Mutual Daily Mutterings
Quote of the day…
“Stupidity got us into this mess, and stupidity will get us out” – Homer J Simpson..…
Table du jour: Commodities…
Source: Bloomberg, Mutual Limited
“Tis But A Scratch…”
Overview…”Taper tantrum fears fade to black…for now”.
- Ironically, after pledging a shed-load of cash to public transport in yesterday’s Victorian State budget, my tram didn’t turn up this morning, so I’m running a little behind the eight-ball. Speaking of the budget, did you see the brilliant strategy to attract big business to the state, impose a levy on them to pay for mental health issues….which I would suggest were caused by extended lockdowns, in turn caused by quarantine incompetency…sorry, I digress.
- A decent risk-on move overnight, I’m tempted to say the catalyst for the rally was the simple fact the sun came up, which is normally as good a narrative as any, but arguably it could have been the better US jobs report, maybe. So, stocks up across the board, and comfortably so, with tech leading the way – some stability in Bitcoin probably helped, as much as it pains me to say. And, once again, cats and dogs are playing nicely together, bonds rallied strongly also. In some good news for peace and brotherly love in the world, Israel and Hamas have agreed to a cease-fire
- Talking heads…”while inflation has been the star of the show, keep in mind that the Fed’s mandate is twofold, with employment as the other side. The jobless claims read shows once again that that we’re heading in the right direction, but we’re a ways away from where we were pre-pandemic.”
- Commodities softened with most metals down a decent clip, while oil extended declines to three-week lows after Iran’s president said the broad outline of a deal to end sanctions on its oil had been reached. Speaking of Iran, I watched ‘Argo’ again last night, starring Ben Affleck (and directed by). Great movie if you haven’t seen it.
- Bitcoin again was whipsawed, up and down like a toilet seat in a…well, you know the analogy. Bitcoin rose +4.4% to around US$40K, after climbing as much as +11.0%, and Coinbase was up +4.3%. Around the water cooler yesterday we were discussing the tax implications of Bitcoin, i.e. do you have to report income, profits etc, and low and behold, today we see the Biden administration is proposing that transfers of at least US$10K of digital currency have to be reported to the IRS. Spooky.
- Offshore Stocks – European markets legged it higher overnight (+1.3% – 1.6%) and when US markets came on line, they picked up the baton and maintained the rage. It was a broad-based rally, with 70% of SPX stocks closing in the green, and only one sector failed to get up on the day, Energy (-0.1%), and even then, only just. Tech (+1.9%) drove the party bus, ably supported by Telcos (+1.7%), and REITS (+1.3%). Volumes were up a smidge on recent averages and volatility gapped lower, -151 bps to 20.7% (VIX). E-mini’s are firmly in the green.
- Local stocks – a solid rally in local markets, up +1.3%, with four stocks up for every one down, or 80% vs 20%. Only one sector failed to fire, Materials (-0.4%), a modest move despite China announcing plans to diversify its iron ore suppliers. Will be interesting to see how they do this, Australia supplies ~60% of China’s iron ore needs, and it is typically of a very high (clean) quality. If memory serves me, and it might not be, but generally smelters are configured to take a particular ore. If you change the ore, you have to reconfigure the smelter – which takes time and capital. Further, Australian iron ore, especially from BHP and RIO, less so Fortescue, is of the highest quality – that is, less impurities. Consequently, when using Australian ore, smelters don’t need to be cleaned as often, which saves $$. Moving on, sector wise yesterday, Tech (+4.3%) had a good day at the office, the best in fact. Also having good days, were REITS (+2.4%), Financials (+1.9%), and Discretionary (+1.7%). In fact, only three sectors (excluding Materials) failed to advance by more than +1.0%. Futures are up.
- Offshore Credit – Some credit (CDS) insights from Bloomberg…”US company defaults are coming to a near stand-still amid unprecedented access to cheap financing, leaving one corner of the credit world that had been preparing for a relatively busy year with little to do. There’s been just one credit default swap auction all year, and there are none on the current calendar, according to data providers Creditex and Markit. That compares to 11 through the first six months of 2020 as the coronavirus pandemic prompted a flurry of bankruptcies, and dire predictions from rating companies of more to come. As the economy rebounds and companies continue to enjoy an unprecedented wave of credit-market liquidity spurred by the Federal Reserve, rating firms have been forced to rip up forecasts for double-digit default rates. Junk bonds will instead see levels closer to 2% in 2021, while the institutional loan default rate is now tracking below 1% year-to-date, according to Fitch Ratings report released Thursday”.
- Local Credit – very little to say here, quiet day in markets, although there has been a reported modest uptick in activity from both domestic and offshore investors. Major bank curve, wait for it…yes, unchanged. Tier 2 also unchanged, settling down a bit after a rush of buying in recent days as investors accept the next deal is a while away. CBA yesterday at their economics update in Melbourne (more details below) stated they expect senior supply to kick off later in the year, most likely post reporting season, so that would be October-November. I’d agree with that. There’s still $100bn, give or take, of the TFF to go, and at 0.10% for three years, why wouldn’t you draw it down. And, this roughly equal to the average annual wholesale funding needs of the major banks over the past say 5 – 10 years, pre-2020. Unless credit growth really amps up, and / or deposits flood out the door, wholesale funding needs will be subdued, which will maintain some tightening pressure on spreads.
- Bonds & Rates – markets want to believe…there seemed to be a bit of a momentum swing overnight with markets remembering the Fed’s dual mandate, or focus, i.e. not just inflation, but employment as well. If the weight of focus shifts to the latter, well then QE tapering and rate hikes probably aren’t as imminent as initially thought…rightly or wrongly. US 10-year yields fell -4.5 bps to 1.625% to be around the middle of the two-month range (1.54% – 1.74%), while break evens (10Y) have pulled back sharply over the past couple days, down -18 bps, from 2.96% to 2.78%. Break evens are a proxy for future inflation expectations, with current pricing suggesting inflation will average 2.78% per annum for the next 10 years. The Fed’s target is 2.0%, and the last reading was +4.2% – impacted by COVID base effects.
- Macro – local labour data out yesterday, full time jobs advanced +34K, part-time fell -64K, for a new change of -+30K. The participation rate dropped from 66.3% to 66.0%, and the unemployment rate fell to 5.5% vs 5.6% consensus estimates. I attended an economics update from my old crew at CBA yesterday. Stephen Halmarick and the team delivered a slick and polished presentation, that on the surface and deep in the under-belly, projected a sense of economic optimism. Underpinned by fiscal stimulus, expectations of accelerating wages growth and loose monetary policy, the team see solid growth ahead with reasonable likelihood that the RBA will be forced to go early on rate hikes (i.e. before the currently projected 2024). The CBA team expect the TFF to end in June, with no extension (agreed). The sovereign S&P AAA rating is at risk (agreed), although this shouldn’t have any meaningful impact on funding costs (agreed, but can depend on when the downgrade occurs vis a vis prevailing market conditions). On QE, Marty ‘McFly’ Whetton, expects the RBA to begin tapering by September, dropping from $100bn of bond purchases to $50bn (over 6 months) and that the yield curve control measures won’t be extended to the Nov-24 ACGB’s (from the current Apr-24) – I’ve yet to see any strategy commentary disagreeing with this stance. Lastly, on the currency, Smokin Joe Capurso sees the little Aussie battler as being undervalued, with 0.80 cents by year end (vs 0.78 presently)
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907