Mutual Daily Mutterings
Quote of the day…
“I intend to live forever. So far, so good…” – Steven Wright
Gimme the risk…
Source: Bloomberg, Mutual Limited
- Overview – not a lot of insight today, I’m back from a week’s leave. I’ve spent the last week playing taxi service to my family as we traversed Sydney’s growing toll road network getting my son from one water polo game to another (NSW Club Championships). I’ve only glanced at day-to-day market moves, so I’ll provide just some very high-level observations. As far as I can tell risk markets remain buoyant, with all major stock indices comfortably higher, aided by some solid macro data and a reasonably positive start to corporate reporting season (Q2). Talking heads (NAB)…”a supportive policy backdrop and good EU and US Covid news favouring the improvement in risk sentiment with Fed Waller noting the US economy is ready to rip while inflation is only likely to tick higher on a temporary basis.”
- Offshore Stocks – a solid week as the S&P 500 closed at new all-time highs. On the week, the index rose +1.4% with all sectors bar-one closing higher, the laggard being Telcos, and only just (-0.01%). At the top of the tables were Utilities (+3.7%), Materials (+3.2%) and Healthcare (+2.9%). With the US government and the Fed pumping trillions into the US economy and financial system, risk assets are running rampant, inflation risk be damned. The S&P 500 is now +23.6% above pre-pandemic levels (Feb 23rd), and a whopping +87.3% above pandemic lows, which was reached just a month into the pandemic sell-off (March 23rd). The NASDAQ is even higher, +44.5% above pre-pandemic levels and up +101.0% pandemic lows. Retail funds flows continue to pile into stocks, as reflected in the above middle Bloomberg chart, retail investors poured US$20bn more into equity funds than they did bond funds. Why? Well from a retail investor’s relatively simple perspective, US equities have delivered +11.0% YTD, whereas US treasuries are down roughly that much. Money tends to follow performance. Talking heads…”as the stock market moves up while bond yields increase, investors are forced to reconsider allocations….if yields keep rising while economic growth and earnings boom, inflow to equities may get even stronger.” US reporting season is less than 10% complete, but early aggregates indicate solid beats vs consensus (+7.3% in sales and +54.7% in earnings). QoQ growth has been strong, aggregate sales up +8.6% QoQ and aggregate earnings up +98.7% QoQ.
- Local stocks – the ASX 200 has hit new post pandemic highs, but is still 1.4% shy of getting back to new all-time highs (7162 on February 20th last year). Last week the index gained 0.98% with Tech (+4.35%), Health (+1.90%) and Materials (+1.47%) leading from the front. Only Utilities (-2.54%) and Energy (-1.17%) were sporting any unfashionable red over the week. Relative Strength Indicators (RSI) are half a good day away from indicating ‘overbought’, 69.5 vs 70.0 overbought levels. The last time the index reached these levels was November last year, but it didn’t precipitate any meaningful sell-off, rather the index trended side-ways, with a reasonably tight 6500 – 6900 trading range. The ASX 200 is now well above its 50D (6828), 100D (6752) and 200D (6409) moving averages. Futures are indicating another solid day of gains.
- Offshore Credit – a very heavy primary market last week with JPM printing a jumbo US$13bn deal on Thursday, followed by Bank of America with US$15bn on Friday. Earlier in the week GS printed US$6bn. Talking heads…”the tailwind of strong earnings results, attractive funding levels given the pause in yield curve steepening and the opportunity to capitalize on strengthening their balance sheets are contributing factors to the recent surge in larger bank deals.” On average over the week books were 2.8x covered, weaker than the month to date average (5.5x), the March average (3.0x), year to date average (3.1x) and 2020 average (4.0x). New issue concessions were also elevated by virtue of the deal sizes, issuers had to cough up to get the volumes away. Compression from launch to final pricing was also lower than recent averages (-15.0 bps vs -24.1 bps YTD). Secondary spreads drifted wider across US markets as primary volumes were absorbed.
- Local Credit – paraphrasing and outright pilfering from traders… “a frustratingly quiet end to the week. Anecdotally, we hear that this malaise is widespread in domestic markets and across multiple product sets. Credit markets remain range bound with the inventory overhang that had previously weighed on secondary spreads now mostly cleared.” Major bank senior spreads closed unchanged with the Jan-25’s at +32 bps, also unchanged over the week, I think. Three-year paper is at +25 bps, also largely unchanged. In the tier 2 space, reasonably constructive, but flows are only in small volumes. Spreads were unchanged to a basis point tighter to close out the week, the 2026 calls are around +131 – 133 bps. Spreads are becalmed and will remain range bound for the near term, and carry remains your friend in this environment.
- Bonds & Rates – a decent rally in local bonds over the week, across both ACGB’s and US treasuries. Data at this stage, which has been buoyant for growth and inflation expectations is having minimal impact on yields.
- Macro – last week in the US….(from CBA)… “Housing starts jumped +19.4% in March to an annual rate of 1.739 million units the highest level since June 2006 (survey: +13.5%). Building permits rose +2.7% to a rate of 1.766 million units last month (survey: +1.7%). The preliminary University of Michigan consumer sentiment index rose from 84.9 to a 12-month high of 86.5 in April (survey: 89)”. On the latter, NAB noted “of interest…was the University of Michigan consumer inflation expectations. Given all the talk about a temporary lift in inflation it is no surprise consumers are now looking for this in their 1-year inflation expectations. However, the pick-up in the last survey was large (to 3.7% from 3.1%) and is at its highest level since March 2012.” This week, locally, it’ll be a quiet one on the data front. The RBA April meeting minutes come out (tomorrow), but the April meeting was a non-event, so nothing insightful really expected here. Elsewhere, the preliminary reading for retail trade in March is due on Wednesday. Internal CBA data points to a solid lift in spending….”however, the annual rate of growth will drop sharply because of grocery stockpiling in March 2020.”
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Scott Rundell, Chief Investment Officer
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