Mutual Daily Mutterings
Quote of the day…
“Mr. President, I’m not saying we wouldn’t get our hair mussed. But I do say, no more than 10-20 million [US citizens] killed. Tops. Depending on the breaks.”…General Buck Turgidson, “Dr Strangelove”
Chart du jour…Australia signs new defence pact
Source: the interweb (a scene from Dr Strangelove)
“Jumping From Headline To Headline…”
Overview…”the dippers are back again.…”
- Stocks rose the most in almost three weeks, for reasons I can’t quite put my finger on. The general narrative is that it was because “the concern that has weighed on investor sentiment about a slowdown in economic growth eased”. I certainly didn’t see any data, or headline, to signal that ‘concerns had eased’. Rather, I saw little change in market conditions at all, except a rally in oil prices. And, that was driven by inventories, not surging demand, which would have signalled growth optimism. Maybe it’s the vibe, you know…the vibe. With apologies to “The Castle”.
- Talking heads…“we have tested the 50-day average on the S&P 500. You could argue nine to ten times this year, we never broke it with any conviction…everybody is worried about where the next 5% to 10% correction comes from. What nobody is thinking about is that the next 10% move could be to the upside.” I’d put myself in that camp to be honest, mainly because I see more monsters under the bed than I do fairies dolling out stardust. Confused yet?
- Bond yields rose a touch, but no real change to recent themes as markets remain wary of lingering macro headwinds. While Tuesday’s US CPI print could be assessed as reducing pressure on the Fed to start tightening up on its monetary policy settings, there are a range of obstacles ahead that will give markets reason to pause. The stubborn COVID Delta variant is one, as is the rising costs on economic reopening. And, while I haven’t mentioned it much in these pages, China’s drive to rein in private industries and the side effects of these actions represent a potential challenge to growth.
- Crude oil jumped with WTI surging +3.8% and Brent hit US$75/bl for the first time in well over a month. Storms in the Gulf of Mexico have added to a rapidly tightening market and US crude stockpiles fell by a larger-than-expected 6.4 million barrels last week to the lowest since Sept. 2019
- Offshore Stocks – a tale of two stories in offshore markets overnight with European stocks in the red, the EURO STOXX 600 down -0.8%, with most sectors under the pump. Only Energy (+2.2%) put up a fight. Across the pond and it was a different scene, stocks opened up from the get go and kept running. Over three-quarters of the S&P 500 advanced and only one sector, Utilities (-0.1%) failed to fire. With oil up over +2.5% on the day (Brent), and +9.3% over the past 30 days now, Energy (+2.5%) did most of the heavy lifting, ably supported by Industrials (+1.1%), and Materials (+1.1%).
- Some steak knives analysis….I came across this nugget this morning, which I found mildly interesting (when taken at face value)…”being bullish on U.S. stocks doesn’t pay off at this time of year. Comparing the value of $10,000 investments in the S&P 500 Index from 1950, anyone who owned the S&P 500 only in May through October would have ended up with about $78,000 based on total return. For November through April, the comparable total was about $3 million. Investing year-round though would have turned $10,000 into $24.9 million. Turns out seasonality does indeed matter.”
- Local stocks – a modest down day in local stocks, although the volume of winners and losers at the stock and sector level were pretty balanced, so a sense of the market not knowing if it was Arthur or Martha. Most of the downward force came from Materials (-1.4%), doing most damage by virtue of its high weight in the index. Joining Materials at the bottom were Utilities (-1.8%) and Energy (-2.2%). Given the strong rally in oil overnight, you’d expect a solid reversal of the latter. Fighting the good fight for the bulls, Health (+1.2%), Tech (+1.0%), and REITS (+1.0%) kept on punching. The ASX 200 closed below its 50-day moving average, just, again (7417 vs 7452), but last night’s leads, the index should be back on top of its moving averages today. Futures are up +0.4%.
- Offshore Credit – JPMorgan led 10 US IG borrowers in pricing deals overnight, bringing weekly volume to US$38bn to already exceed estimates (US$35bn). Monthly sales are approaching US$120bn at the mid-point of September, nearing forecasts calling for US$140bn. Deal metrics remain constructive, albeit a tad softer than YTD averages. Average new issue compression on last night’s deals was 2.3 bps (vs 1.5 bps YTD), while books were 2.5x covered (vs 3.1x YTD). Meanwhile spread compression, from launch to pricing averaged -22.8 bps (vs -23.8 bps YTD).
- Local Credit – trader’s comments…”little of note other than the rates market response to US CPI. This move higher (lower in yield) did little to ignite interest in secondary credit markets, that spark likely to come from the 7th QANTAS deal which may formally launch today”…we have little interest in this deal. On financials (with some edits) “we await a meaningful reaction to Friday’s CLF announcement. We pre-emptively moved spreads another +1 bp wider but rather surprisingly net lost financial inventory over the course of the day. Major Bank fixed paper remains better bid, its scarcity value making ongoing appeal. We remain convinced that the basis between Majors and Regionals need to decompress, the rating differential itself does not justify the current spread, let alone the pressure that some regionals may experience given their dependence on domestic funding markets”. I agree on the latter. While the path for spreads strategically is wider across bank paper, it’s likely to be a gradual process, nothing too violent or aggressive – all other things being equal. And the relativities between regional and majors, the former have stronger deposit funding bases, which will help cushion any near-term funding needs. The Aug-26 NAB senior line closed unchanged at +43 bps, while the Jan-25’s were a basis point wider at +30 bps, and three-year paper also a basis point wider at +26bps. In the tear 2 space, the longer dated 2026 calls were a basis point tighter at +128 – 129 bps.
- Bonds & Rates – the solid risk off tone from offshore markets the prior evening set the tone for local markets yesterday. A pithy one line from Marty McFly at CBA…”once again the market is showing who is boss, as Team Transitory chalks up a win and the bond market (as the average yield of all the analysis of such key data) decides yields should be lower.” Despite the relative solid rally in risk assets overnight moves in bonds were more measured, with ten-year treasuries a basis point or two wider at +1.30%.
- Offshore Macro – pilfering some commentary from my former shop here…”US industrial production expanded by +0.4% MoM in August compared to expectations for a +0.5% MoM increase. Car and car parts production increased marginally. Shortages of semiconductors may be holding back the recovery in car production that has pushed up car prices and inflation strongly.” That was last night, to night…”we expect another fall in US retail sales in August (10.30pm Sydney time). The combination of fading fiscal stimulus, an increase in restrictions and low consumer confidence likely weighed on retail sales. Nevertheless, the risk is that sales declined by less than anticipated if rising covid infections and fear of catching the virus disrupted the shift back towards more services spending”.
- Local Macro – Westpac Consumer Confidence data out yesterday, with a bit of an improvement over the prior month. The Consumer Confidence Index for September hit a pretty solid 106.2 (vs 104.1 for August), a rise of +2.0% (vs a -4.4% decline last month). The lift in confidence means the level of the index is now just -0.9% below its June 2021 pre-NSW lockdown level. A somewhat surprising level, although probably reflective of confidence that once NSW and Victoria escape lockdown, everyone will be splashing the cash. Having said that, the growth in confidence isn’t equal. NSW, who have a reasonable well-articulated and detailed plan of escape, saw a sharp +5.3% lift in consumer confidence, whereas in Victoria, where the populace continues to be treated like juvenile mushrooms by their blindly elected overlord, held steady. QLD also saw an outsized gain of +8.4% after the end of its snap lockdown in late August. Today, the focus will be on labour data, with consensus expectations tabled below:
Click here to find the full PDF from our Chief Investment Officer’s daily market update.
Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907