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Mutual Daily Mutterings

Quote of the day…

 

“Somebody said to me, ‘But the Beatles were anti-materialistic.’ That’s a huge myth.  John and I literally ised to sit doen and day, ‘Now, let’s write a swimming pool…” – Paul McCartney

 

 

 

 

 

 

 

Chart Du Jour:  AU breakevens…rising also

 

 

 

“Let Them Eat Cake…

Source: www.hedgeye.com

 

 

OverviewSideways…”.

  • A wishy-washy day for US stocks despite modest leads from European markets.  Across the main US indices stocks closed little changed after oscillating between modest gains and equally modest losses.  Treasuries slumped on speculation the Fed may have to tap the gas-pedal and speed up its tapering program after the fastest inflation in three decades (reported last week, but some people are slow I guess).
  • As we head into the final month and a half of the calendar year street strategy teams have dusted off the old dartboard and roped in their quantitative boffins to have a punt at predicting what 2022 might look like.  Morgan Stanley have shot out of the gate with a pessimistic view, expecting “the S&P 500 to slide to 4,400 in the next 12 months, implying a 6.0% drop from Friday. While profits are projected to extend their expansion, they warn that a growth slowdown and withdrawal of Fed stimulus will likely pressure valuations.”  I must be ahead of my time. I’ve been wary of valuations for a while now, although it hasn’t helped me much, the market has ploughed on ahead.
  • Inflation watch….a November survey of credit investors by Bank of America showed that 73% are worried about rising price levels, the highest percentage in almost a decade. It remains the top risk that investors cite. In government-debt markets, expectations for the pace of inflation over the coming decade on Friday climbed to a level unseen since 2006.
  • Fed speak…(ex-Fed to be exact)…”the Fed may have to raise rates to at least 3.0% to try to keep inflation in check. The peak will be “probably 3.0% to 4.0%,” according to ex-New York Fed leader William Dudley.  Former Richmond President Jeffrey Lacker agreed, saying 3.5% to 4.0% is “plausible.” The two, along with Larry Summers, suggested that the Fed should accelerate tapering. (Bloomberg)”
  • It’s not just the US, across the pond, Bank of England Guvna, Andrew Bailey, has stated he is “very uneasy about the inflation situation” as evidence indicates a shortage of workers will drive up wages, with the labour market “tight”.  However, no action yet, he’s waiting to see what happens once the furlough program ends before contemplating hiking rates.

Details….

  • Offshore Stocks – modest losses across the board after a choppy day in US markets.  European markets extended gains and are looking ripe for a pull back with the Euro STOXX sporting RSI’s of 76.5, well into ‘overbought’ territory.  Within the S&P 500, stocks advance outweighed those retreating, just.  Utilities (+1.3%) performed best on the day, followed by Energy (+0.8%) and then REITS (+0.5%), so ‘safe-haven’ sectors.  Healthcare (-0.6%), Materials (-0.5%), and Tech (-0.1%) dragged their feet a touch.  The S&P 500 racked up its 22nd day with a move of less than 1.0% in either direction, a streak not seen in almost two-years.  Not all indices have been so sedate, with the NASDAQ posting at least six days with bigger moves during that time (but that’s to be expected of the NASDAQ really).  With six weeks until we’re singing drunkenly belting out Auld Lang Sine with our nearest and dearest, what can we expect for the remainder of the year?  Arguably most risks are already well-articulated and arguably priced in.  “At the same time, big up days are scarce after an $8 trillion rally added a quarter of the S&P 500’s value this year. While the rotation between the S&P 500’s sectors and styles keeps on going, on the surface the 500-member gauge remains imperturbable”.  One potential source of wobbles is option expiries, which are approaching.  While history may not always repeat, it does often echo.  In this regard, the S&P 500 has posted a 1.0% move (in either direction) in six of the past eight option expiry weeks according to Bloomberg.
  • Local stocks – modest gains again as the ASX 200 remains wedged into a reasonably tight 30-day trading range of 7325 – 7470, closing at the top of that range yesterday.  The ASX 200 is now at two-month highs.  Yesterday saw Healthcare (+1.2%), Discretionary (+1.1%) and Tech (+1.0%) dominate, while Energy (-0.2%) was the only real sector to lag the positive tone.  Materials and Utilities did little, closing largely unchanged.  And just as the index reaches two-mo9th highs, futures are pointing to a weaker session ahead today, -0.5%.

 

 

(Source: Bloomberg)

 

 

