Mutual Daily Mutterings
Quote of the day…
“The state has run up much bigger deficits and debt than any other jurisdiction and has been, over the past decade, very dependent on people moving to it … but it has shot itself in the foot as a people magnet by its inept handling of the pandemic,” – Dr Saul Eslake..…
Chart du jour: spread changes…
Source: Bloomberg, Mutual Limited
“Monkey Bar Chart…”
Overview…”well that escalated quickly …”.
- “Stocks fall for second day on inflation worries”…that’s the narrative put forth by Bloomberg to explain last night’s moves. While ‘technically’ correct, in that the prevailing theme in markets is the finely tuned dance between inflation fears and whether it’s transitory or not, there was no news of significance to sway the argument either way. US housing starts and building permits were a tad softer vs expectations, with supply chain constraints and rising material costs flagged as culprits. Looking at the tapes on the day, stocks sold off late in US markets (much of the declines came in the last hour of trading), elsewhere the tone was mixed. With the risk off tone, bonds reverting to ‘normal’ instincts and rallied a smidge. Oil whipsawed on conflicting headlines of an Iranian nuclear deal, closing down in the end.
- Talking heads… “the market has been trying to process a very unusual economic environment and a confluence of factors that it has not faced for a long time. It’s a new set of circumstances for markets, so we’ve had more churn over the last couple of weeks. I personally would say that the stock market has absorbed it all extremely well because there’s still a high conviction view on earnings being strong.” Agreed, for the next 12 months at least, beyond that you’re on your own.
- Despite the softening tone overnight, a survey of global investor sentiment, conducted by Bank of America indicates that investors are nevertheless “unambiguously bullish.” Inflation has been pegged as the biggest tail risk, followed by market taper tantrum and asset bubbles. COVID was soooo last year darling, coming in a lazy fourth place. I’d buy that, although I’d also possibly add armed conflict between China and someone.
- More talking heads…. “the fact that inflation and interest rates are on the way up, I think we have to recognize that returns overall in the US equity market from this point will be very modest and perhaps volatile compared to what we have enjoyed especially over the last 12 to 15 months. What appeals to me is that investors are acting like investors again. There is less emphasis on momentum and there’s more emphasis on relative valuation and which of the companies that have the strongest cash flow growth and are investing that cash flow for growth.”
- Offshore Stocks – European bourses were mixed, STOXX 600 was up a touch, while the DAX and CAC went the other way, by similar magnitudes. US markets opened a touch softer, but some softer housing data seemed to be enough to soften the tone further and resilience dropped away and the DOW, NDX and SPX fell off a modestly high cliff. Within the SPX, four stocks fell for every one that gained, or 80%/20%. Only two sectors fought a rear-guard action, with REITS (+0.2%) and Utilities (+0.1%) able to walk off the field of battle with their heads up. As for the rest of the team, all passengers. Energy (-2.6%) dropped the ball most, followed by Industrials (-1.5%) and Financials (-1.3%). E-minis are in the red.
- Local stocks – the ASX 200 bucked the weaker lead from offshore markets yesterday, although it wasn’t all one-way traffic with stocks up on the day matched by number of stocks down. The broader index was led by the old guard, Materials (+1.6%) and Financials (+0.8%), which combined account for almost 90% of the ASX 200 advances. Energy (+1.6%) has a solid day also, but represents a much small portion of the index. Four sectors closed in the red, REITS (-0.6%), Industrials (-0.5%), Utilities (-0.5%) and Healthcare (-0.2%). After snubbing the weaker leads yesterday, and a follow-up softer night last night, futures pointing to a much weaker open, down -1.1%, with the ASX 200 likely to break below 7,000.
- Offshore Credit – some commentary lifted from Bloomberg, quoting Morgan Stanley and Bank of America research…corporate credit’s best days are behind it. That’s the bearish assessment of Morgan Stanley strategists, who cited a combination of “extended valuations, less favourable technicals and a slower pace of balance sheet repair” while downgrading their outlook to neutral. Meanwhile, BofA strategists expect rising Treasury yields will “lead the market to price in a much faster rate-hiking cycle,” causing spreads to widen. Me talking now, having said that, demand in primary is not abating with deals being well covered. As for spreads in secondary, US IG corporate and financials spreads (per Barclays indices) are at post pandemic tights, and at levels not seen since early 2018. Its similar for EUR credit. Now for some random stats (US IG, I’ll provide EU IG tomorrow): since the beginning of 2020, US IG Corporate spreads have closed wider 31% of the time, with an average move of +4.0 bps, were unchanged 32% or the time, and tightened 38% of the time, with an average move of -3.9 bps.
- Local Credit – nothing of significance in major bank senior space, all unchanged and moribund. In the major bank tier 2 space it was a different story. After NAB squashed local investor’s hope and dreams of any likely and imminent local tier 2 deal by heading to the US, local tier 2 spreads gapped -3 – 5 bps tighter yesterday. It was a lift-a-thon as investors scrambled to buy back the bonds’ they’d sold to make room for the new deal that now appears not to be forthcoming. The 2026 callable cohort is now pricing +132 – 135 bps. Looking at the same random data as I did for offshore credit, in the FRN space, spreads widened 36% of the time, for an average move of +0.6 bps, and tightened 48% of the time, by an average of -0.8 bps. Much less volatile than offshore spreads, which is as I would have expected given local technicals.
- Bonds & Rates – RBA minutes out yesterday, and surprise-surprise, little new information provided or apparent change in themes or views. Situation normal, carry on. Again, and poor literary iteration aside, not surprising given the recent release of the Statement of Monetary Policy. Nevertheless, local bond curves steepened a touch with the index 10-year yield out 3 bps to 1.78%. Given the leads overnight, we could see this widening given back. US 10-year treasuries were a basis point tighter in the end, closing at 1.64%.
- Macro – pilfering some NAB commentary…too lazy to use my own brain here…”US housing starts (April) were down -9.5%, slicing a large piece off the Mar 19.8% MoM gain that rebounded after the bad weather-affected crimped building activity in Feb. April building permits (a closer reflection of demand, if over time) were very close to expectations at 1760K, following on from the large lift in sales during the second half of last year, levels remaining high if choppy into this year”. And this…”following today’s starts data, the Atlanta Fed reduced its Q2 GDP Now estimate to 10.1% from 10.5%, cutting its estimate of Q2 residential investment to 10.6% from 19.2%”. Out today we have local Q1 wage price index (at 11:30am) – consensus is for a subdued growth figure of +0.4% QoQ which would take annual growth to a record low +1.3% YoY. Also, Westpac-MI consumer confidence is out at 10:30am. Offshore tonight, Fed minutes are out, which will be dissected to the nth degree.
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Scott Rundell, Chief Investment Officer
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