Mutual Daily Mutterings
Quote of the day…
“When will I learn? The answer to life’s problems aren’t at the bottom of a bottle, they’re on TV!”…Homer Simpson
Chart du jour…global spread change …
Source:Bloomberg, Mutual Limited
“Another Round (of QE)…”
Overview…”the S&P 500 raises the bat…”
- A mixed offshore session. European stocks closed with a moderate degree of downside conviction as softer macro data and lingering COVID infections took some jam out of investor’s donuts. US markets started softer, but then clawed their way up into positive territory. The S&P 500 raised the bat, advancing over +100% since the March 2020 market maelstrom. Treasury yields did little, while oil re-engaged with its inner emo, falling.
- The situation in Afghanistan has deteriorated rapidly, with Vietnam flashbacks. No immediate impact on asset prices expected, but the US is at risk of losing face – what’s left of it – and it is becoming a political weapon domestically in home markets. If President Biden is seen as politically weakened through having mishandled the crisis, both sides of the political spectrum could distance themselves from him, and possibly jeopardise infrastructure and stimulus bills currently being debated.
- Fed Chair Powell is scheduled to speak tonight, a town hall event, which some are viewing as a potential precursor to the Jackson Hole symposium (26-28 August). Consensus expect the Fed to lay out the timing and contours of its expected move to taper the bond-buying program at this event. Talking heads… “the big question that’s hovering over the market is about the Fed — when the Fed is going to move, when the Fed is going to taper. What we do know is that the recovery is going to be bumpy — it’s not going to be in a straight line.”
- Some nuggets of wisdom from Citigroup’s lead equity strategist (via Bloomberg), who has warned that investors should be bracing for more volatility as Fed tapering, the possibility of higher US taxes, margin pressures and persistent inflation become forces that the bond market has to respond to – I would add, ergo equities need to be wary of…which he does. “We’re a bit more cautious”, adding that these four potential issues “could cascade onto each other around September” as valuation is extended. I agree, stocks are priced to perfection, but there is an under-belly of fragility that could precipitate a meaningful sell-off in risk assets over coming months.
- Offshore Stocks – a mixed session on offshore markets, starting off the Euro STOXX finally stumbling after a consecutive run of up-days numbering in the double digits (their longest winning streak apparently), down -0.5% on the day. US markets started with a soggy bottom, picking up the ‘woe is me’ baton from Europe, but before long began to claw its way up from the intra-day lows, Survivor’s “Eye of the Tiger” providing the sound-track on the day. In the end, the DOW and S&P 500 both advanced +0.3%, while the NASDAQ (-0.2%) gave up some ground. The S&P 500 has again notched up a new record high, it’s 49th this calendar year. Across the index it was a pretty shallow rally, just over half of stocks gained ground. Healthcare (+1.1%) showed some good health, followed by Utilities (+0.7%) and Staples (+0.6%). The losers were led by Energy (-1.8%), followed by Materials (-0.5%), and Discretionary (-0.4%). More sectors gained (7) than retreated (4). Relative strength indicators are warming up, closing at 67.9, just shy of the ‘overbought’ signal.
- Local stocks – a modest pull back yesterday, which has been somewhat expected. It was a relatively narrow sell-off with 53% of the ASX 200 stocks retreating, but it was what retreated that mattered. Three of the biggest losers on the day sector wise, are three of the biggest sectors. Leading the charge down the rabbit hole was Energy (-3.4%), followed by Financials (-1.3%) and Materials (-1.0%). It was the drop in Financials that did most damage to the broader index on the day, driven lower by BEN (-9.9%), which attracted a mob of market haters after missing average consensus earnings estimates for FY’21. For some context, they missed the average, but cash earnings were within the range of analyst expectations. Unlike most peers so far, BEN did not announce any buy-backs, which could have driven some of the selling. The bank instead is focused more on growth, which is evident by BEN’s loan book growth, 5x system at +10.6% YoY per APRA’s June Banking Statistics. AMP (-4.8%) and ANZ (-2.7%) in the financials space also attracted some heavy selling. At the other end of the tables, the winners, and there were only four, were Staples (+1.1%), Industrials (+0.3%), Tech (+0.2%), and Healthcare (-0.1%). The pull-back has seen the RSI dip below 70.0 to 65.6, under the ‘overbought’ threshold, but still frothy. Modestly positive leads from offshore markets have futures up +0.1%.
