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Mutual Daily Mutterings

Quote of the day…

 

 

“The real reason that we can’t have the Ten Commandments in a courthouse: You cannot post “Thou shalt not steal,” “Thou shalt not commit adultery,” and “Thou shalt not lie” in a building full of lawyers, judges, and politicians. It creates a hostile work environment.” –  George Carlin

 

 

 

 

 

 

Chart du jour…ACGBs vs Crude.

 

 

“Stock Puppets…

Source: www.hedgeye.com

 

 

Overview: ”Hawkish Fed and virus concerns weigh on sentiment…”

  • The risk-tone on Friday night our time softened as news filtered out of Europe that the pandemic was once again having an impact.  Austria announced it will again go into a nationwide lockdown and Germany is considering a similar move.  Israel’s infection reproduction rate rose to over 1, the highest since early September, indicating the virus is spreading there again.
  • Northern Hemisphere stocks retreated with Europe underperforming the US, although daily moves in the latter were modest, with the NASDAQ actually gaining.  Over the week, US markets were generally up, although the DOW lagged, while Europe and Australian markets were faced with less than enthusiastic risk appetite.
  • Talking heads…”we’d view weakness in cyclicals/value on COVID headlines in the coming weeks as an opportunity to add to those sectors for anyone with a medium term or longer time horizon.”  If we do have a resurgence in cases and economies do head back into lockdown, does this reverse the reversal of accommodative monetary policy?  I think not, in the US and here at least, it might delay it, but I doubt we’ll see a reversal.  Europe on the other hand will likely keep the foot on the gas.
  • Fed speak…two members of the Fed’s board said the central bank may need to consider a faster reduction in its bond-buying program.  Which has been a regular comment made by various board members over the past month or so, it’s almost background noise now.  Talking heads…”we don’t consider this hawkish shift in Fed policy to be a massive headwind for the overall market as monetary accommodation is still tightening at a rate substantially slower than the economy is rebounding.
  • The back end of the US treasuries curve rallied a touch, while the front of the curve rose a smidge on the Fed-member’s comments…when I say smidge, I mean you need to go to three decimal places to see the change.  Back-end bond yields were likely rallying on the COVID headlines out of Europe, i.e. signalling continued accommodative policies to offset the macro impact of lockdowns.
  • Some big moves south in oil prices as Japan and the US are expected to announce releases of crude from their respective strategic reserves.

 

Details….

  • Offshore Stocks – modest losses on the day as Fed comments weighed on sentiment and US investors caste a slightly weary eye across the pond and signs of rising infection rates and further lockdowns.  Personally, I can’t see the US economy locking down again, the place would erupt!  Around two thirds of the S&P 500 retreated on Friday with only three sectors gaining any ground, Tech (+0.8%), Utilities (+0.6%), and Discretionary (+0.3%).  Bottom of the tables was dominated by Energy (-3.9%), followed by Financials (-1.1%).  Modest gains on the week also, but also very narrow with three sectors carrying the load, Discretionary (+3.8%), Tech (-2.4%), and Utilities (-0.9%).  Elsewhere it was all red, with Energy (-5.2%) the worst offender, followed by Financials (-2.8%) and Materials (-2.0%).  Valuations are still frothy, pricing a goldilocks year ahead.
  • Local stocks – modest and narrow gains across the ASX 200 on Friday, +0.2% with marginally more stocks advancing than not, and the same across the core sectors.  Healthcare (+0.9%), Staples (+0.7%), and Materials (+0.6%) gained most on the day, while Industrials (-0.6%), Tech (-0.2%) and Utilities (-0.2%) were bottom of the tables.  The gains weren’t enough to offshore earlier losses in the week, with the index losing -0.6%, although the broad tone was positive with 8/11 sectors gaining ground.  However, the three biggest sectors by weight fell, led by banks (-3.6%) – curtesy of CBA’s Q1 trading update, followed by Materials (-1.7%) and Energy (-1.5%).  Tech (+3.1%) was best performer on the week.  Valuations remain in the frothy side of frothy with forward PE’s at 18.5x vs pre-pandemic averages of 16.1x and still considerable uncertainty around earnings and margins ahead.  Basically, a lot of rainbows, lollipops, and the occasional unicorn are baked into current valuations.  The index has lost momentum and is looking for a new narrative to cling to.  Questions is, which way will it go?

 

 

(Source: Bloomberg)

 

 

  • Local Credit – traders reporting a quiet end to the week, with subdued flows in secondary with investors focused primarily on the new shiny-pretty primary issuance.  As primary is absorbed, and assuming no new deals, we should see some attention swing back to secondary.  No major movements on the week in the major bank senior space, with only the Aug-26 seeing any action, edging a basis point wider to +59 bps, elsewhere it was tumbleweeds, unchanged.  Major bank tier 2 was a little more-frisky with the bulk of the curve edging +2 bps wider, while the CBA Aug-26 calls were +3 bps wider.  By all accounts the street is heavy with inventory, which will weigh on spreads for the time being.  Spreads to likely drift sideways all other things being equal.

 

 

  • Bonds & Rates – not a lot happened in local bond land on Friday, as reflected below, pretty quiet and with only modest movement on the week (first chart below).  Market pricing of rate hikes through 2022 eased off a touch (second chart below), but still remains well above RBA guidance.  Offshore, a slight bull flattening on Friday in US treasuries, and something similar on the week – the 2s10s closed about -5 bps flatter, although hawkish comments from several Fed-members weighed on the front of the curve.  With these leads, we’ll probably see a similar theme locally, a modest rally in the back end.   A big week for the Fed also given the next Fed chair will be likely announced by week’s end, be it the incumbent, Jerome Powell, or Lael Brainard.

 

 

  • Macro – it’s a light data calendar for Australia with retail sales (+2.5% MoM cons.) and Q3 Capex (-2.4% QoQ cons.) and Construction Work done (-3.0% QoQ cons.) the only data of note.  In the US there is PCE spending nd deflators data (+5.1% YoY cons.), Markit PMIs (59.1 cons.) and durable goods (+0.2% cons).  The FOMC meeting minutes are out which may provide more colour on tapering while Biden is expected to announce his nominee for Fed chair before the Thanksgiving holiday on Thursday.

 

 

 

Click here to find the full PDF from our Chief Investment Officer’s daily market update.

 

 

Contact:

Scott Rundell, Chief Investment Officer

T: +61 3 8681 1907

E: Scott.Rundell@mutualltd.com.au

W: www.mutualltd.com.au

Mutual Limited Daily Update

Mutual Funds

MCTDF – Mutual Cash Fund
Gross running yield: 0.29%
MIF – Mutual Income Fund
Gross running yield: 1.38%
Yield to maturity: 0.89%
MCF – Mutual Credit Fund
Gross running yield: 2.69%
Yield to maturity: 1.82%
MHYF – Mutual High Yield Fund
Gross running yield: 4.91%
Yield to maturity: 3.98%