Mutual Daily Mutterings
Quote of the day…
“If you don’t know where you are going, you might wind up someplace else.…” – Yogi Berra
Chart du jour…US margin debt vs S&P 500
Source: Bloomberg,Mutal Limited, www.finra.org
“This won’t end well…”
Overview…”ahh, it’s our old friend, buy the dip…”
- As there was no real identifiable catalyst for yesterday’s sell-off in risk assets, likewise there was no discernible reason why they bounced back last night, other than faith that dip-buyers were waiting on the sidelines. News and data was light. While the market is awash with monetary accommodation, these kind of ‘up-down’ periods will persist. It’s almost market canon now, when markets dip, they come back. While stocks bounced like a dodgy kebab at 3am, bond yields were less convinced, US 10’s rose +3 bps (vs -10 bps yesterday), while EU 10’s across GILTS, OATS and BUNDs fell -1 – 2 bps. At the front of the US curve, the 2’s close a fraction lower. Oil advanced (+1.5%), clawing back some of yesterday’s losses (-6.5%) and gold fell back. Asian equity futures are in the green.
- The recent sell-off was seen by many investors as a buying opportunity amid prospects for “solid earnings, government stimulus and easy monetary policy”. These are the pillars of the bull themes in play, while the main bear themes include the spread of the Delta COVID variant and the consequences, the prospect that perhaps the recovery isn’t as robust as first thought and that buoyant growth narrative is incorrectly priced in. And, of course the yet to be answered inflation question – transitory or not? Recent performance would suggest the bond market is gulping down the central bank Kool-Aid in heroic proportions, in the super-sized cup.
- Talking heads… “we have a ways to go on the cyclical recovery here…an exceptionalism in the amount of fiscal policy (US), the amount of monetary stimulus and also in the way we vaccinated the population. And because of that I actually am very bullish”…supporting this, JPM strategists said any growth and slowdown fears are premature and overblown as they raised their S&P EPS estimates and boosted the 2021 year-end call.
- On the data front, US housing starts increased in June by more than forecast, suggesting residential construction is stabilizing despite lingering supply-chain constraints and labour shortages. However, forward-looking permit applications missed estimates, dropping to a 10-month low. Locally today, June Retail sales due out, with consensus at -0.7% – lockdowns will impact.
- Headlines coming through that the Tokyo Olympics could still be cancelled given rising COVID cases. The opening ceremony is scheduled for Friday.
- Offshore Stocks – a broad based buy the dip rally with the S&P 500 leading all comers, up +1.7%, followed by the DOW (+1.6%) and the NASDAQ (+1.6%). Across the pond in Europe, the Euro STOXX rose +0.6%. Within the S&P 500 it was almost a clean sweep with just under 90% of stocks advancing and all bar one sector closed with a relieved shade of green. Leading the sectors was Industrials (+2.7%), Financials (+2.4%) and REITS (+1.9%), while at the other end of the table, Staples (-0.1%) lagged, followed by Utilities (+0.4%) and Telcos (+1.1%). E-mini’s are firmly in the green.
- Local stocks – well, it could’ve been worse. In the end, a modest down day yesterday after US and EU stocks were spanked the night before on virus angst and related growth concerns. The ASX 200 fell ‘only’ -0.5%, breaking through its 50-day moving average, although the index was down -1.1% in the first hour of trading. As the day wore on, e-minis (offshore futures) turned positive and the local index bounced off intra-day lows. Just under two-thirds of stocks were bloodied, and seven of the eleven core sectors were sporting flesh wounds of varying degrees of severity. Materials (-1.8%) was the worst, while not a gushing severed artery, still a meaningfully down day. Utilities (-1.7%) and Energy (1.7%) made out the top three worst performers. At the other end of the spectrum, Health (+0.9%), Tech (+0.4%) and Staples (+0.3%) held their heads up. Futures are up +0.7% at the time of publishing.
- Offshore Credit – US IG primary markets came back to life, with five deals and US$8.7bn printed. Issuers paid less than 2 bps in new issue concessions, driven by order books that were 3.2x oversubscribed (vs 3.1x YTD average). Initial price targets on averaged looked to offer about 26 bps in new issue concession vs the curve at the outset. Modest volumes in European IG, €5.1bn, with deals well supported. In secondary, spreads slightly better bid with core IG indices -1.5 bps tighter on average, while over the week spreads are +4 – 6 bps wider across US IG, while high yield spreads are +41 bps wider on the week with much of that coming yesterday. European IG outperformed over the week, with IG spreads +1 bps wider (Corp) to -4 bps tighter (Fins), while high yield is +9 bps.
- Local Credit – traders commentary…”palpable risk-off overtones in offshore markets made for a tough trading session in domestic credit. The withdrawal of bid-side liquidity that we have warned about in this forum was fully evident today with a number of sales clearing way back of supposed mid marks. We expect these patchy liquidity conditions to persist until such time that we see some stabilisation in USTs/ equities.” Having said that, spreads were left unchanged as expected. Following on from the trader’s comments, if markets settle, then credit will settle….and given last night’s risk-rebound, the tone should settle. If there is sustained weakness and volatility offshore, i.e. it’s raining dead-cats, then local spreads will be dragged wider in sympathy.
- Bonds & Rates – US treasuries gave back a small portion of yesterday’s gains, at least out the back with the 10’s +3 bps (vs yesterday’s -10 bps move), closing at 1.22%, while the 2’s rallied again -1.5 bps to just shy of 0.20%. A decent rally locally yesterday on the risk off trade and as markets digest a plethora of street estimates around the path of tapering in light of the local lockdowns. Not a lot data wise, while the RBA July Board meeting minutes garnered the most attention. Nothing new noted beyond what was articulated in the initial statement and in subsequent speeches. However, following the July meeting the Sydney lockdown intensified (extended and tightened) and the Delta variant made its way to Victoria courtesy of a few careless NSW removalists. With the Sydney lockdown likely to drag on, to at least the end of July, and the harder from the get-go lockdown in Victoria likely to extend into three weeks (my opinion after it was formerly extended to two weeks yesterday), the economic impact is estimated around the c.$8bn mark. This would send national Q3 GDP into contraction territory. Consequently, the market is now pondering the likelihood of the RBA halting their planned QE tapering at the next meeting in August. This should be supportive of bonds (yields lower).
- Macro – some macro comments above around the likely impact of the NSW and Victorian lockdowns, and as of yesterday South Australia has been added to the mix with a week-long lockdown after cases were reported there. Apart from that, a quiet day for data, and not a lot offshore last night either. Local retail sales for June out today with consensus expecting -0.7% MoM vs +0.4% MoM in May.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907