Mutual Daily Mutterings
Quote of the day…
“I went to a bookstore and asked the saleswoman, ‘Where’s the self-help section?’ She said if she told me, it would defeat the purpose.”…George Carlin
Chart du jour…US GDP (Thursday) vs US 10Y
“It’s a Picnic…?”
- Looks like some optimism is creeping back into markets, evidenced by firmer commodities and oil prices, both of which are up again overnight and over the week. Stronger corporate earnings outweighed lingering Delta concerns overnight, which has underpinned gains in stocks over the past few days. US treasury yields also moved higher, with a modest bear-steepening (long end moves faster than the front end). Credit is stable.
- Talking heads…”as long as the economic and corporate earnings environments continue to improve, the market is likely to withstand ongoing concerns about the virus and policy…that said, risks for the market are becoming more balanced as we move throughout the market cycle.”
- “In China, the government has rapidly brought local delta-variant virus cases down close to zero and traffic is showing signs of recovery, although the variant continues to impact other regions. In another sign of recovery, the country’s Ningbo port, one of the busiest in the word, has reopened after shutting for two weeks” (Bloomberg).
- The main event this week remains the Fed’s Jackson Hole hoedown. With stocks powering ahead and only modest moves in treasury yields, this suggests a growing view that the Fed will either not say very much or communicate a slower timeline for tapering of asset purchases than markets were expecting a few weeks and months ago. That’s been supportive for risk assets.
- From CBA this morning…”the title of Powell’s speech is ‘The Economic Outlook’. Powell will likely acknowledge the progress in the labour market given the bumper July payrolls report. He might also note the economic downside risks from the recent rise in the Delta variant cases in the US. But if Powell speaks about the policy outlook and more specifically, hints at the time and/or pace of tapering”, then bond yields will likely get a wriggle on (move higher). More talking heads on tapering…”we do not expect these specifics to be announced on Friday. They will come at the September meeting. But we do expect Powell to hint at an outcome…if there’s to be a surprise, it’s likely dovish.”
- Offshore Stocks – modest gains across US stocks, while the EU STOXX closed largely unchanged. Across the S&P 500, 62% of stocks advanced and six sectors gained. Energy (+1.6%) was top of the pile again, followed by Discretionary (+0.8%) and Financials (+0.7%). Moping around at the back of the bus we had Staples (-0.8%), REITS (-0.7%) and Utilities (-0.6%). The S&P 500 is once again strutting around with its chest puffed out, proud as punch as it shows off its new ‘record high’ sticker! Despite rising Delta variant concern, and the associated impact on growth potential analysts continue to upgrade forward earnings expectations, up +5.9% QTD and up an incredibly optimistic +23.0% YTD. Forward PE’s are ranging between 22.0x – 23.0x, well above historical averages (19.5x 5Y average and 17.5x 10Y average). Thoughts of the Fed announcing tapering actions this week are having minimal impact on market trajectory, which is in stark contrast to previous tapering episodes.
- Local stocks – a modest rally yesterday with the ASX 200 +0.2% higher, underpinned by another day of solid gains in Energy (+2.8%) stocks, while Materials (+0.8%) also continues to claw back some lost ground, aided by improving commodity prices. Tech (+0.6%) rounded out the holy-trinity of the top three performing sectors. At the bottom of the table, Staples (-1.2%), Telcos (-1.0%) and Discretionary (-0.5%) all dragged the chain. Local reporting season has passed the half-way mark with 103 of the ASX 200 now reported. Aggregate sales have exceeded consensus estimates by +1.2%, whereas aggregate EPS has beaten estimates by +94.5%. Growth has been very strong, which is not unexpected given COVID driven base effects, sales are up +8.7% YoY and EPS up +172.0% YoY. A touch over 65% of companies have reported EPS growth and 69% have reported sales growth. With modest leads from offshore, futures are up +0.3%.
- Offshore Credit – a modest day of issuance in US IG, with just three deals and only US$2.6bn priced. Deals were well supported, with minimal spread concession and books were almost 4.0x covered. Spread compression from launch to final pricing was a very solid -37 bps. Volumes are expected to remain subdued through to US Labor Day weekend at least (September 6th). A more active day in EU IG markets with eight borrowers and €11.1bn priced. Deal metrics were constructive. No meaningful change in spread trends in secondary across both US and EU markets, a basis point here or there in either direction.
- Local Credit – not a lot to really add here, spreads aren’t doing much at the moment. Same-same.
- Bonds & Rates – “the supply of ACGB linker debt yesterday weighed on the market, with bonds soggy from the start. The sentiment seemed to hold through the day, with lows seen in the afternoon session post pricing in what was one of the larger daily moves in a while”…on the tenders…”the AOFM took $A3.25bn of a $A7.5bn book, while buying back $A1.72bn of the Feb 22 linker. Tomorrow the AOFM has $A1bn May 32 to tender, which keeps pressure on the 10Y tenor and also the ACGB/UST spread” (CBA).
- Macro – nothing worthwhile here locally, and a busy couple of days for US data (tabled below):
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907