Mutual Daily Mutterings
Quote of the day…
“There has been too much violence. Too much pain. But I have an honorable compromise. Just walk away. Give me your pump, the oil, the gasoline, and the whole compound, and I’ll spare your lives. Just walk away and we’ll give you a safe passageway in the wastelands. Just walk away and there will be an end to the horror …” – The Humongous, Mad Max II
Chart du jour…light at the end of the tunnel
Source: Bloomberg, Mutual Limited
Overview…”just blowing off some steam…”
- Oh, what a night! Offshore stocks were belted from pillar to post with nowhere to hide, nowhere to run to baby! One sliver of hope, stocks closed off their intra-day lows with some very modest upward momentum. Bond yields plummeted as safe haven assets favoured, while oil absolutely soiled the bed and painted the walls with it following the new OPEC deal (+production). Brent crude is down a whopping -6.8%, although strategists are predicting a bounce back given expected supply gaps through the latter half of the year. Credit drifted wider, and has been on a widening path for the past week or so. Even Bitcoin was taken to the cleaners. Why? Increasing concerns around rising variant infections and whether this will hamper the global economic recovery. Escalating tensions with China also impacted sentiment (the US – and most of the western world – now implicating Chinese nationals in the hacking of Microsoft servers earlier in the year).
- Talking heads…”peak growth is starting to become a more concerning element”…the combination of price pressures and soaring infection rates raises the risk of falling short of forecasts. And with equities teetering at all-time highs, there’s no room for error. More talking heads…”risk aversion is firmly in place as the Delta COVID variant spread is triggering a flight to safety…equities were ripe for a pullback given Wall Street was in agreement that this is ‘as good as it gets’ for peak earnings, economic growth, monetary stimulus. It is hard to hold risky assets over the short-term now.”
- Does the sell-off have legs and evolve into a full-blown rout? Gun to my head, possible, but not probable. Markets were priced to perfection before last night with stocks near all-time highs despite growing uncertainties. There was very little room for error, so a pull-back was needed, a pull-back is healthy. Global markets remain awash with liquidity, and policies are still incredibly accommodative. I’d argue if risk markets took it in the neck too much more taper talk would be pushed further down the road, keeping conditions very much accommodative, which is what bond markets are pricing. And, as per the Chart du jour, vaccinations are working. Careful of catching falling knives, but this is just a required circuit breaker.
- Offshore Stocks – markets were smashed, with key support levels broken. Across the S&P 500 almost 90% of stocks retreated, and no sector was spared the burn. Not surprisingly, Energy (-3.6%) attracted a lot of fire, as did Financials (-2.8%) and Materials (-2.2%). The least worst on the day was Staples (-0.4%), followed by Healthcare (-1.1%) and Discretionary (-1.2%). Moving on from last night’s action, but still a very relevant theme, 87% of S&P 500 companies tracked by Bloomberg mentioned inflation in conference calls this month. Price pressures squeezing margins will be watched for as earnings season ramps up this week. E-mini’s are following on with the pain in after-hours trading, but the depth of despair has levelled out, not worsening. DOW (-2.1%), S&P 500 (-1.6%) and NASDAQ (-0.9%).
- Local stocks – yesterday’s action is largely irrelevant as we’ll get smacked around the chops with a particularly moist and rancid fish today. Potentially with an inkling that last night’s offshore action was on the cards, and as our own COVID circumstances continued to deteriorate, we closed down -0.9%. More than three-quarters of the ASX 200 fell with all but four sectors also bathing in crimson. Materials (-2.4%), Energy (-2.3%), and Telcos (-1.5%) were the worst of the worst, with only Healthcare (+1.6%) putting up any real fight, while Staples (+0.2%), Utilities (+0.1%) and Tech (+0.1%) all had small cameos. Futures are pointing to another tough day in the trenches, down -0.9%, although easing off the early morning lows (was -1.2% when I woke up). Either way, the ASX 200 looks set to break through key support levels, the 50-Day moving average.
- Offshore Credit – firstly CDS, despite the violence across stocks and bonds, credit spreads were relatively muted on the day. Yes, they’re wider, but the MAIN is only +1.5 bps wider, and CDS is +2.0 bps wider on the session. Perhaps sensing something was coming, CDS spreads have been trending wider for the past week and a half, -4 – 5 bps. Not a lot done in primary markets, conditions were not conducive to issuing. In secondary cash markets, the US IG Financials index underperformed CDS, +4 bps wider, while EU HY spreads were +6 bps wider. It’s little surprise that credit spreads have widened, which is naturally what you’d expect amidst a backdrop of sinking equities and a surging risk premia. Noting credit market’s ability to lead stocks on the downside, US spreads are +6 – 10 bps wider in the IG space over the past week and a half, that’s an 8% – 10% move in percentage terms. The good news is that despite the widening of spreads, the price of corporate bonds has risen in aggregate terms thanks to the interest rate component.
- Local Credit – very little to report from yesterday, from the traders “light trading session as many domestic market participants adjust to the evolving COVID situation and implications for working arrangements. Senior financial and T2 spreads remained resilient atop muted flow, SSA spreads drifted wider out the curve.” As for last night’s action across risk markets, a cautious tone will emerge in Australian credit markets today, and spreads will generally drift wider – mainly on the back of traders pricing in the rise in volatility rather than any actual panic selling. The technicals are too strong for anything too sinister…yet. History indicates we need more than one risk-off session to move the dial locally. If it’s the start of something more sustained, then spreads will likely drift wider.
- Bonds & Rates – I plucked this passage from a Bloomberg article yesterday…”Bonds, bonds, bonds. Debate surrounding inflation’s staying powers may be keeping central bankers and economists occupied, but the Treasury market has clearly made up its mind already. Worsening Covid outbreak, doubts about the strength of the recovery and brewing US-China tensions are keeping bond bulls busy. 10-year Treasury yields dropped for a third straight week and seem destined to revisit that 1.20% February breakout level soon”. Well played. I also have to acknowledge a brave, yet somewhat Nostradamus like, call by my former CBA colleague, Marty ‘McFly’ Whetton who yesterday nailed a pretty ‘out there’ call to the mast, specifically that Aussie 10’s would hit 1.0% in the not-too-distant future. They closed yesterday at 1.25% with the vast majority of interest rate strategists calling yields in the opposite direction. While 1.0% won’t be on the cards today, given moves in treasuries last night (10’s -11 bps), we’ll be a damn-sight closer to it than we were yesterday.
- Macro – from NAB’s morning note…”there were no major data releases or central bank commentary to impact sentiment but concerns around the spreading delta coronavirus variant (the US Government has raised its travel warning for the UK to the highest level) is likely fuelling expectations that growth momentum is slowing. Pricing for Fed tightening has been pushed out with the first-rate hike now priced in the OIS curve by March 2023. The holiday season and positioning are likely exacerbating the moves. The weekly JP Morgan investor survey will be published tonight but last week’s report showed that investors maintained overall net short positions.” RBA July meeting minutes out today
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907