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Mutual Daily Mutterings

Quote of the day…

 

I’m like that guy who single-handedly built the rocket & flew to the moon. What was his name? Apollo Creed?”..…” – Homer Simpson

 

 

 

 

Chart du jour…US Q2’21 reporting season so far

Source: Bloomberg

 

“Bull(ies)…

Source: www.hedgeye.com

 

Overviewearnings better, less COVID concerns…for now”

  • US stocks climbed for a third straight day, approaching record highs, buoyed by earnings growth.  Stocks dipped intra-day on news that multiple websites were temporarily inaccessible (Amazon being one), likely stoking fears of another Chinese hack – a la Microsoft’s email server hack earlier in the year.  It was later confirmed as not a cyber-attack.  US jobless claims surprised to the high-side, but was largely ignored by markets.  As a sign of concerns around the impact of the Delta COVID variant on growth prospects, firms closely tied to a broader reopening of businesses underperformed, with tech again gaining as the safety trade within equities.  Treasury yields dropped a smidge, and the curve flattened a touch…a lot of smidges and touches lately.  Oil gained, as did gold, and the broader complex of commodities is up again.
  • In the magical land of central banks, where unicorns are still a thing, the ECB revised its guidance on when it may tighten, saying it’ll persist with ultra-loose stimulus until there’s solid evidence it can sustainably hit the new inflation goal.  Sound familiar?  Very much the same as most other central banks at the moment.  This positioning allows the bank to keep rates at a record low for longer and to extend bond buying, and they promised, on scout’s honour, not to withdraw support too early, saying the bank has learned from past errors.  If they’d learned from past errors, QE wouldn’t still be a tool of choice…its supposed to be ‘unconventional’ policy, yet as with the Fed, it has become ‘conventional’, or mainstream.
  • One area of inflation that has me concerned is coffee, I’m a three-cup-a-day man myself.  Frost conditions in Brazil, the world’s largest supplier, have damaged crops, and with more cold snaps to come, an estimated loss of 4.5 million bags from next season’s crop has seen arabica futures spike 25% over the past week, to 7-year highs, or up +46% vs 7-year averages.
  • The Tokyo Olympics officially kick-off tonight with the opening ceremony, which will be a weird spectacle.  The athletes of the world’s nations streaming into an empty stadium, waving to, well no one…a handful of officials.  At least it’s going ahead.

Details….

  • Offshore Stocks – modest gains across northern hemisphere indices overnight, led by the Euro STOXX (+0.6%).  Across US markets, cyclicals’ two-day winning streak is fading and returning to the familiar pattern of July, with tech on top – the NASDAQ gained +0.4% vs the DOW (+0.1%) and the S&P 500 (+0.2%).  Sectors linked to the so-called reflation rally (aka ‘recovery trade’) are shedding any momentum they have gained this year compared to the broader market.  Within the S&P 500, a touch over 60% of stocks advanced, with Tech (+0.7%) on top, followed by Health (+0.7%) and Discretionary (+0.6%).  After a couple of days in the sun, Energy (-1.1%) was back in the doghouse despite oil rising for a third day, joined by Financials (-1.0%) and REITS (-0.7%).
  • Local stocks – a solid day yesterday with the ASX 200 up +1.1%, buoyed by better risk sentiment coming out of the US and EU, in turn driven by earnings confidence.  Around three-quarters of the ASX 200 closed ahead, and only one sector fell on the day, Healthcare (-0.3%).  Energy (+2.5%) benefited from resurging oil prices, while Materials (+2.2%) and Industrials (+1.1%) also had strong sessions.  Futures are off a touch, signalling a moderately soft open.

 

(Source: Bloomberg)

 

  • Offshore Credit – modest volumes in US IG with only two issuers coming to market, both REITS, both in the low BBB area.  Nonetheless, demand was very robust with new issue concession of -10 bps and book coverage ratios of 7.5x and spread compression of -30 bps.  Very quiet in EU IG markets.  Little movement in secondary cash, and same in CDS markets, which are now largely unchanged on the week.
  • Local Credit – throwing over to the traders again, because let’s be honest, it’s all about the technicals at the moment.  Fundamentals are trust up and hog tied in the boot of the car with a sweaty gym sock taped into their mouth…”a further recovery in risk sentiment overnight helped set the stage for what felt like a reasonably active day both in terms of client participation and the interdealer market.  Spreads remain resilient across senior financials, T2 pulled tighter after a constructive session, long end corporates drifted on the back of better selling and SSA’s continue to feel pressure further out the curve.”  Lovely jubbly!  In the tier 2 space, the 2026 callable paper is being quoted around +123 – 125 bps, which may be the tightest it’s been…assuming I don’t have early onset dementia, which is plausible being stuck in lockdown with three teenagers.  The 2025’s are around +114 – 120 bps and the 2024’s hugging +98 bps.
  • Bonds & Rates – a few basis points of movement, but local bond yields still wallowing around 6-month lows, give or take a couple of basis points.  I’m scratching my head on where to from here, but my gut feel is sideways with a rising bias.  Talking heads…”with the proviso that the market narrative can still turn on a dime, it sure feels like those growth fears that we were all talking about a few days ago have been consigned to the dustbin of history. Inflation rubber-necking has even made a sudden comeback, with coal and coffee replacing lumber as the charts to watch…. fixed income markets are behaving as if a key turning point is at hand, though in which direction remains to be seen…this is one of those cases where the explanation will seem more obvious in hindsight than it does at the moment.

 

(Source: Bloomberg)

 

  • Macro – US new jobless claims surprised with an increase last week, rising to +419K from a revised +368K. Consensus was forecasting a decline to +350K.  Continuing claims fell.  President Biden Wednesday warned hospitality and tourism may be “in a bind for a while” as workers seek better wages and working conditions.  Locally, we have PMI data out today.  No consensus forecasts, but last print was a very strong 56.9, which is toward the higher bounds of historical trading ranges – 21.7 – 58.9 (2016 – 2021).  The average over this period is 50.7.  The PMI is an index of the prevailing direction of economic trends in the manufacturing and service sectors, so likely the Sydney lockdown will have had an impact, as will the other state lockdowns in future readings.

Have a good weekend….

Cheers,

 

 

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: 0.37%
MIF – Mutual Income Fund
Gross running yield: 1.46%
Yield to maturity: 0.82%
MCF – Mutual Credit Fund
Gross running yield: 2.58%
Yield to maturity: 1.69%
MHYF – Mutual High Yield Fund
Gross running yield: 5.65%
Yield to maturity: 3.99%