Mutual Daily Mutterings
Quote of the day…
“Knowledge is knowing a tomato is a fruit. Wisdom is not putting it in a fruit salad. Philosophy is wondering if a Bloody Mary counts as a smoothie”…random meme
Chart du jour…now that’s a long trend!
Overview…”I get locked down, but I get up again..”
- A decent rally across US stocks overnight with sentiment buoyed by regulators granted full approval of the Pfizer- BioNTech COVID vaccine, which will be marketed as ‘Comirnaty’ – the most widely used of the three vaccines available in the US with 92 million does administered. Colour me behind the times, but I thought approvals were already in the can – apparently it had only been approved for emergency use. Regardless, the standard narrative out of the US is this ‘could’ lead to more vaccine mandates amid a surge in Delta cases, and therefore must be good for the recovery story, which has looked fragile of late. Better than expected home sales (existing) didn’t hurt the better risk tone. European markets also sporting some summery green. Oil bounced again on improving growth sentiment – I knew it would, as soon as I raised my hunch that it would drop 10%, Murphy’s Law dictates that it heads in the other direction. Commodities also bounced, which underpinned a better session for the little Aussie battler, back up to 0.72.
- Bonds were non-plussed, no change in yields overnight, instead waiting for some words of wisdom from the monetary druids later this week. Recent data has suggested some growth wobbles (vs previous optimism), raising doubts around the resilience of the recovery and ergo doubts on whether the Fed will in fact unleash the taper bat this week. Supporting this, US PMI data last night was weaker than expected, which has also boosted the confidence of those espousing a ‘keep it in the holster’ approach from the Fed. Talking heads…“it’s looking harder for the Fed to effectively declare victory over the pandemic’s economic fallout by signalling any plans to start pulling back on its monetary stimulus” (Bloomberg).
- Talking heads… “solid economic and corporate profit growth, in conjunction with a still-accommodative Fed, means that the environment for stocks remains favorable….as a result of our (UBS) higher EPS estimates, we raise our targets for the S&P 500 for December 2021 by 100 points to 4,600 (+2.7% vs last night’s close) and June 2022 by 150 points to 4,800 (+7.2%).”
- Offshore Stocks – a sea of green for offshore markets overnight. Just over two-thirds of the S&P 500 gained ground and seven of the core eleven sectors also advanced, let by Energy (+3.9%), Discretionary (+1.4%) and Tech (+1.3%), with the latter having the most meaningful impact on the broader index. Utilities (-1.3%) dragged the chain a bit, while REITS (-0.4%) and Staples (-0.4%) both had cases of Monday’it is. The S&P 500 is half a bee’s hind leg away from a new record high, closing 4479.53 vs 4479.71, the prior record high, which was set last week.
- Local stocks – taking leads from offshore markets, the ASX 200 delivered a modest +0.4% rally yesterday with 64% stocks gaining and nine of eleven main sectors advancing on the day. Tech (+1.7%) led the pack, followed by REITS (+0.9%), while Materials (+0.6%) clawed back some of its recent losses. Staples (-0.4%) and Energy (-0.3%) were the only sectors to stumble on the day. Optically the index appears to have bottomed following its recent mini-hissy. Futures are pointing to modest gains today.
- Offshore Credit – some observations on recent spread movements, primarily US HY spreads…first, equities…for context…”the higher the wall of worry, the faster the S&P 500 climbs it, with last week’s drop amid tapering anxiety turning into yet another buy-the-dip opportunity”. However, in the pointy end of the credit market, the mood has been a little less exuberant, quite the opposite in fact. US high yield spreads have been widening for the past seven weeks, or +50 bps to around +350 bps. This is the longest widening stretch since 2013 according to Bloomberg data. History has shown that US HY spreads can be the canary in the coal mine for broader markets, although history hasn’t seen a Fed balance sheet at $8.2 trillion, so what does that tell us? History probably won’t repeat itself…probably, right? Maybe, but we might have echoes of history that can inflict meaningful pain and suffering.
- Local Credit – trader talk…”a typical Monday with modest participation from both domestic and offshore accounts seeing in the week. We fielded the bulk of interest in senior financials and SSA’s whilst the corporate sector benefited from some primary related flow. Underlying sentiment remains shaky although spreads mostly flat on the day”. Not a lot happening in the major bank senior space, although the new NAB Aug-26 deal inched half a basis point tighter, to +39 bps. The Jan-25’s are unchanged at +25 bps, so the pick up between the most recent deal and the previous deal is +14 bps for 19 months, which in anyone’s language is a flat curve. In the tier 2 space, not a lot happening spread wise, although traders are reporting “two-way interest yesterday with clients as better buyers in the Major Banks and better sellers in the Regionals…” a regional coming with a tier 2 perhaps? One can only hope.
- Bonds & Rates – range bound across local bonds and treasuries again overnight, while European bond yields drifted higher (+1 – 3 bps). I’m not going to spend too much time on bonds today, nothing is really going to happen until markets receive a policy update from the Fed’s Jackson Hole Symposium.
- Offshore Macro – the IHS Markit Economics purchasing managers’ index (PMI) last night showed that growth in the private sector was the slowest since December 2020 with the July jobs component dropping to the lowest in 12-months. The August PMI Manufacturing Index printed at 61.2 vs 62.0 consensus (and 63.4 last), while the Services index printed at 55.2 vs 59.2 consensus (and 59.9 last). US July Existing Home Sales grew +2.0% MoM vs a drop of -0.5% forecast by consensus.
- Local Macro – consumer confidence out today, which has been trending lower over the past couple of months, with no guesses why. No consensus forecasts available (per Bloomberg), but last month the print was 101.1 after averaging around 110.0 through the first half of the year. Only a muppet would expect consumer confidence to remain blindly buoyant during a lockdown of the severity we’re experiencing. I’d suggest a 100.0 print, or possibly lower is plausible.
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Scott Rundell, Chief Investment Officer
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