- Offshore Credit – four companies priced US$3.25bn in the US IG primary market overnight, jumpstarting sales that had screeched to a halt Thursday following a US$40bn flood early last week. Borrowers paid about 2bps on order books that were just north of 2x covered, navigating a volatile broader market as the situation in Afghanistan worsens. Secondary spreads did little, while CDS spreads are range bound.
- Local Credit – while last week’s CBA tier 2 ‘bestilled’ (not a real word) my heart, yesterday’s announcement by NAB of a 5Y senior A$ deal almost sent me into cardiac arrest, coming almost 3 months earlier than anticipated. And, then when price guidance was released, the defibrillator was needed a second time. Somewhat opportunistic timing by NAB with c.$4bn of maturities yesterday, so some cash sloshing around on the sidelines. Secondary curves were indicating 5Y major pricing around +32 – 33 bps (linear), so initially I thought perhaps +35 – 37 bps as a starting point, but then guidance came out at a chunky-monkey +47 bps. From traders yesterday…”smalls selling in Major Bank senior 2023/24s on the back of the new NAB 5Yr. IPT is at +47 bps, it is likely we see a price in the low 40s which is in line with A$ fixed 26’s in secondary and wide of USD WSTP 1.15% 2026 print from June. We are marking spreads +2bps wider in 23-25s, mostly on the IPT level, given the lack of supply it’s likely any move wider will be reversed post pricing”. I agree on likely final price, around +40 – 42 bps. The big question now is whether the rest of the curve moves to meet the new deal, or the new deal moves to meet the old curve. As at the last update, the book was at $1.5bn, so demand was solid as expected. No moves in tier 2 paper.
- Bonds & Rates – no surprises in yesterday’s rally given offshore leads. I’ve lifted this nugget from CBA’s Daily Wrap yesterday, a publication I hated doing it when helping out the rates guys – it had some fiddly spreadsheets….“yields dropped from the open of the markets, as the momentum from Friday’s move accompanied a risk off event for equities and a further set of restrictions on the Australian economy. Over recent weeks we have spoken to Australian investors of our views that the hit to GDP and employment from the lockdowns would be more severe than most are thinking, and likely more elongated. This manifests our view in a shift lower of the Australian rates curve, the 10Y to 1.00% and the ACGB/UST 10Y spread to trade towards 25 bps”. The ACGB/UST 10Y spread is currently at 11 bps…certainly an outlier view from CBA, with the closest strategist’s view being 1.40% (by year end). Consensus is at 1.80% (median) or 1.83% (average), by year end. Minimal leads from offshore last night, just a very modest bull-flattening in US treasuries – that’s trader jargon for when longer dated yields fall faster than shorter dated yields. RBA minutes today, but I doubt they’ll move the dial too much, at best we’ll see a basis point or two of movement in yields, most likely a dull day ahead.
- Offshore Macro – from NAB…”economic data was limited to the US empire manufacturing report. The activity index pulled back to a more measured pace of 18.3, from the record high of 43. Detail within the report indicates that producers continue to have trouble meeting demand while inflationary pressures remain elevated (prices paid index rose 6.6 points to 46 – a record high).
- Local Macro – this snippet (attached to a larger piece) from WBC yesterday…”the recent further deterioration in NSW outlook has prompted a cut in forecast national GDP growth in the September quarter from -2.2% to -2.6%; and lowered the forecast 2021 growth rate to 2.4% from 3.2%. The lockdown in NSW is now expected to extend to end October when 80% full vaccination is likely.” Given the stupidity of some people in Victoria, we’ll more than likely be lockdown until then also. Case in point, an engagement party of nearly 70 people was held over the weekend in what looks to be a small apartment, with 2 people attending while knowingly COVID positive. No masks, no social distancing, hello super-spreader. It is one Darwin Award candidate after another these days.
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Scott Rundell, Chief Investment Officer
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