Mutual Daily Mutterings
Quote of the day…
“The nuclear arms race is like two sworn enemies standing waste deep in gasoline. One with three matches, the other with five”…Carl Sagan
“Words, Words, Words.…”
“Where to stop, where to stop…I wonder”
Overview…”getting the band back together…”
- US markets were closed overnight for Presidents Day holiday, so no leads from that corner of the world. European markets were belted on Russian headlines with stocks down around 2.0%, while US futures are down -1.2% on average. EU bonds sold off +2 – 3 bps (yields higher), while US treasury futures rallied on save haven trading. The US continues to warn that Russia intends to invade its neighbour, while Russia continues to say “Не сегодня, капиталистическая свинья” (translation: “not today you capitalist pig swine”). Data flow was subdued.
- The Kremlin officially recognised (by decree) self-proclaimed separatist republics (Donestk & Luhansk) that Russia backs in eastern Ukraine. A moved that “effectively torpedoes years of diplomatic efforts to implement a peace accord to resolve a conflict that has killed 14,000 since Russia-backed separatists seized control of the two areas in 2014.” (Bloomberg).
- “Russia appeared to continue preparations to invade Ukraine, blaming renewed conflict in eastern Ukraine on “provocations of the Ukrainian security forces” and moving tens of thousands of Russian troops into what appeared to be combat formations.” (Bulletin of the Atomic Scientist). For mine, Putin has made his mind up, he’s going in…well, he’ll send the troops in while he’s safe and cosy in the Kremlin, or some opulent dacha somewhere. The US will impose sanctions and tsk, tsk, tsk, but won’t commit any military assets, nothing meaningful, and nothing overt. That would be politically unpalatable at home (“it’s a European problem”…sound familiar?). Markets will be volatile for a while, then settle down.
- “In a televised address to Russians late Monday, Putin devoted part of his argument to a historical recitation aimed at showing that Russia’s former Soviet neighbours were created by the Bolsheviks and don’t deserve to be considered as genuine independent states…” (Bloomberg).
- Russia continues to argue it has no intentions to invade, but you don’t deploy 150K or so troops on your neighbour’s border, with all the bells and whistles the fun of it. In the end they’ll go to the aid of one of the separatist republics they now recognise. Putin’s goal, as it has been ever thus, is to get the USSR band back together, whether the former members like it or not.
The Long Story….
- Offshore Stocks – nothing done in US physicals given the public holiday, while the deteriorating Russian vs Ukraine situation weighed on sentiment across European markets with core indices down -1.0% – 2.0%. US futures are firmly in the red, which seems appropriate given the reds are at the gate. Markets will remain volatile for a period of time, but eventually interest in the conflict will likely wane – assuming it remains localised – and market interest will shift to the next shiny pretty bauble of interest. In time, and as callous and cold as this sounds, the Ukraine situation will move further and further from the front page and will lose importance for market sentiment. If we look to Russia’s annexation of Crimea back in early 2014 (March), in the lead up to actual military action markets were trading range bound and sideways. Three months after annexation, the S&P 500 was up almost +5.0%. By year end the index was up +10.8%. Different macro circumstances at the time versus now, but an indication of what play book to consider when things “get real.” NOTE: I am not a geopolitical expert, just someone with an opinion, rightly or wrongly.
- Local Stocks – despite geopolitical tensions, the local market was able to claw out some very modest gains yesterday. The ASX 200 rise +0.2% with only three sectors in the red, Tech (-2.7%), Healthcare (-1.3%) and Discretionary (-0.9%). In a straight-line sense, Utilities (+3.7%) led all comers after a strong day from AGL (+10.6%), suggesting investors are expecting an improved offer from the Brookfields / Canon-Brookes’ consortium. Staples (+2.3%) and Telcos (+2.3%) completed the podium. Financials (+0.6%) won the day on handicap. Unfortunately, anyone who added risk yesterday will probably find themselves underwater today with futures down -1.1%.
- Offshore credit – US markets closed, while in European markets, weaker sentiment saw spreads drift further with Investment Grade Financials and Corporates both +3 bps wider. European High Yield edged out +5 bps. Credit will struggle to attract a bid over the near-term time horizon, at least whilst geopolitical tensions remain elevated and frontpage news, especially if bullets start pinging around. If, however, we have this faux conflict persist for a prolonged period of time, markets could well grow bored of it and move the narrative on to new catalysts – i.e. the Fed and monetary policy…well, an old catalyst, but back in the driver’s seat.
EU Cash vs CDS…
Source: Bloomberg, Mutual Limited
USD Cash vs CDS…
Source: Bloomberg, Mutual Limited
- Local Credit – traders…”we saw very limited interest in secondary credit yesterday, owing to a combination of risk off themes from Russia/Ukraine tensions and the President’s Day holiday in the US. The interest we did see was skewed mostly to client selling and centred in lower beta/short end stock. The liquidity backdrop remains very poor and we expect this persists whilst headlines continue to drive volatility.” Major bank senior curves closed largely unchanged with the recent NAB 5Y at +70 bps (-2 bps vs issuance levels). Traders, again..” lifting domestic real money and selling into offshore real money. Recent primary has done little to unhinge the preferences of secondary investors; offshore buying continues to be the driver of any long end spread performance whilst domestic accounts show little interest to add. Flow away from this was modest and skewed to better selling of short dates. We leave spreads unchanged though make note of heaviness in the front end.” Nothing really happening in the tier 2 space either, most lines unchanged – just one line marked wider, the ANZ Feb-26 call, +1 bp to +144 bps.
AU FRN Cash vs US & EU Fins…
Source: Bloomberg, Mutual Limited
- Bonds & Rates – a modest rally yesterday, reflecting moves lower in treasury markets at week’s end on Friday. As the situation in Europe deteriorates, bonds will attract a safe haven bid in the near term. In early 2014, when Russia annexed Crimea in Ukraine’s south, bonds (US 10Y) range traded through the whole thing, with a very modest and gradual 6 bps rally in the subsequent 6 months. This time feels a little more volatile, but history does suggest market interest in the conflict will become secondary if it remains localised and surrounding areas aren’t drawn into a more meaningful ‘war’. A modest rally in local bonds today is likely.
- Macro – from NAB this morning…”economic data has taken a backseat to geopolitical developments. The most notable piece was the Markit PMIs for the Eurozone which surprised to the upside for the services sector at 55.8 (52.1 expected), while manufacturing activity was broadly as expected at 58.4 (58.7 expected). Importantly, the PMIs continue to sound alarm bells over the inflation picture with the Markit write-up noting; “Average prices charged for goods and services rose at the sharpest rate yet recorded by the survey as firms increasingly sought to pass persistent higher cost inflation on to customers. A record high rate of inflation in the service sector was accompanied by a near-record rate in manufacturing”. In terms of activity, the overall composite index was hit a five-month high, illustrating that activity has rebounded sharply after the Omicron peak and governments have started to ease restrictions.”
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907