summer, and the rally in US markets lacks a sustainable foundation. Having said that, forward PE’s are cheapening up, now at 15.8x, below the pre-pandemic five-year average of 16.1x. If we ignore the volatility on or around Q1 and Q2 of 2021, forward PE’s are back to levels not seen since August 2019. It all depends on you investment horizon.
- Offshore credit – a modest tightening on the improved risk tone, but it was a basis point here or there. If history repeats itself, any sustained change in overall risk sentiment will take a little longer to entrench itself in credit markets. CDS pricing firmed up in line with equities, with MAIN (-0.74 bps) and CDX (-2.6 bps). Macquarie Bank (A2/A+) launched a multi-tranche US$ deal yesterday, all up US$2.75bn price. Lines included US$1bn 3-year fixed at T+120 bps (vs IPT’s of T+135 bps) out of the bank, and a US$500m 3-year FRN at SOFR+131 bps. Out of the HoldCo, Macquarie Group Limited (A3/BBB+) priced US$650m of 6.25-NC-5.25 fixed at T+200 bps (vs OPT’;s pf T+210 bps) and a US$600m 11.25-NC-10.25 fixed line at T230 bps (vs IPTs of T+240 bps). The bank issued 3-year line swaps back around BBSW+133 bps vs the bank’s A$ Feb-25 line, which was pricing around +77 bps per Bloomberg yesterday. So that’s some expensive funding. Having said that, Macquarie has a lot of US$ funding requirements, so there is no guarantee it’ll come back onshore anyway.
|European Credit Spreads…
|US Credit Spreads…
- Local Credit – still no respite in the strained liquidity conditions. Traders…”extremely light flows indicative of fragile market sentiment. Secondary curves continue to be reset by primary. Little incentive for investors to add risk via secondary markets at this juncture which in turn blunts the secondary market’s capacity to take down any switch flow. We expect further primary supply, with the aforementioned dynamic unlikely to help broader market liquidity conditions.” Within this backdrop, major bank senior drifted wider again. Five-year senior is at +90 bps (+2 bps), while three-year paper is at +67 bps, unchanged on the day. Major bank senior is hovering +4 – 5 bps above its long run average (2012 – now) as markets normalise post the TFF funding environment and as investors reprice macro risk. Spreads are doing as we expected they would, at the beginning of the year. However, the pace at which spreads have normalised has been more aggressive than envisaged, and the catalyst definitely not in our base case. With further primary expected, there is scope to widen further and I can see 5-year major bank senior raising the bat at the ton (+10 bps from here) – over coming months. Tier 2 again widened again yesterday, +3 – 5 bps across the curve. The major bank 2026 callable cohort is around +171 – 175 bps, while Macquarie Bank’s 2026 callable tier 2 as wide as +195 bps.
- Bonds & Rates – RBA minutes (discussed below) did little for markets – no new information. Nevertheless, yields continued to punch higher on inflation concerns and likely monetary policy tightening. Through much of 2016 – 2018, ACGB 10-year yields ranged between 2.50% and 3.00%, with brief flirts over or under that range, but that was a reasonably consistent range. Heading into 2019, yields tumbled, hitting 1.00% around mid-2019 as growth concerns weighed on sentiment. Then the pandemic hit and we all know what happened then. As of yesterday, ACGB 10-year yields are back into the 2016 – 2018 range, at 2.52%, and looking to trend higher. Having said that, I doubt we’ll test the highs of the 2016 – 2018 range given rising inflation (not an issue previously) and likely tightening monetary policies, which will form a headwind for growth, capping long end yields. In fact, current levels are well through consensus medium forecasts for year end (2.33%) and through to Q3 2023 (2.22%). Perhaps its time to lengthen duration bets? As for offshore last night, some very modest rises in yields, not a lot happening, which is par for course on day one of the FOMC gathering.
- Macro – RBA March meeting minutes were released yesterday, with no surprises expected…bit of an oxy-moron, but anyway. True to expectations, no surprises given much of the detail has been discussed by Governor Lowe in post meeting speeches anyway. “Patience remains the theme, though the balance of risks have clearly tilted relative to the February forecasts. The Minutes note the RBA’s “business liaison program had suggested that firms were increasingly prepared to pass these higher costs onto their customers” and the Board has also concluded “the risks to the outlook for wages growth were skewed to the upside”. Nevertheless, the RBA is prepared to be patient as it assesses how “how persistent the pick-up in inflation ” would be, with aggregate wages growth still held out to be important in assessing inflation sustainability.” (NAB)
- Looking further afield, and to be taken with a grain of salt if you ask me…”China’s industrial output, retail sales and investment data beat expectations over the start of 2022, though lockdowns to fight Covid and elevated commodity costs pose challenges going forward. China also injected more funds into the financial system and set a weaker-than-expected reference rate for the yuan, seeking to support the economy.” (Bloomberg). As for the specifics, Industrial Output rose +7.5% YoY (vs +4.0% YoY cons.), Retail Sales rose +6.7% YoY (vs +3.0% YoY cons.), Fixed Investment rose +12.2% YoY (vs +5.0% YoY cons.) and the Surveyed Jobless Rate rose +5.5% YoY.
- Overnight, “prices paid to US producers rose strongly in February on higher costs of goods, underscoring inflationary pressures that set the stage for the Fed’s first-rate increase since 2018 on Wednesday (tonight). Still, officials will have to balance curbing higher prices without hampering the economic rebound. A separate report showed New York state manufacturing activity weakened considerably in early March as orders fell and delivery times lengthened.” (Bloomberg)
Source: Bloomberg, Mutual Limited
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Scott Rundell, Chief Investment Officer
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