Mutual Daily Mutterings
Quote of the day…
“Whatever is funny is subversive, every joke is ultimately a
custard pie…a dirty joke is a sort of mental rebellion”..George Orwell.
“Six More Weeks.…”
No Shame… …
- A softer end to the week as geopolitical risk continues to assert dominance of the narrative. The Fed’s next policy move is also still weighing on sentiment, but probably playing second fiddle to the Russian stuff at this very minute. Daily moves: Stocks ↓, credit spreads ↑, offshore yields ↓, AU yields ↑, and commodities ↑
- There was no apparent escalation in the Russia vs Ukraine, but the rhetoric out of the US is getting more urgent. US VP Kamala Harris has said she’s put some coin on Putin going in all guns blazing in coming days. No, not really, that’s purely made up…but she is “convinced” it’ll happen. France is doing its best to keep Russian aggression at bay with soothing words of diplomacy over the weekend.
- The Beijing Winter Olympics concluded last night, so that could clear Russia to go in -without upsetting close ally, China. Not surprisingly, Russia continues to deny any aggressive intent. Never mind the growing troop count on the Ukraine border and the fact they’ve advised that joint military drills between Russia and Belarus will not cease on February 20 as originally planned…and that Russian troops will remain in Belarus…on Ukraine’s northern border.
- The S&P 500 dropped further and the NASDAQ fell into a “death cross” pattern that many technical pundits believe presages further market weakness. A ‘death cross’ appears when the 50-day moving average crosses below the 200-day moving average, i.e. a signal that a short term correction could evolve into a longer term downtrend. The question is, is it a sign that pain is coming, or it simply affirms a downtrend that has already taken place in markets?
- The next Fed meeting is approaching (mid-March). JP Morgan nailed their rates opinion to the mast last week, expecting the Fed to raise rates +25 bps at nine-straight meetings in a bid to tamp down inflation. This would take the Fed Funds Rate from 0.25% to 2.50% by year end. “The bank’s economists said a “feedback loop” between strong growth, cost pressures and private sector behaviour may keep inflation high even as energy prices eventually drop. The risk that central banks shift to generate slow growth is the biggest threat to an otherwise healthy backdrop.” (Bloomberg). Expectations of a +50 bps first up hike are waning, down from a sure thing a week or so ago to just 25% now.
The Long Story….
- Offshore Stocks – geopolitical risk asserted its ‘authorita’ to quote one Eric Cartman. EU and US markets were universally in the red, each performing as bad as each other. Down 0.7% – 1.2% across the board, which contributed to weekly losses in the range of 1.6% – 2.5%. Two-thirds of the S&P 500 retreated and only one sector was able to fire a shot in anger, and it was a pellet gun, Staples (+0.1%). Tech (-1.1%) Industrials (-0.9%) and Telcos (-0.9%) were worst performers on the day. The S&P 500 is down -8.8% YTD with only Energy (+21.8%) and Financials (+0.2%) still with their noses above water.
- Local Stocks – another tough day as geopolitical risk weighed on sentiment. The ASX 200 retreated -1.0% with Healthcare (-3.1%) and Financials (-0.9%) doing most relative damage, although Utilities (-4.1%) fell most with Origin (-8.3%) the primary driver – off the back of their decision to cut the life of their biggest power generation asset by 66%, which saw analysts take the hatchet to the firm’s valuations. APA (-1.2%) and AGL (-1.7%) were also under some selling pressure, although the latter is subject to a joint takeover offer from a Brookfield and Atlassian founder, Mike Cannon-Brookes (formally rejected this morning). Two-thirds of the index failed to get out the gate, running in the opposite direction. No sector was able to gain ground. The index as able to generate very modest gains over the week, outperforming offshore peers. It’ll be a tough start to the week given soft leads, although investors may latch on to some progress made by the Frenchies in negotiations with Putin on the whole Ukraine thing. I wouldn’t be putting any additional risk on the table at the moment…some big knives falling.
- Offshore credit – still drifting wider…US investment grade corporate and financial paper in secondary closed +3 bps wider on Friday, which took weekly moves to +10 – 11 bps. Year to day US IG spreads are +26 – 30 bps wider, or +28% – 34%. US High Yield spreads are +74 bps wider, or +24% YTD. Despite the prospect of war on their backyard, EU investment grade spreads showed some resilience over the week, just +1 bps on Friday and +6 – 7 bps on the week, and +22 – 31 bps YTD (+33% – 46%). Supply in the US will likely be muted relative to prior weeks’ given the truncated week (President’s Day holiday – tonight).
