Mutual Daily Mutterings
Quote of the day…
“Things aren’t right. If a burglar breaks into your home and you shoot him, he can sue you. For what, restraint of trade?” – Bill Maher
“Fellowship of the BitCoin…”
“Higher borrowing costs causing some angst…”
- Overview – another modest risk off session as the collective hive mind of the market questions whether rising bond yields – up a touch again – and higher borrowing costs will hamper the recovery. A reasonable concern given the vast volume of debt that has been raised in the past year, more than raised / issued in the prior ten-years combined. But, the cost of debt is still, very, very, very low by historical standards. So, if a bit of steepening of the curve is causing this kind of angst, and its modest to be honest, then god help us when tapering really kicks off…if it ever kicks off. US jobless claims also unexpectedly increased over the week, +861K vs +773K expected and +848K (revised from +793K). Theoretically borrowing cost thematic shouldn’t carry as much weight in Australian markets given the local funding dynamics. Banks and households are predominantly funded through the floater space and therefore off the front end, which remains anchored. And, the vast majority (70%- 80%) of mortgages are variable, also priced off the front of the curve with little spread in swap rates. In the US the long end of the curve is more relevant for business and household funding. Despite these differences, local markets are slave to offshore thematics to a greater or lesser extent, so a broad-based risk off sentiment offshore will colour local investor sentiment.
- Offshore Stocks – a modest pull back overnight with markets (US) closing off their intra-day lows, so not a lot of conviction in it, also the third down day in a row. The S&P 500 is at a two-week low! OMG how will the retail FOMO crowd cope? Don’t despair, the index is still within spitting distance of its all-time highs, 3916 vs 3934. Being at such highs with still a reasonable degree of uncertainty on the macro-outlook, potential flies in the recovery ointment will always cause investors to doubt themselves, especially the Johnny-come-lately FOMO’s. On a side note, some research published by David Rosenberg, who we follow, smart guy, knows his stuff and articulates his views very well. Anyway, he put together an index of unprofitable listed US stocks and compared the index to the broader market. Shock horror, the unprofitable index outperformed the market by +17% YTD. A sub-index of unprofitable tech stocks outperformed by +30% YTD. Food for thought on the irrationality of prevailing valuations and market psychology.
- Local Stocks – end to end, a nothing day in the local market, but some oscillating through the day with the lead changing a handful of times, from gains to losses. Intra-day the ASX 200 breached 6900, but was unable to hold there. In the end, a last-minute desperate lunge for the line saw the index close ahead by a fingernail. Despite the overall gain, roughly two thirds of stocks closed weaker, with seven sectors closing in the red, led by Energy (-1.5%), REITS (-1.7%) and Utilities (-1.2%). At the other end of the scale, Healthcare rose +2.0%, doing most of the heavy lifting in getting the broader index home in the green. Financials closed up as well (+0.3%), a bit player on the day, but played their part. Gains were driven by another solid day from WBC (+3.5%) with ANZ joining the party post their Q3 trading update, also up +2.8%. Besides these two, peers were all in the red with BEN dropping -6.5% and BOQ down -2.8%. ANZ reported strong HoH earnings gains, boosted by improved asset quality and provision releases. An increase in NIM and market share gains also helping. Futures are down -0.4% as I type.
- Offshore Credit – a busier session in US IG with five borrowers tapping the market for $7.1bn of loose change. Casting an eye over the guidance levels and final price points and we can say the deal metrics were robust and the deals well supported. Week to day issuance has reached $14bn, $6bn shy of expectations with one day to go. Secondary spreads are flat. In Europe, sustainability funding again gathering attention, H&M Finance launched a debut 8.5 year €500m deal to very strong interest, so much so they were able to bring spreads in 45 bps from initial guidance. Collectively €2.5bn priced with coverage very strong at an average of4.6x and average spread compression of 21.5 bps. CDS is a touch wider, but not a lot in it, less than +1 bps wider across the main indices.
- Local Credit – the most notable thing from yesterday in local credit markets is the major bank tier 2 stood still, not further tightening. Must be a misprint! Decent Q1 results from ANZ closes out bank reporting season, which has brought mainly positive surprises, the key one being the collective reduction in provisioning for soured loans. Broadly on the day traders are calling it a quiet session, which they expected given the release of domestic employment data and they feel it’s “conceivable that we see an uptick in client activity should rates markets consolidate further”. The major bank senior curve was unchanged, again, and traders are reporting a real lack of flow. However, “it feels as though the street owns some inventory and with a lack of meaningful client buying it would not be a surprise to see senior spreads come under some mild pressure.” On the recent Suncorp deal, spreads have settled around +43 bps and with no local buying interest it’ll probably remain around these levels, short of normal roll-down. Not a lot done in tier 2 space. Obviously, supply would be embraced like a long-lost lover, especially given there is $2.5bn of major bank tier 2 callable in the next 6 months, and there is little doubt in this little black duck’s mind that it will be called.
- Bonds & Rates – US treasuries inched higher again, but then closed off their intra-day highs as labour data missed the mark. The 10’s trade din a 1.255% – 1.316% range, closing around 1.287%. ACGB’s paused their recent steepening run, pulling back a touch with the 10’s closing at 1.37%, down -3.5 bps on the day. It’s been a wild ride up the mountain, +63 bps since November lows, but still very low and very accommodative levels. Arguably yields have gotten ahead of themselves and we’ll possible (hopefully?) consolidate around these levels. Yesterday’s local labour data report didn’t really move the dial. Let’s see how the next few days pans out.
- Macro – local labour data out yesterday, a positive report with 29K jobs added, a smidge below expectations (30K), but importantly full-time grew +59K vs a -30K drop-in part time. The participation rate fell 0.1% to 66.1% and the unemployment rate dropped to 6.4% vs 6.5% expected and 6.6% last month. The report was underpinned by continued recovery in Victoria and the unemployment rate is now just 0.5% below pre-pandemic levels. So, rebounding employment is good for the recovery obviously, but the challenge for the broader economy is how the labour market reacts when government support measures, JobKeeper and JobKeeper, fall away at the end of March, just six weeks away. Around 1.5 million people, or around 13% of the workforce is currently receiving government funded wage subsidies. US jobless claims out last night, which I touched on above, a modest surprise increase. Other data however was reasonably buoyant – from CBA “permits to build homes surged by more than 75% compared to the pandemic low in April 2020 to the highest level since May 2006. With years of underbuilding and low US mortgage interest rates – despite the increase in US government bonds – US home building can continue to lead the US economic recovery. The Philly Fed business survey eased in February but remains well above average levels”.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907