Mutual Daily Mutterings
Quote of the day…
“Roads are just a suggestion Marge, just like pants.”.…Homer Simpson
Chart du jour…yep, two cartoons coz its Friday
- A mixed bag of two-cent lollies overnight with European stocks closing firmer, which gave US stocks an early spark, but that went to custard promptly. But then, markets rallied on better-than-expected US retail sales data, clawing back early losses and more. But then, US stocks turned south again, closing marginally lower on the day. Yields largely ignored the intra-day gyrations, rising as investors tried to parse the impact of muddled economic data on the central bank’s plan to reduce stimulus. Oil wavered, but still gained a smidge, while gold fell again. Talking heads…”investors are really trying to weigh the tug-of-war of concerns between how soon will the Fed taper“.
- More on that US data, retail sales surprised against consensus expectations through August as a pickup in purchases across many categories more than offset weaker demand for vehicles. Sales climbed +0.7% MoM after a downwardly revised -1.8% MoM fall in July. Excluding autos, sales advanced +1.8% MoM. Also in the US, initial jobless claims increased to 332K last week vs 322K consensus expectations.
- Some technical colour on US markets overnight, “the session marked a fourth time the S&P 500 was able to hold the 50-day moving average this week. Once it did, it drew in the largest algorithmic program of the week in a vacuum. This followed large demand from pensions and insurers in stock futures Wednesday after a similar test of the moving average”. (Bloomberg).
- Option noise…as US equities hover near record highs again, options traders are reportedly piling into contracts betting the stock market will go down, pushing the price of several put contracts up and call contracts down. The gap has become so wide that earlier this week, you could sell a single put contract that pays out if the S&P 500 drops to 4,200 by late October to fund 18 calls that pay out if the index jumps to 4,600 by then.
- Offshore Stocks – a messy day in US markets with stocks flipping and flopping around before closing mixed. The DOW and S&P 500 closed lower, with the latter down -0.8% at one stage before staging a solid recovery back into positive territory just before the close, only for it to drop back below the hard-deck in the final half hour or so. The NASDAQ was able to close a smidge higher. Within the S&P 500 we saw 62% of stocks lose ground and only three sectors advance: Discretionary (+0.4%), REITS (+0.2%), and Tech (+0.1%). While oil prices have held on to their recent gains, Energy (-1.1%) fell on the day, the second worst performing sector. Materials (-1.1%) took the gold in that regard, while Utilities (-0.8%) took the bronze.
- An interesting chart and commentary our found this morning…. “comparisons between the S&P 500 Index and corporate earnings hinge on the time period used for the analysis. This year, actual and projected earnings at S&P 500 companies have both climbed more than the US equity benchmark. But contrast that to say 2010, and the S&P 500 has pulled away from earnings in the almost 18-month bull market now in progress”. The observable divergence reflects the weight of monetary stimulus and resulting excess liquidity in the system, as well as a meaningful helping hand from fiscal stimulus.
- Local stocks – reasonably decent and deep gains yesterday in the ASX 200, +0.6%. Around 60% of stocks advanced, and only one sector lost ground, Discretionary (-0.1%), and only just. Bathing in the sweet glow of higher oil prices, Energy (+1.3%) took line honours, while Financials (+0.9%) won on handicap (higher weight). Health came second on liner honours. Futures are pointing to a weaker open for the ASX 200 today, -0.2%.
- Offshore Credit – a quieter session in primary markets with no deals of note announced, secondary markets are steady.
- Local Credit – traders…”primary was undoubtedly the focus yesterday with attention on the A$500mn new Qantas 7 year. The deal was well received, final orderbooks closed ~4x oversubscribed at a spread of ASW+210bps and we have the line marked 10bps tighter on the break. Secondary flow was light away from this with no strong theme or trend.” That’s a scary prospect, such strong demand for a name like Qantas and at that price too. I accept the airline is generally a protected species, enjoying some modicum of government support, but that’s very expensive for mine – from an investor’s perspective. The coupon on the new bonds was set at 3.15%, which is the second cheapest bond (from the airline’s perspective) on issue. The range of coupons they pay on their six AUD bonds is 2.95% to 7.75%, with an average of 4.7%. Qantas lost $1.3bn last year and is forecast to report another ~$600m loss this financial year, the worst two year run while in public hands…cray-cray. Having said all that, relative to other bonds in and around that part of the curve and rating (Baa2/NEGATIVE), the bond looks ‘okay’. I just don’t like Qantas as a credit here and now. In my old banking credit day’s we had the ‘Four F’s’ of credit, sectors you don’t lend to. Anything that ‘Floats’, ‘Flies’, has ‘Feet’, or ‘Fashion’. Moving back to our own sandbox, the world of financials, no noticeable moves in spreads, with traders reporting modest two-way flow.
- Bonds & Rates – “the move overnight in bonds saw a strong rally that was unwound over the course of the day and left the Down Under markets a little heavy as the new contracts start” – CBA Daily Wrap. US treasuries steepened again overnight, with US 10’s +4 bps to 1.34%, which is around the upper-middle of its 30-day trading range, 1.26% – 1.37%. Focus will increasingly be drawn to next week’s Fed meeting (22 September), with speculation all over the shop on whether the Fed will officially announce its tapering agenda, beyond just saying that it remains appropriate to do something by the end of the year. With leads from offshore, local bonds will likely drift higher today.
- Offshore Macro – borrowing some CBA commentary to save time and ink…”August retail sales beat expectations, rising +1.8% MoM (consensus: +0.7% MoM). US control group sales, which is a proxy for consumer spending in GDP, rose an even stronger +2.5% MoM. However, the details of the report were mixed. Online sales lifted sharply, suggesting that consumers were nervous about the Delta situation. At the same time, restaurant and bar sales were unchanged. July data was also revised lower from -1.1% MoM to -1.8%MoM. Tonight’s September University of Michigan sentiment data will be important to assess whether delta concerns have further weighed on consumer confidence (12am Sydney time)”.
- Local Macro – a pretty average set of labour numbers yesterday. Consensus expectations were for a drop in jobs, but the actual number was larger than expected, -146K vs -80K. Opposite to expectations, unemployment actually fell to 4.5% vs 4.6% last month and consensus estimates of 5.0%, much of this on account of a -0.8 point drop in the participation rate. And we all know why that happened, don’t we kiddies. That’s right, our evil overlords have locked us up. On the outlook, pilfering some words of wisdom from NAB…”expect a further deterioration in September as the labour force survey more fully captures the VIC and ACT lockdowns. While we should expect further deterioration in the near-term, an improvement is likely from October/November given NSW expects to substantially ease lockdown restrictions in early-to-mid-October, timing based on when 70% full adult vaccination is achieved.” As for Victoria, afraid no clarity, Chairman Dan is hiding behind the health advisors, and only allowing the return of some token freedoms. All up, we’re allowed to have a picnic with five of our most vaccinated friends, how lovely!
Have a good weekend.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907