  • Offshore Credit – I’ve pilfered some commentary from Morgan Stanley who have thrown down some bearish thoughts on the outlook for credit.  To be clear, this is US credit, and fixed rate.  Having said that, a meaningful widening in offshore spreads is rarely ignored in local markets, although the delt in A$ markets tends to be muted.  Morgan Stanley stated that “with inflation fears rising and interest rates looking increasingly likely to be hiked soon, investment-grade corporate bonds are at high risk of getting slammed in the coming months.”  Morgan Stanley fear the Fed will be forced to hike rates sooner rather than later, although they’re not Robinson Crusoe on that trade, citing an index of expectations for future bond yield swings has reached its highest level since April 2020.  Added to this, Morgan Stanley are wary of supply-chain problems and wage pressure on earnings.  I would stress these views have more significance for fixed rate bonds than floaters, but the latter would likely be dragged along for the ride if we saw spreads punch wider.  The capital impact, however would be much, much lower as floater coupons reset every 30 – 90 days.  Investors are dealing with this scenario in the US by shifting to shorter duration credit, which saw longer dated spreads widened more than shorter dated paper last week.
  • Local Credit – not a lot happening in Aussie credit yesterday with traders reporting muted flows, but with client flow balanced.  No change to the supply dynamic in the ADI space with a growing conviction that the majors have put the cue back in the rack, in senior at least.  We might, just might, see a subordinated deal.  No change to senior or subordinated spreads yesterday.  Back on the senior space for a second, kind of, Westpac went back to the US$ mandating banks to help with a benchmark US$ covered deal.  This is on top of the A$7.4bn five tranche senior and sub deal priced recently.  This would be Westpac’s third covered deal (that is outstanding), their last was a US$1.75bn 5-year deal priced early last year, January 2020, which is swapping back at BBSW+23 bps.
  • Still on A$ credit, APRA Chair Wayne Byres provided speech yesterday, previewing the changes it will be making to the bank capital framework later this month.  The unquestionably strong capital requirement will be formalised, with banks currently holding “more than enough capital”.  No major changes there.  APRA will require the banks to hold a larger share of their capital in the form of regulatory buffers.  This is expected to provide flexibility though economic cycles, but is nothing new.  Nothing to see here, move along.  Of most relevance is on the matter of loss absorbing capacity, or TLAC.  And from here I’ll borrow some words from Citi…”recall that the major banks have been expected to increase their Loss Absorbing Capacity by 400-500bp of RWA over time. But as a first step, APRA’s mandate was that the major banks should raise an additional 300bp of risk-weighted assets as LAC, using existing capital instruments, by January 2024, while it pondered what the remaining 100-200bp of RWA would look like. The initial 300bp of RWA has been largely filled by the major banks through tier 2 issuance over the past couple of years and we have highlighted many times the relative ease with which banks have been meeting this 300bp target. Mr Byres comments yesterday suggest that APRA has gotten comfortable around the market capacity for tier 2 capital. Our expectation is APRA will mandate that the remaining 100-200bp of loss absorbing capacity to also come from existing capital instruments (effectively tier 2 capital). Our view is that it does not make sense for APRA to introduce a new form of capital instrument (e.g. non-preferred senior) for a relatively thin slice of the capital structure (100-200bp of RWA), especially when the market for Aussie Tier 2 instruments has developed as much as it has over the past few years. While there is no clear timeframe for when this remaining 100-200bp of LAC will need to be filled, our view is that there is sufficient market capacity for this in the medium to long term. Assuming RWAs remain constant at September 2021 levels, 100-200bp of RWA equates to around A$17-35bn of tier 2 issuance across the four majors”.
  • Bonds & Rates – a little more vigorous in local bond markets yesterday, than I expected at least.  A decent rally in the front end of around 5 bps, while the back end lagged, tighter by around 2 bps, aka a bull steepener. Given offshore leads, I was expected a basis point or two here and there.  Also of note, from CBA…”the long, slow path to re normalisation of the cash markets took an important step yesterday.  The RBA cash rate was deemed to be 0.04% on Friday night, up from 0.03% that has been prevailing since January.

 

 

 

 

  • Offshore Macro – some commentary on inflation, I know, we haven’t nearly heard enough about inflation.  I lifted this from Bloomberg, some interesting insights…”the whole back to the 70s narrative is in full swing. And it’s the loss of earnings power that makes inflation an economic threat. But, the thing to keep in mind about reaction functions is that one-time price level step ups don’t matter to central bankers. The world’s major central banks will likely wait out 2021 before accelerating tightening guidance.”  And, “….base effects for the Baltic Dry Index are leading to lower numbers. And that’s exactly what central banks are looking for. The Fed and other central banks hope the pandemic has simply induced a one-time step up in the price level. And whether that level remains sticky or prices recede back down to pre-pandemic trend is irrelevant for their reaction function because unless you get constantly accelerating prices, base effects kick in and send inflation rates back down.  So central bankers have sat on their hands as inflation has reached 30-year highs. Is that reckless? Maybe, but with anecdotal evidence that supply-chain pressures are easing, we should expect this wait-and-see game to continue despite the re-emergence of bond vigilantes and the selloff of the back end of government yield curves. Only when the holiday season is over will we have a firm read on how persistent these supply chain pressures are. That makes winter inflation prints the ones to watch.
  • Local Macro – on the Australian calendar today we have the RBA minutes for the November Board meeting and RBA Governor Lowe is speaking on “Recent Trends in Inflation

 

 

 

 

 

Click here to find the full PDF from our Chief Investment Officer’s daily market update.

 

 

Contact:

Scott Rundell, Chief Investment Officer

T: +61 3 8681 1907

E: Scott.Rundell@mutualltd.com.au

W: www.mutualltd.com.au

Mutual Limited Daily Update

Mutual Funds

MCTDF – Mutual Cash Fund
Gross running yield: 0.29%
MIF – Mutual Income Fund
Gross running yield: 1.38%
Yield to maturity: 0.89%
MCF – Mutual Credit Fund
Gross running yield: 2.69%
Yield to maturity: 1.82%
MHYF – Mutual High Yield Fund
Gross running yield: 4.91%
Yield to maturity: 3.98%