Mutual Daily Mutterings
Quote of the day…
“Light travels faster than sound. This is why some people appear bright until you hear them speak…” – Alan Dundes
S&P 500 – quarterly reporting…
Source: Bloomberg, Mutual Limited
“Earnings season, meet COVID resilience…”
- Overview – the cease fire between cats and dogs has ended with stocks falling (for a second day) and bonds rallied. The offshore narrative swung back toward rising virus cases (globally), and the potential economic impact as being cause for concern…that’s back-filling 101 there, or choose your own narrative, COVID had nothing to do with last night’s move. This is not to say the stubbornness of COVID is not a risk, rather it wasn’t a catalyst last night. Nevertheless, a raft of solid corporate results wasn’t enough to sway investor sentiment, which remains cautious post the recent run-up in valuations to historical highs (or near highs depending on the index). And that’s the issue, stocks have run hard, it makes sense to ease off a touch as reporting season unfolds. Speaking of which, as reporting season rolls on all eyes will be on whether an anticipated rise in profits will be followed by more buoyant guidance. Markets are priced for stronger growth ahead, so downside risk stems from a more cautious outlook, collectively, from management. Talking heads…. “earnings season is ramping up, and there’s this concern about how the multinationals will give their guidance in view of the fact that we haven’t drawn a line under COVID yet…that is just starting to unnerve investors. Demand for riskier assets has come off.” Still reasons to be bullish? According to some, apparently so…talking heads… “the economic recovery has taken hold, the earnings recovery has taken hold, everything we’ve seen from first-quarter earnings so far has been that it’s going to be a blowout quarter”…yes, but is it sustainable?
- Offshore Stocks – a sea of red across the Bloomberg terminal this morning with a second day of weakness, coincidentally just after S&P 500 RSI metrics hit, or broke through, ‘overbought’ levels. Across the index some 62% of stocks were bloodied and bruised to varying degrees, while across the eleven sectors just four were able to take the points, closing higher. Leading the rear-guard action were sectors considered more safe havens, with Utilities (+1.32%) and REITS (+1.12%) performing best. At the bottom of the pile we had Energy (-2.66%) – oil down -1.5%, Financials (-1.81%), Discretionary (-1.22%) and Industrials (-1.09%). European markets fared worse, with key indices over -2.00%. Asian markets were mixed with the NIKKEI down -1.97%, the HANG SENG up +0.10% and the CSI 300 (Shanghai) down -0.07%. Futures are in the red, down -0.70 – 0.75% across US indices, and down over -2.00% in European indices. Asian markets also to open deeply in the red.
- Local stocks – after breaking through the 7,000 level, momentum continues to wane with the ASX 200 enduring a reasonably broad-based, and possibly sustained, pull-back. Yesterday, 68% of stocks were in the naughty corner, and only one sector was able to get an elephant stamp from the teacher, Telcos (+0.20%). Elsewhere, it was a day for the bears. Tech (-1.17%), Healthcare (-1.11%), Energy (-0.98%), and Financials (-0.89%) were the main culprits, with the latter driving most of the losses (~30% index weight). The ASX 200 closed above 7,000 yesterday, still, however with futures down -1.2%, the index will be back in the 6,000’s by the close of business. It’s not all doom and gloom, the index is still up +6.6% YTD, or +18.99% financial YTD.
- Offshore Credit – reasonably active in US IG primary markets with US$7.35bn priced across five deals. After steepening for the majority of 2021, the treasuries yield curve has reversed trend. Longer-dated Treasury bonds have led a rally in rates across the curve (i.e. a bull flattener). After rising to 1.75% and 2.45% about two weeks ago, 10 -year and 30-year yields are currently around -20 bps and -30 bps lower, respectively. For credit, with spreads entrenched near or around pre-pandemic tights, the “about-face in rates is creating an unexpected opportunity for nimble issuers, especially when considering the hordes that see another bear steepener coming on the horizon” (Bloomberg), that is, the reflation trade. Here and now, primary market metrics remain constructive with books 2.0x cover (down on YTD averages, 3.1x) and minimal new issue concessions, just 2 bps. Spread compression post launch is also a solid -24 bps. Secondary spreads were stable on the day, but a few basis points wider on the week as heavy bank issuance continues to be absorbed.
- Local Credit – traders indicating a constructive day of trading across local credit markets. For us the primary focus was on Bank of Queensland (BBB+/A3) seeking expressions of interest for a new 10.25-NC-5.25 tier 2 deal. No guidance provided, but the deal will likely be today’s business. The combined BEN and BOQ tier 2 curve (all maturities) indicates fair value around +178 – 180 bps, but if we exclude the BEN Dec-21 call, the curve flattens to around +168 – 170 bps, which is where the deal will likely price (probably launch at around +170 – 175 bps). At these levels the deal offers +37 – 40 bps pick up over major bank tier 2, which is fair given the rating differences at the security level (two notches, BBB- vs BBB+). BOQ has only one existing tier 2 line and may have further need for more issuance once the ME acquisition is finalised (ME has no outstanding tier 2 paper). Volume wise, at best BOQ will likely issue somewhere between $200m – $250m, but it may be as low as $150m. Elsewhere in secondary, no change to the major bank senior curve, while in the tier 2 space, modest movements here and there.
- Bonds & Rates – caution has crept into bond markets with yields well off their Q1 highs. Overnight, US treasuries rallied with 10-year yields falling almost 5 bps to 1.56%, or -18 bps month to date. ACGB’s have underperformed treasuries month to date with the local 10-year yields largely unchanged (1.78%) vs levels seen at the beginning of the month. Although, yesterday, they gapped +7 bps higher, which will likely largely reverse today. The ACGB vs UST spread (10-year) has consequently grown from +5 bps at the beginning of the month to +22 bps vs a 12-month average of +14 bps, with today’s likely moves directing it back toward the average. Against consensus estimates, the US 10-year is a fair way off, with consensus expecting yields at 1.71% by the end of Q2 (June) – so +16 bps off. Locally, the view is ACGB’s (10-year) will be 1.65% by the end of June, or -13 bps below current levels (yesterday’s close).
- Macro – the day ahead brings us local retail sales data (March), with consensus pencilling in +1.0% vs -0.8% over the prior month. Shouldn’t be a market moving print, markets (et al) will likely be driven by offshore leads today – even if it is a stonkingly good number. Elsewhere, not a lot to focus on.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907