Mutual Daily Mutterings
Quote of the day…
““There’s only one thing I hate more than lying: skim milk. Which is water that’s lying about being milk.”…Ron Swanson
Chart du jour… US COVID infections (and deaths), infections up 66% in past two weeks…
Source:Bloomberg, Mutual Limited
“Here to Stay…”
- Despite the usual superstitions, Friday the 13th didn’t bring doom and gloom, rather it brought nothing but good cheer for all risk assets. The doom-and-gloom comes from the fact that we in Victoria and NSW remain in lockdown, circumstances which don’t look like changing for weeks. Offshore stocks closed the week on a firm footing, albeit Friday’s rally was very modest. Offshore gains came despite a reading of US consumer sentiment plunging to the lowest level in nearly a decade. Local stocks had a solid Friday and week (leading all comers). Surging COVID cases, and the potential impact on growth, are obviously weighing on sentiment, and sustained inflation concerns are lingering within the narrative, causing layers of doubt on the year ahead (and beyond). Despite all this, S&P 500, and others, plus the ASX 200 are all sitting at record all-time highs.
- Reflecting the cautious tone, ten-year treasury yields ripped lower on Friday night our time, slumping to 1.29%, with a -7 bps flattening of the 2s10s curve. The next road marker for bonds, and broader markets is the next Fed meeting, the Jackson Hole Economic Policy Symposium on 26 – 28 August. Debate rages on whether the Fed will announce tapering plans at this meeting, an expectation that has attracted a reasonable fan base. Rampant COVID infections – despite vaccination rates – could cause the Fed to keep policies accommodative for that little longer – which is a view espoused by Bank of America strategists….”Jackson Hole will be a policy black hole”…the firm doesn’t expect a policy shift or taper signal from the gathering. Chair Powell is expected to recount economic progress and acknowledge the FOMC will continue debating taper but fall short of signalling it. BofA’s base case remains a signal from the September FOMC, an announcement in December and a start in January (Bloomberg). Policy error is a big cause for concern here.
- On the matter of economic progress, a range of partial indicators are scheduled this week for the US, including retail sales, housing starts, building permits, and release of FOMC meeting minutes. Locally, it’ll be all about labour data (Thursday).
- Offshore Stocks – modest gains across core indices, with the S&P 500 marginally outperforming the DOW and NASDAQ, while the Euro STOXX outperformed all. European stocks are on a hot streak, notching their tenth day of gains in a row. Within the S&P 500 the gains were pretty shallow, just 53% of stocks advancing, although more sectors gained (7) than retreated (4). Despite plunging consumer sentiment, Staples (+0.8%) was the best performer on the day, followed by REITS (+0.7%) and Healthcare (+0.6%). Dragging their feet were Energy (-1.3%) on oil weakness, followed by Financials (-0.7%) and Industrials (-0.3%). Relative strength indicators continue to climb, ending the week just shy of ‘overbought’ (66.3). Over the week European indices have outperformed all comers, while the US markets have underperformed.
- Local stocks – new record highs again on Friday in the ASX 200, cray-cray given such lofty valuations (by historical norms). Relative strength indicators (RSI) are flashing all hot and bothered, aka ‘overbought. The RSI peaked at 73 on Friday. Any time over the past year when the RSI has tripped the ‘overbought’ line in the sand, shortly thereafter followed a modest sell-off, averaging -2.5% (range 1.5% – 3.6%). On the day, Friday was a pretty robust and broad-based rally, with 73% of stocks advancing, and to find a sector in the red, you have to go to two decimal places, Materials (-0.01%). At the top of the tables, were Healthcare (+2.0%), Utilities (+1.7%) and Discretionary (+1.2%). Futures are hinting at a modest pull-back this morning at the open (-0.12%).