EU Cash vs CDS…
Source: Bloomberg, Mutual Limited
USD Cash vs CDS…
Source: Bloomberg, Mutual Limited
- Local Credit – traders…”a tough week in the trenches as the ongoing volatility in rates market kept credit investors sidelined. Anecdotes of weakness in Asian markets combined with the onset of A$ primary issuance and the customary retreat of fair-weather market makers pressured secondary spreads but we made a sufficient volume of sales to suggest that any weakness in spreads will be viewed an as opportunity to add.” Major bank spreads were unchanged on the day with 5Y at +70 bps and 3Y at +45 bps. On the week, with primary supply from NAB, 5Y was +4 bps wider, bit 3Y only +1 bp wider. Major bank tier 2 started the week around +139 – 145 bps for the 2026 callable paper, which ended the week at +143 – 149 bps, so that’s +4 bps on the week. From the traders…”flows light but spreads remain under pressure. The spectre of new issuance continues to weigh and we think it likely that its eventuality may be cathartic as we continue to drift wider on negligible volumes.”
AU FRN Cash vs US & EU Fins…Source: Bloomberg, Mutual Limited
- Bonds & Rates – a modest sell-off on Friday in local bond markets which took 10Y yields to 2.25%, a post pandemic high and levels not seen for three-years (since early 2019). Three-year yields hit 1.64%, also on or around three-year highs. While the geopolitical rhetoric was generally negative, particularly from the US, France seemed to make some diplomatic inroads to averting imminent conflict. Markets might give this some credence, which would likely see bonds continue to sell off (yields higher) on inflation and monetary policy risk, but conflict will attract a safe haven bid (yields lower). Offshore leads suggest we’ll see a modest rally, so we’ll see. As per above, JP Morgan strategists are calling a Fed Funds Rate of ~2.50% by year end after a consistent monthly increase in rates by the Fed. The RBA continues to espouse patience on rate hikes (late 2022 for their first hike), but markets have priced in at least four by year end, taking cash rates to ~1.25%, kicking off as early as June. Over the past 30 years it has been very rare for the RBA Cash Rate to remain inside the US Fed Funds Rate, only two times since 1990. Specifically, 1997 – 2000 (-50 bps inside) and 2018 – now (peaked at -125 bps, currently -15 bps). The long run average spread between the two rates has been +190 bps. With wages data out this week (a key focus point for the RBA), we could gain greater clarity on likely path of rates locally.
- Macro – some US housing data commentary (ANZ) – “US housing market strength: January housing sales rose unexpectedly, up 6.7% MoM versus another fall anticipated. This took monthly sales to a one-year high. This may have reflected some bringing forward of demand amid expectations that mortgage rates have room to rise. The number of houses available for sale fell to a fresh low of 860,000 in January. Amidst the lack of supply, the median selling price rose by +15.4% YoY. First home buyers accounted for 27% of sales – near the lows.”
- Locally…”border opens, but it’s a long way to normal: From today, fully vaccinated international travellers can arrive in Australia without having to quarantine. With this change, people can now effectively move across Australian borders as they did before the pandemic (with the exception of entry into Western Australia). There is still a lot of uncertainty about how quickly tourism will pick up. The distance of travel to Australia suggests our tourism pick-up is likely to be at the lower end of the international experience.” (ANZ).
- Week ahead… “Flash PMIs for February are released around the globe today with France, Germany, and the Eurozone in focus as investors hope to assess how major EZ economies are emerging from the Omicron wave. After no change to the Medium-Term Lending facility last week, China’s Loan Prime Rates are expected to remain unchanged today, the US celebrates Presidents Days today” (NAB).
- Locally, the main focus will be wages data…”our economists have pencilled in a +0.7% QoQ rise for +2.4% YoY (also the consensus). If realised that would show wages growth already edging above pre-pandemic levels by late last year. Importantly +0.7% QoQ is also what the RBA had pencilled in their most recent SoMP, meaning the RBA can have more confidence in their forecast track which as Governor Lowe noted recently is consistent with the RBA considering rate hikes later in 2022. An upward surprise would certainly increase the pressure on the RBA to consider rate hikes sooner rather than later.” (NAB)
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907