Mutual Daily Mutterings
Quote of the day…
“Would I rather be feared or loved? Easy. Both. I want people to be afraid of how much they love me”…Michael Scott (The Office)
Chart du jour…equities, pandemic performance
Source:Bloomberg, Mutual Limited
“No Inflation Down Here…”
Overview…”We’re not in Kansas anymore Toto…”
- A risk off session as the weight of numerous headwinds, including geopolitical risk, Fed tapering expectations, and rising COVID variant cases outweighed the seemingly perennial abundance of liquidity tailwind. Despite stocks closing lower in the US (up a touch in Europe), treasury yields did very little on the day, and remain in a relatively narrow trading pattern ahead of the Jackson Hole Symposium, albeit toward the low end of recent ranges.
- Weaker than expected retail sales in the US represented a drag on the day. There’s emerging pressures on consumer sentiment such as COVID gloom and inflation that might not be fully captured in economic data yet — or in retailers’ future plans. I’m certainly feeling the COVID gloom as I awake to our 198th day of lockdown in Melbourne, that’s around 40% of days since the pandemic first kicked off, and more to come.
- The turmoil in Afghanistan continues to build, with ramifications across the global geopolitical landscape, which may be contributing to negative sentiment – be it adding to terrorism concerns or potentially harming President Biden’s ability to press his stimulus agenda. Basically, it’s a humiliating outcome for the US and highlights they don’t have the stomach for playing global sheriff anymore. Bigger picture, this could embolden the likes of Russia and China in the empire building ambitions. A potential slow boil risk.
- Fed Chair Powell spoke at a town hall event with educators and students, which was dissected by markets, although economic commentary was light on. He did note that the Fed’s “powerful tools” have limitations and that COVID and its variants will likely stay “for a while,” and we’re not going back to a pre-pandemic economy…i.e. there will be major changes to the economy that the Fed will need to monitor as the US is still in the midst of the pandemic, adding that it’s not yet clear how big of an impact the Delta variant will have. No monetary policy talk of any note was forthcoming.
- Offshore Stocks – European stocks regained some lost ground, emphasis on the ‘some’. US markets opened down from the outset, with the S&P 500 down as much as -1.3% intra-day, but firmed up into the close despite weaker than expected Retail Sales data. In the end, the index saw 70% of stocks retreat, eight out of eleven sectors close in the red and all up a drop of -0.7%, which was better than the DOW (-0.8%) and NADSDAQ (-0.9%). With weaker than expected retail sales, it’s not surprising to see Discretionary (-2.3%) as the worst performer on the day, followed by Materials (-1.2%), and Industrials (-1.1%). At the other end of the performance tables, only two put up what can be considered a fight, Healthcare (+1.1%), and a token effort from REITS (+0.1%). It’s been a while since geopolitical concerns were on investor’s radar, and they’re back now. Investors don’t like uncertainty and are likely to rotate more towards risk-off as this unfolds. Within this backdrop, and elevated valuations, stocks will be in the cross-hairs. I’ve been beating this drum for a few weeks now. It could be that some large and consistent sell programs roll through and inherently lift volatility, but to date dip-buyers have stepped in to prevent any meaningful sell-offs. Moreover, COVID variant risk fuels the fire for further uncertainty. Having said all that, until the S&P 500 has a sustained break below its 50-DMA (4341 vs last night’s close of 4448), dip buyers will likely provide support. Note, YTD the S&P 500 has touched, or modestly pushed through it’s 50DMA on 7 occasions, and each time dip-buying has saved the day…eight time’s a charm perhaps, for bears?
- Local stocks – channelling the wolverine here, but I told you so (inside joke). The ASX 200 was running hot, at peak levels, and elevated valuations despite the impact of the Delta variant spreading. All it took was a couple of earnings misses, largely in the financial space, and the broader index retreated. The ASX 200 closed almost a percent lower yesterday, and is now down -1.6% from record highs at the end of last week. Just over two thirds of stocks closed in the red, with eight sectors bathing in crimson. Financials (-1.7%) again has a tough day in the trenches, with Magellan (-10.2%) beaten up badly, and the majors in general were taken to with a gnarly lump of timber, particularly CBA (-3.5%), which went ex-dividend (accounts for ~50% of the drop). Utilities (-1.3%) and Materials (-1.3%) also suffered at the hands of sellers. Healthcare (+0.4%) put up an ineffectual rear-guard action, as did Telcos (+0.2%) and Staples (+0.1%). Relative strength indicators are now back in the mid-50’s. Futures are indicating the sell-off will continue today, -0.5%.
- Offshore Credit – just three deals in US IG markets as the summer lull looms. Negligible movement in secondary spreads. European IG markets were quiet. CDS markets also exhibited very modest moves (wider).
- Local Credit – all about primary yesterday, with most focus on the new NAB 5Y A$ deal. NAB has a reputation for printing to demand, or close to it. They were true to label again yesterday, printing $2.75bn at +41 bps (vs +47 bps initial guidance). At $2.75bn it is equally the largest A$ major bank senior deal. The new line priced -36 bps inside NAB’s last senior 5Y deal (Jan-25’s at +77 bps) and priced -54 bps inside the average for major bank 5-year primary deals (+95 bps) over the past five years. The final book was $3.8bn. What I didn’t consider initially, but was highlighted in the following trader’s comments, was major bank participation in the deal…”the deal stats attest to the demand from the balance sheets (67% allocation) who took the opportunity to gorge on size that the secondary market cannot provide. Having priced at +41 we saw modest two flow in secondary, the bonds trading as tight as +39 before closing at +39.5. This sees it fit nicely onto the secondary curve with the possibility that the 15bps concession vs the 1/25 may contract further in the near term. We saw minimal switching pre or post pricing which validates current levels suggesting that it is the new issue that will grind to meet the secondary curve, not the other way around. To illustrate this point we saw modest buying in 3yr majors at levels disclosed below, we also traded both sides of SUNAU 5yr covered bonds in quick order in both fixed and FRN format.” Whose next then? If I had to guess, I’d say ANZ or WBC, but not CBA.
- Bonds & Rates – despite the decent size sell-off in risk assets yesterday, only muted moves in bonds. Last night, treasuries initially continued on their rallying ways, but by day’s end, yields were largely unchanged. I doubt we’ll see much in the way of theme change until the Fed’s Jackson Hole Symposium. As for the weaker retail data, it isn’t clear how the Fed will react. If we assume tapering will kick off shortly, despite the lingering COVID variant concerns, monetary policy will still remain in accommodative mode, particularly with regard to forward guidance on rates. Particularly if we accept that COVID and its merry band of variants will be with us for the long haul. We have to consider the possibility that COVID outbreaks will continue to occur and these outbreaks will take place without trillion-dollar stimulus packages (in the US). A similar argument could be mounted for local bonds and monetary policy settings, and fiscal intentions – the government has shown no inclination to re-introduce JobKeeper.
- Offshore Macro – Bloomberg: “US retail sales fell way more than expected last month, plunging -1.1% after a revised +0.7% advance in June. Consensus was for a -0.3% decline. Core sales tumbled -0.7%, also more than forecast. It all indicates a soggy start to spending on goods in the third quarter. Production at US factories, however, strengthened by the most in four months, rebounding above pre-pandemic levels and indicating manufacturers are coping with snarled supply chains and shortages”.
- Local Macro – wage price index out today, with consensus at +0.6% QoQ and +1.6% YoY vs +0.6% QoQ and +1.5% YoY respectively at the last print, so only modest change. Not likely a market moving print. More important labour data out tomorrow.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907