- Offshore Credit – It was a quiet Friday for sales of US IG bonds, and the primary market is set to be relatively calm until after the US Labor Day weekend (September 6). This week’s forecast calls for US$10bn to US$15bn, with most anticipating another front-loaded week. With US$73bn priced month to date and consensus of US$80bn for August, the bulk of issuance has probably been done. Amidst the deluge of issuance last week, spreads were relatively stable. US corporate indices closed unchanged, with US financials were a basis point wider. High yield also drifted a touch (+3 bps) wider. With the summer lull approaching, we could see a drop in liquidity and spikes in volatility – it tends to happen around this time of the year. EU IG spreads have also drifted wider, just a basis point though.
- Local Credit – a somewhat frisky end to the week on Friday, with some action in the tier 2 space amidst the aftermath of the CBA tier 2 deal. The deal launched at +132 bps after initial guidance of +140 bps, and then we saw it middling around +129 bps on Friday, although no actual paper has changed hands…apparently. Away from the new CBA deal, the Sep-25 call was marked a basis point wider at +116 bps, implying a +13 bp spread extension out to the new line, which is probably +3 too much given prevailing technicals. The NAB Nov-26 call is the only other line to make any moves, tightening by a basis point to +128 bps. If I had to suggest a likely path from here for the new CBA line, it should be 2 bps inside the NAB Nov-26 callable line. On a linear curve basis, however, the 2026 calls are 5 – 8 bps expensive.
- Bonds & Rates – someone in the talking head space recently posed the following question “if the Fed is so close to scaling back its bond purchases, why aren’t we having a taper tantrum like we did in 2013?” A fair question given the shear hint of tapering back in 2013 saw markets et al throw a hissy-fit that any entitled 2-year-old would be proud of. As the author of said question pointed out, “yields are low because the central bank is still buying tons of Treasuries and will continue to do so. It’s now scooping up $120b of government and mortgage debt a month. Over time, that may be cut to $100b, $80b, $60b and so on. These are not small amounts. The Fed will still be gobbling up bonds for, let’s say, the best part of a year”. Further, and this is a staggering number, the Fed now owns US$5.3t of government debt, or about 25% of the market. As proven by Friday’s action, yields can conceivably go lower…again. Nevertheless, policy failure remains a risk over the remainder of the year, and likely into next. Local bonds ticked higher despite lingering lockdown expectations, and will likely attract a strong bid today on the back of offshore leads.
- Offshore Macro – Consumer sentiment in the U.S. plunged to the lowest level since 2011. The University of Michigan’s preliminary sentiment index fell by 11 points to 70.2, well short of all estimates. The data highlight how rising prices and concerns about the Delta variant’s potential impact on the economy are weighing on Americans. Over the week ahead, Retail Sales will likely attract the most attention. Consensus expects a -0.2% MoM pull-back, mainly because of falling vehicle sales. Ex-autos, Retail Sales are forecast to rise +0.2% MoM. Following Retail Sales is building permits (positive print expected MoM) and housing starts (negative print expected MoM). A modest drop in jobless claims is also on the board. Minutes from the last FOMC are also scheduled for release.
- Local Macro – a light week for data volume wise, but important in that it’s labour data (Thursday). A modest uptick in the unemployment rates is expected, from 4.9% to 5.0% with a 46.2K fall in jobs (vs +29K last month), obviously linked to the various COVID lockdowns – risk is for an overshoot here, but realistically markets should look through it. Lockdowns harm jobs and growth in the near term, but when economies open up, the rebound has been typically vigorous and prompt. One has to wonder though, do we start seeing lockdown fatigue, i.e. rebounds aren’t as robust or quick on a rising lack of faith that we’ll actually stay out of lockdown. Vaccination rates are key here. RBA meeting minutes are released also (tomorrow), which will be dissected for any discussion around tapering.
- Just because…from Bloomberg – gold had a golden anniversary on Sunday. Fifty years have passed since President Richard Nixon said the US government would no longer convert dollars into the precious metal at $35 an ounce, effectively ending the gold standard. While it generally had bigger gains since that time than the S&P 500 Index, there was no comparison between the two after accounting for dividends, according to data compiled by Bloomberg. The S&P 500’s total return approached 20,000% last week, while gold returned about 4,200%.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907