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Mutual Daily Mutterings

Quote of the day…

 

”The United Nations’ founders understood that decisions affecting war and peace should happen only by consensus, and with America’s consent, the veto by Security Council permanent members was enshrined in the United Nations Charter. The profound wisdom of this has underpinned the stability of international relations for decades.’… Vladimir Putin…..ahhh, he is a joker

 

 

 

 

“Oh Pooh(tin).…


Source: www.theweek.com

 

 

“Let’s go comrade…”


Source: www.antikbar.co.uk

 

 

Overview…”boots on the ground…?”

  • Moves: risk off…stocks ↓, bond yields ↑, credit spreads ↔, and oil & gas ↑.
  • The situation in the Ukraine just got real with the Duma (Russian Parliament), approving troops on the group – but not yet deployed.  Never mind, all is good, we can rest easy.  They’ll be peacekeeping troop!  And, if you believe that, well, you’re likely one chromosome away from being legally classified as a chimpanzee.  At this stage, it’s not a full-blown invasion, but risks are high after NATO head-honcho, Jens Stoltenberg, told reporters every indication is that Russia is planning a full-scale attack.  And, Russia is withdrawing diplomats from the Ukraine capital, Kyiv, so that’s a pretty telling sign.  Economic sanctions are being discussed, and are likely imminent.
  • A meaningful bull flattening of US treasuries overnight, with 2’s +7 bps – driven by a two-year auction, and 10’s largely unchanged.  Somewhat concerningly, the curve has flattened -50 bps YTD, signalling markets are increasingly cautious on the outlook for growth.  There is growing concern that expected aggressive monetary policy tightening will derail the post pandemic recovery.  More recently, however, the Russian / Ukraine conflict and heightened market turbulence might stay the tightening hands of central banks for a while, or at least moderate the pace and scale of tightening.
  • Talking heads…”the stock market is right to be concerned about current tensions between Russia and Ukraine, which run the risk of exacerbating the challenging inflation backdrop that many investors and companies have expected to improve in the back half of 2022…the bad news is that the investment community still appears to be in the early days of understanding the potential implications of this conflict.”
  • Talking heads…geopolitical risks and path of policy tightening…” “the market had gotten way ahead of itself in terms of expecting Fed rate hikes and now we have this heightened political risk that’s going to mean potentially tighter financial conditions, and that means a slower process of rate increases from the Fed and probably a flatter yield curve, more flight to safety into Treasuries.

 

The Long Story….

  • Offshore Stocks – generally a weaker day in offshore stocks, although in the last hour of trade things did seem to be looking up.  With an hour or two to go in the trading day the S&P 500 was down -1.9%, with the DOW and NASDAQ similarly wallowing in the mire.  Markets then rallied off the bottom, with intra-day losses down to -0.4% for the S&P 500 and trending higher, but then the wheels fell off again and stocks trended lower.  The S&P 500 closed down -1.0% in the end, with the DOW (-1.4%) and NASDAQ (-1.2%) similarly burned.  No sector spared the rod with all closing in the red, and four in five stocks retreating.  Discretionary (-3.3%) suffered most, followed by Energy (-1.6%), and Materials (-1.4%) who also had bad days at the office.  The least-worst performers were Utilities (-0.1%), REITS (-0.3%) and Healthcare (-0.3%).
  • Local Stocks – not surprisingly given prevailing events, the ASX 200 closed -1.0% lower with four in every five stocks retreating and only three sectors able to advance: Energy (+2.0%), Staples (+1.8%) and Healthcare (+1.1%).  Tech (-3.2%), Discretionary (-2.7%) and REITS (-1.6%) were the worst performers on the day.  Materials (-1.1%) and Financials (-1.5%) did the bulk of damage to the broader index, however, accounting for around ~70% of performance.  Trading geopolitical risk can be difficult, so caution is encouraged, or at the least, patience.  Despite weak leads from offshore, ASX 200 futures are moderately up as I type…wait, I just checked again, no they’ve slipped into a racy red number.

 

 

 

 

  • Offshore credit – very little action in CDS overnight despite the intra-day sell off in US stocks and jump in volatility (VIX).  Both the MAIN (EU) and CDX (US) CDS indices closed within less than a basis point of where they opened.  Cash spreads were generally unchanged with some slight widening here and there.  Geopolitics didn’t halt primary with five deals kicking off in US IG markets, with volumes of US$6bn.  Consensus estimates for the week is US$25bn, a little lower than recent averages on account of yesterday’s public holiday.  Spread compression was solid, ranging from as low as -5 bps, out to -20 bps from initial guidance to final pricing.

 

 

EU Cash vs CDS…

Source: Bloomberg, Mutual Limited

USD Cash vs CDS…

Source: Bloomberg, Mutual Limited

 

 

  • Local Credit – traders…”challenging market backdrop as events in Ukraine continue to deteriorate. Little ambition to add risk in this environment and limited means to meaningfully reduce. We all talk of keeping positions light and nimble, yet that luxury is largely absent in markets such as these. Domestic wage data today, expect another bout of rates market volatility.”  Major bank senior and tier 2 paper both closed unchanged on the day.

 

 

AU FRN Cash vs US & EU Fins…


Source: Bloomberg, Mutual Limited

 

 

  • Bonds & Rates – little movement yesterday in local bonds, at best a very modest 2 bps rally further out the curve, while the front end stayed unchanged.  With major conflict on the horizon likely – and the associated market turbulence that goes with it – what does it mean for planned monetary policy tightening?  “Inflation fears have led to an aggressive repricing of rates curves and ambitious expectations for the pace of balance-sheet contraction. However, liquidity is already turning down sharply, pointing to further market turbulence, while leading indicators expect economic growth to slow down over the next year. Central banks are therefore unlikely to get close to the level of rates currently priced or the anticipated shrinking in the size of their balance sheets, before being forced to pause or reverse course.” (Bloomberg)

 

 

 

 

  • Macro – US PMI’s out overnight, but it was largely ignored by markets whose focus was elsewhere.  Q4 wages data today, which I touched on yesterday.  Consensus is expecting a +0.7% QoQ (vs +0.6% QoQ Q3) and +2.4% YoY (vs +2.2% YoY Q3).  While the RBA has a CPI target (+2.0% – 3.0%) and CPI is currently outside the high end of this range, and has been for three-quarters, wages is also a key input to any decision to kick off their policy tightening agenda.  The RBA is expecting a +2.25% print for Q4, with expectations wages will gradually lift to 3.25% by Q2’24.  A beat to the high side will put pressure, perceived or otherwise, on the RBA to accelerate rate hikes.

 

 

Wages vs CPI…


Source: Bloomberg, Mutual Limited

 

 

Wages vs 10Y ACGB’s

Source: Bloomberg, Mutual Limited

Wages vs 3Y ACGB’s

Source: Bloomberg, Mutual Limited

 

Charts…

 

 

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: 0.31%
MIF – Mutual Income Fund
Gross running yield: 1.37%
Yield to maturity: 1.00%
MCF – Mutual Credit Fund
Gross running yield: 2.73%
Yield to maturity: 1.90%
MHYF – Mutual High Yield Fund
Gross running yield: 5.04%
Yield to maturity: 4.23%