Mutual Daily Mutterings
Quote of the day…
“Think about how stupid the average person is, and then realize that half of ’em are stupider than that”.…George Carlin
Chart du jour…stagflation trending..
“Navigating With Narratives…”
Overview…”substantial progress, or a slow grind.…”
- It’s a slow grind, a slow grind lower for stocks with 50-day-moving-averages tripped across key indices, while bond yields grind higher as central banks globally continue to signal their intent to either normalise monetary policy settings, i.e. tapering, or articulate their tapering intentions. As to what drove markets on Friday, that’s a bit of a mystery for me. The only data of note was US consumer sentiment, which showed some improvement, but mist consensus estimates. All up, we saw some meaningful moves lower in stocks, yet some modest moves in yields. Oil and commodities softened, and credit was steady.
- The bog-standard narrative for why markets did what they did on Friday focused on “concerns over the delta strains impact on the economy”… and risks from China. I’d agree these items are weighing on investor sentiment, but would suggest Friday’s action was more to do with this week’s plethora of central bank get togethers. The US Fed, the BoE, the BoJ, and several Scandinavian and European central banks all set to meet, discuss and project their monetary policy intentions. With a strong likelihood the Fed will articulate the details of its tapering plans, investors may have been playing it safe and taking a little more risk off the table.
- While tapering, or the act of pontificating on when one should taper has occupied much of the market narrative for several months now. More recent narrative would suggest that taper talk is ‘soooo last month darling, anyone who is anyone is talking stagflation, it’s hip, it’s cool, it’s super-groovy, ya?’ This nugget from Bloomberg…”after the summer lull, markets are marching to the beat of a different drum. Step aside taper chatter and team transitory inflation – the new risk is an old standard: stagflation…” The chart du jour depicts the chart that accompanied this nugget of apparent insight, with the number of times stagflation has been including in market narrative pieces rising steadily as the year has progressed.
- Offshore Stocks – a tough night in the trenches on Friday for offshore markets, and not such a hot week either. Firstly, Friday…just under 80% of the S&P 500 retreated, led primarily by Materials (-2.1%), with almost every stock in the red, followed closely by Utilities (-1.6%) and Tech (-1.5%). Only one sector, Healthcare (-0.1%) was able to put up a fight, and to be honest, my 96-year-old late granny could have done better. The S&P 500 is now trading under its 50-day-moving-average, and looking precarious ahead of this week’s Fed meeting (Wednesday). The NASDAQ and DOW also soiled the bed, although on a relative basis, the latter outperformed the former. On the week, offshore stocks, across both Europe and the US were down in the order of 0.5% – 1.0%. With the exception of the Nikkei (+0.4%), Asian markets had a pretty tough week, down 3.0% – 5.0% across the Hang Seng and Shanghai Comp. Chinese regulatory actions and growth concerns no doubt weighing on sentiment.
- Local stocks – another weaker session in local markets on Friday with the ASX 200 down more than -1.2% at one stage, before a late rally took some of the sting out of the sell-off, still down -0.8% on the day (but flat’ish on the week). Materials (-4.0%) was the main culprit on Friday, taking an iron bar to the side of the head on the back of iron ore prices remaining under the pump. As for what’s driving iron ore down, “China is expanding air pollution curbs to more cities across major steel, coal and oil hubs ahead of the Winter Olympics, which will dampen steel production further from a 17-month low. Spot ore — material instantly traded at the ports and a sign of current market trends — has collapsed and is on their longest losing streak since 2018. Worsening the outlook, the country is set to face a wave of more power shortages, especially in winter. This would likely lead to electricity rationing at industrial hubs, cutting operations of energy-intensive processes such as steel-making” Bloomberg. Within the remainder of the index, it was mixed. Tech (+2.1%) rallied strongly, and Industrials (+0.9%) put up a decent fight, as did Healthcare (+0.3%) and REITS (+0.3%). Joining Materials at the back of the bus was Utilities (-1.9%) and Energy (-1.3%). Given the offshore leads from Friday, I doubt it’s going to look any better today. The ASX 200 spent much of the past two weeks trading below its 50-day-moving-average and is now only a couple of moderately bad days from dropping below the 100-day-moving-average (7326 vs last close of 7403, or -1.0%). After that we have a lot of clean air all the way down to the 200-day-moving-average of 7059, which was last truly tested in March this year, the height of the inflation hysteria. Futures are down -0.9%.
