Mutual Daily Mutterings
Quote of the day…
“We actually got the winning goal three minutes from the end but then they scored”.…Ben Cousins, West Coast Eagles
Chart du jour…..
Overview…”did the earth move for you to.…?”
- Stocks pulled out of their recent dive last night, with solid gains across Northern Hemisphere markets, while the front of the treasuries curve sold off (yield rose) following the FOMC outcome. Oil and commodities rallied, while gold eased off a touch.
- In my mind there were two broad themes influencing last night’s reasonably solid rally across stocks. First, the headline yesterday our time that Evergrande would make today’s scheduled coupon payment, avoiding as some were suggesting a Lehman-esque moment (not my base case though). Secondly, the Fed last night signalled its taper intentions, indicating tee-off in November (and ending mid-2022) on the assumption the economy keeps chugging along and there isn’t any fallout from the Chinese property market. An inappropriate situation for tapering might include one in which liquidity drops in credit markets because of a wave of panic in Chinese property companies.
- I must admit, given the Fed statement, I wouldn’t have expected such a strong rally in stocks, quite the opposite actually. Talking heads…”I don’t know about you, but I thought all of this was pretty hawkish – more rate hikes through every horizon of the dot plot, and Powell basically saying a taper is nailed on in the absence of a total stinker in the next payroll report.” Further evidence perhaps that markets ignore dot-plots?
- Credit was stable…and as a sign of the god’s displeasure at the state of affairs in Victoria he / she / they threw an earthquake at us…quite a noticeable one too, 5.8 on the Richter scale, our biggest on record. The state just can’t take a trick. We’ve had the world’s most draconian and longest COVID lockdown, we have Dan Andrews as our ‘leader’, we’ve had riots, we have Dan Andrews, we’ve lost the grand final for the second year running, we have Dan Andrews, and now we’ve had earthquakes. What’s next, zombies? Or even worse, Dan Andrews re-elected at the next election!!!
- Tomorrow is a public holiday in Melbourne, so no morning note.
- Offshore Stocks – a broad-based rally across US and European markets with no child left behind as Bella would say (“Hunt for the Wilderpeople”…a great movie if you haven’t seen it, highly recommended). With the imminent default by Evergrande seemingly off the table (for now), as well as the PBOC pumping some liquidity into the system, and some sense of clarity around the Fed’s tapering intentions, markets got their risk on. Over 80% of stocks in the S&P 500 advanced on the day, and only one sector retreated, Utilities (-0.1%). The winner’s circle was dominated by Energy (+3.2%), Financials (+1.6%), and Tech (+1.4%). I’d question the sustainability of last night’s tone, but it is what it is.
- Local stocks – after some wishy-washy offshore leads, the local index opened in negative territory, down -0.4% within the first hour of trading. Then came the news that Evergrande would be making coupon payments on Today, as scheduled, which lifted the mood. Markets climbed into positive territory as a result and stay there for the remainder of the day, closing up +0.3%, with its nose just a head of its 100-day moving average. RSI’s are at 37.2 after bottoming recently around 31.0. Volumes were around YTD averages. Energy (+2.4%), Materials (+2.1%), and REITS (+1.0%) were best performers on the day. Meanwhile, dragging the chain was Financials (-0.6%), with insurers under some pressure following the earthquake in Victoria. Tech (-0.3%) and Industrials (-0.2%) rounded out the bottom three. Futures are signalling a modest positive open.
- Offshore Credit – primary markets tend to put the cue in the rack on FOMC meeting days given the risk of rate changes, admittedly muted at the moment, but one can never be too careful. Nothing worth noting in secondary markets either.
- Local Credit – so the Evergrande news calmed markets in general, but the news did four-fifths of not much for domestic credit spreads. Sentiment probably firmed a smidge in that the potential; default will no longer (for now) present a possible risk contagion event. Major bank senior and tier 2 spreads were marked unchanged at the close, wait, no I lie, the 2024 callable tier 2 cohort closed a basis point tighter at +94 bps.
- Bonds & Rates – feeling lazy, steeling some comments from CBA’s Daily Wrap…adjusted for tense…”bond markets remain relatively quiet, with the Evergrande situation looming large, but not yet commanding all out attention. There was a bounce back in iron ore prices following a PBOC liquidity injection. Bond yields have been relatively range bound, but finished the day fractionally lower, particularly at the 10Y”. While the Evergrande headline soothed the savage beast (risk markets), and arguably fuelled the bounce in stocks on the day, local bonds were a little more guarded with their reaction. Overnight, the US treasury curve flattened post the FOMC with two-year yields rose +2 bps to 0.235%, the first meaningful move higher at the front of the curve for a while. As for the language around tapering expectations…tapering may be warranted “soon”, “if” there are no surprises in the meantime. That looks like a wink to the November 3 meeting, though the language is vague enough to leave some optionality in place. At the same time, the dot plot showed officials are divided on whether to raise rates next year or not. In this regard, the median dots (plot) for the next three years are: 0.3% in 2022, 1% in 2023 and 1.8% in 2024. The distribution of the next two years are quite wide, but taken at face value, it implies a modest tightening pace.
- Macro – within the FOMC statement the Fed nudged up its inflation expectations: core PCE forecasts have been adjusted to +2.3% and +2.2% for 2023 and 2024. In other words, above-target inflation with a modest pace of tightening — that’s perhaps a bit more dovish than expected. Locally, PMI’s and payroll data is scheduled, with readings to reflect the state of lockdown across Victoria and to an increasingly lesser extent, NSW.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907