Mutual Daily Mutterings
Quote of the day…
“He scored that goal after only 22 seconds – totally against the run of play.”.…Dermott Brereton
Chart du jour…..still a lot of froth
“Seeking The Soothsayer…”
Overview…”oh, it’s murder on the dance floor alright.…”
- Move over COVID, there’s a new narrative in town. Thy name be Evergrande (Chinese property developer), and contagion be its business! Well, not quite a new narrative, it’s been bubbling away in the background for a while now. And, truth be told, it has been an area of interest at Mutual for a while also. There’s no sugar coating it, US and European stocks were smoked overnight. The S&P 500 was down as much as -2.9%, the most in almost a year, but some late buying lessened the pain into the close. Yields rallied on safe haven demand, oil and commodities fell, and CDS spreads punched higher, +6 – 7 bps. Not surprisingly, volatility measures spiked with the VIX up +4.9 ppt to 25.7%. While Evergrande is the immediate focus, looming US government debt ceilings, uncertainty around US fiscal stimulus, tapering prospects, and lingering Delta impacts are all weighing on sentiment.
- These mid-month sell-offs in stocks have been a theme since around March, usually coinciding with option expiries, which I’ve mentioned numerous times. And, ‘normally’ the dip-buyers have come bounding over the horizon on a gleaming white steed to save the day. It would seem said gleaming steed may have been shipped off to the knackery. I lifted this from Bloomberg yesterday, touching on dip-buying…”maybe they’ll step in today, or maybe they’ll hold out for Turnaround-Tuesday, but history suggests dip buyers will make an appearance any moment now for two reasons. One, the witching is over, and that’s been a turning point in recent sessions. And two, drawdowns in S&P 500 futures have seldom been greater than 3.5% this year. In fact, at 3.9%, the current retracement is the third largest this year”….buying in the last hour of trade could have been said dip-buyers, but it’s more a donkey they’re riding.
- Talking heads…“if the market is ripe for a correction, ‘tis the season for one…most selloffs seem to occur at the end of the third quarter, beginning of the fourth as investors start to adjust future expectations.” A little too US centric a view, but then there is this nugget of truth…“China is not investable, not at this point — even on a government level because you just really don’t know what protection you’re going to have or what the currency is going to do.”
- Offshore Stocks – markets steadily declined through much of the offshore session with the S&P 500 down as much as -2.9% with just under an hour to go in the trading day. Traded volumes were 3x greater than average. A late rally took some of the sting out of earlier losses, the narrative suggesting (perhaps hoping) that it was dip buyers, tentatively emerging from their mother’s basement. On the day, no market and no sector were spared the rod. In the S&P 500 nine out of ten stocks took a header off the kitchen table. Worst of the worst was Energy (-3.0%), followed by Discretionary (-2.4%) and Financials (-2.2%). Tech (-1.9%) had the single largest impact on the broader index though. Utilities (-0.2%) and REITS (-0.6%) were the only sectors to keep their losses to less than -1.0%. The S&P 500 has punched through its 100 day-moving average, 4328 vs 4357, and futures are pointing to more losses ahead. Relative strength indicators are approaching oversold territory, 33.9 vs 30.0, which would become categorical if we have another session like last night. If Evergrande is in fact the master of woe, then markets will likely have to wait until Thursday for any clarity (because of public holidays), if at all, on the group’s ability to meet financial obligations. E-mini’s are deeply in the red though, so I’d say things look precarious.
- Local stocks – there was murder on the dance floor yesterday as the ASX 200 took the weaker leads from offshore and just ran with it…and there’s more to come. The ASX 200 tried a couple of times to rally off its intra-day lows, but with offshore futures weakening by the minute, the index was doomed from the start. Across the ASX 200 some 93% of stocks closed with a reddish hue. The worst of the worst in a straight-line sense was Materials (-3.7%), pummelled further as China increases restrictions on steel output to clear its skies. While demand concerns emanate from worries about China Evergrande Group and the slowdown in the country’s property sector, decarbonization targets and vulnerability to supply disruptions. Energy (-3.0%) was second worse, and Tech (-2.8%) took the bronze for third worst. Financials (-2.2%) was fourth worst, but had the most meaningful impact on the broader index because of its weight. Only Utilities (+1.0%) was able to hold its head high, although this in turn was because of one stock. AusNet (+19.2%) rallied strongly on the back of a takeover bid from Brookfield Asset Management, which came at a +26% premium to Friday’s close. All other stocks in the sector were blood-red. The ASX 200 is now -5.0% off its record highs (August) with relative strength indicators approaching ‘oversold’ territory, 31.3 vs the oversold threshold of 30.0. Futures are pointing to another tough day in the trenches, -2.1%, not a day to test one’s knife catching skills.
- Offshore Credit – it was too blustering for primary activity, with ‘sources in the know’ indicating eight borrowers stepped back from intended issues. Worries about a potential default by Evergrande has spooked markets as the distressed company and largest issuer of junk bonds in the region faces interest payment deadlines. CDS spreads were smashed with the CDX (US) +7.0 bps higher and MAIN (EU) +6.5 bps higher, both at three-month highs. The Senior Financials index closed +8.0 bps higher, while the Sub-Financial Index closed +15.5 bps higher. Secondary spreads in cash markets are +1 – 2 bps wider in the IG space, and EU high yield spreads are +19 bps wider on the day.
- Local Credit – traders…”a combination of factors made for a very quiet day in the secondary credit market, most pertinently Asian public holidays and the FYE induced deterioration in interbank liquidity. Flow was light across all asset classes although select corporate names garnered a response to M&A headlines.” Major bank spread, across both senior and subordinated, did very little, closing unchanged, despite volatility across stocks. If the sell-off persists in stocks, we might see some spill-over effects into credit – especially given constrained end of financial year liquidity conditions…I wrote that sentence last night. Obviously, the stock sell-off has persisted, and with ASX 200 futures suggesting another -2.0% down day, we could see some traders move their marks cautiously wider. Whether we trade there remains to be seen. With such an uncertain risk back drop, it would be only the bravest, possible foolhardy sailor to brave primary waters.
- Bonds & Rates – as the equity market rout grows, a safe-haven bid has emerged with US treasury yields dropping 5bps (10-year). Despite yesterday’s carnage in stocks, local bond markets took a wait and see stance, standing moodily just off the dance floor, hands firmly shoved in pockets. I suspect the rhythm of the night will be too much to ignore and we’ll see local bonds busting a move today. I’d suggest a 3 – 5 bps rally in 10-year yields is likely. A question to ponder, does this change the Fed’s taper discussions tomorrow? It’ll probably be raised, especially if we have another night of rocking and rolling, but…stocks are really only -3.0% – 5.0% off their ding-dong all-time highs. So, I’d say it won’t change their schedule, here and now. It’s worth noting also that the weight of consensus is leaning to no meaningful tapering announcement from this meeting anyway. I’d also suggest, if I may, the Fed would welcome some steam being let out of the market…perhaps not too keen on the catalyst for said steam venting (Evergrande), especially if it does in fact default and trigger wide spread financial instability. Speaking of which, the US Financial Conditions Index fell from 1.16 to 0.79 last night, down to levels not seen since the ‘reflation’ trade kicked off in March, earlier this year.
- Macro – nothing of real significance in an official data sense. Today locally we have the RBA minutes for the September meeting, but that’ll be hardly market moving, with focus firmly planted elsewhere.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907