- Offshore Credit – broader weakness across equity markets and rising yields saw a handful of potential issuers shelve deals on Friday. Nevertheless, it was a solid week for issuance, US$38bn priced, taking the MTD total to US$119bn vs initial monthly estimates of US$140bn, and there’s a week and a half to go. Estimates this week are for a more modest run-rate, US$20bn to US$25bn. Despite the flood of issuance, secondary spreads have held up well. Still on offshore credit, a big week for Chinese credit markets, and markets in general, with the focus on property developer Evergrande, who is wilting under a mountain of debt (~US$315bn). The group recently said there is “no guarantee it would meet its financial obligations”. To this matter, a big test comes on Thursday, when interest payments on two of its notes come due. Markets are pricing in a high risk of default with one of the notes trading at 30 cents in the dollar. The develop is already behind schedule banks, suppliers and investment product holders. In the past, a company of this size and significance in the system would generally receive Chinese government support. However, there is growing speculation that such will not be forthcoming this time around, presenting a potential contagion event, particularly across the banking sector. Note: a handful of Chinese banks are active A$ issuers who are heavily exposed to the developer. Mutual does not invest in Chinese banks in A$.
- Local Credit – trader’s commentary…”a fatigued end to the week evident from both buy side and sell side participants. Flows were light across all asset classes and we noted a marked deterioration in interbank liquidity conditions. This is unlikely to improve given the pan Asian holidays next week with the likelihood that the street starts to charge an increased liquidity premia to move material risk positions”. Keep in mind also, three of the big-boys are heading into financial year end this month, so they’ll be cautious on taking any undue risk. On the financials, these observations “one week on from APRA’s CLF announcement and we close the senior curve +3 – 5 bps wider. Fairly modest moves, but to this point the secondary market has NOT been tested. We have not seen any material selling and if does eventuate (our base case is that it will, likely be on switch into new issuance) it will inevitably reset the curve wider. We maintain our view that the curve will continue to widen and steepen from the 3-year point with the only circuit breaker between here and +50 bps in 5yr FRN being the dual redemptions ($3.25bln) due in late October”. A somewhat strange end to the week with CBA launching a 5.25-year new senior bond, a tree-hugger, at +46 bps, and capped at $500m. In the end the book was just shy of $1.1bn, with pricing tightening into +41 bps. An odd bond to return to the market with. Their last senior benchmark deal was in January 2019.
- Bonds & Rates – yields continue to grind higher with US treasuries (10-year) at or near their two-month highs, and the same for ACGB’s. US treasuries are through their 50 and 200-day-moving average, and fast approaching their 100-day moving average as markets look to price in the impact of tapering. Against consensus Q3 estimates, ACGB’s have over-shot (so far), 1.30% vs 1.28%, with consensus also expecting 10-year yields to reach 1.55% (+25 bps) by year end. US treasuries still have some ground to cover by month end to meet up with consensus, 1.36% vs 1.45%, while year-end estimates are at 1.59%.
- Offshore Macro – pretty quiet on the data front in the US, with all the focus on the Fed, and an emphasis on their tapering decisions, if at all, or specifically whether the data has exhibited ‘substantial further progress’ in order to justify tapering. Some additional insight from Bloomberg on what they may do…”the Fed may inch closer to announcing a taper timeline without actually doing it this week. Data since the last FOMC meeting has been mostly negative, though inflation seems to be leveling off. The global impact from the delta variant as well as a looming debt ceiling crisis could also constrain Jerome Powell from laying out when to start curtailing asset purchases”. All said and done, I suspect the Fed will keep it (tapering) in the holster this meeting. Some thoughts from my old shop…” the setback in the labour market recovery in August and the jump in serious infections will encourage the FOMC to wait before it announces it will taper its asset purchases. Any dovish tilt to the FOMC’s messaging can weigh on the USD. In particular, the FOMC may discuss how delta related disruptions are delaying many workers return to the labour market (read our note on the US labour market here).”
- Local Macro – a quiet week for data, just some PMI data on Thursday. The RBA September meeting minutes are due out tomorrow, but I wouldn’t hold your breath for anything market moving to be contained therein.
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Scott Rundell, Chief Investment Officer
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