Mutual Daily Mutterings
Quote of the day…
“No one party can fool all of the people all of the time; that’s why we have two parties” – Bob Hope
Rolling weekly spread changes…
Source: Bloomberg, Mutual Limited
“Nothing to see here…”
- Overview – so on the day, a little more rose tinting to the glasses as investors weigh the outlook for vaccinations, economic growth and inflation in a slightly more positive light. Stocks rose modestly, while bonds sold off (yields up) a touch. Given a sniff risk markets will party like it’s 1999, the abundance of money in liquidity in the system is keeping many derelict boats afloat, and with the fiscal stimulus impulse behind the economy near term, oh what a party it could be. But, but then comes the hangover, which is being reflected in yields (aka the sensible one at the party), and that’s what’s keeping investor’s risk appetite in check. It’s been a data-heavy week in the US, with jobless claims out last night, falling further than expected. The Suez Canal traffic jam persists with attempts to free the Ever Given failing and fears it could take days or weeks to clear. The alternative, for getting oil from the Middle-East to Europe, is almost an additional 10,000kms, and around A$500K in fuel costs for your average oil tanker. President Biden has doubled down on his vaccine targets, now 200 million doses within his first 100 days, up from 100 million. That’s roughly two-thirds of the population, and from many survey’s I’ve read, only around 55% – 60% of Americans intend on getting the shot. Maybe they could make a TV show out of it, where snipers run around with dart-guns inoculating the anti-vaxxers from great distances…would have to be better viewing than “Married at First Sight!”
- Offshore Stocks – European stocks closed with a mixed score card, a few bogies, and a few birdies, but nothing too far from par. It was a choppy session in US markets, and to describe the timing of intra-day movements, I’m nicking a comment from Alice (aka Brendon Cooper) at WBC “the lows of the session coincided with comments from Fed boss, Powell, who reiterated the view that the Fed would wait until the economy had “all but fully recovered” before rolling back policy support, but he did mention that support would be pulled back at some point (to quote Lloyd Christmas “you’re telling me there’s a chance”)”…obviously liking it for the Dumb and Dumber reference, the movie I watched with my now wife on our first date. It wasn’t a good start to the relationship obviously. Thematically, equities continue to churn a fraction below record highs as investors assess the latest progress and setbacks in the fight against the pandemic amid concerns that a surge in economic growth could fuel inflation. That’s the basic narrative, and the tune hasn’t materially changed for over a month now, and probably won’t for a few months more, all other things being equal. While gains in the main indices were modest, they were pretty broad with 80% of the S&P 500 constituents up on the day, and only two sectors closed in the red, and only marginally so – Telcos (-0.3%) and Tech (-0.1%). At the other end of the stick, Financials (+1.6%), Industrials (+1.6%), and Materials (+1.4%) were on the podium.
- Local stocks – very modest gains, with gains in Healthcare (+1.0%), Discretionary (+0.7%) and Utilities (+0.4%) countered by losses across Tech (-1.1%) and very modest losses within Financial (-0.1%). Not a lot to add beyond this, the themes impacting daily momentum remain unchanged, it’s just the ebb and flow of headlines around said themes influencing the daily mood. Futures are pointing to some modest gains this morning.
- Offshore Credit – active in primary with a smidge under US$9bn priced in US IG, taking week to date issuance to US$42bn. Secondary spreads mixed, with Financials outperforming Corporate, while high yield ripped tighter (see chart above). A solid session in EU primary also, €6.5bn priced, although deal coverage was weak vs recent ranges, just 1.6x (vs 2.5x recent average) with spread compression of 14 bps (vs 20 – 25 bps recent average). Nothing worth mentioning in CDS land, marginal changes.
- Local Credit – traders commentary…”overall a quiet day before a flurry of activity post release of allocations for the 10-year Lendlease deal. Secondary flows remain subdued, volumes only picking up in response to the primary pipeline. Doubtless impending quarter end has kept some players on the sidelines. Mercifully, the end of this month is now in sight.” A sign of how buoyant local credit markets are, the Lend Lease book hit $1.5bn yesterday, strong appetite for a borderline investment grade company that many would say is opaque and difficult to understand. Nevertheless, it’s a green bond, and there aren’t many of those around in A$, so that could be a contributor. Within our sand box, no change to major bank senior paper spreads, and tier 2 also closing unchanged.
- Bonds & Rates – European bonds closed a smidge firmer overnight, with ten-year yields rallying 2-3 bps amidst continued concerns the additional rollout of pandemic lockdowns will potentially overrun the rollout of vaccination programs over the near term. Not to mention question marks vaccine over efficacy rates as new and funky variants continue to emerge. US treasuries traversed a relatively modest range over the session, before closing a couple of basis points higher at 1.63%. Another treasury auction this week and it was the one some bond market observers were wary of, the 7Y auction. The last auction saw treasuries weaken to a new high point in the day for yields
- Macro – borrowing from the street again, some CBA commentary on the data coming out of the US in the next 24 hours or so – US inflation will be back in the spotlight with the release of the PCE deflator for February tonight (11.30pm Sydney time). We estimate the PCE deflator (the Fed’s preferred measure of inflation) lifted slightly to 1.6% YoY thanks in part to higher gasoline prices. Over coming months, the PCE deflator will surge mainly because of ‘base effects’ (i.e. weakness in early 2020) and partly because of strong demand fuelled by government stimulus cheques. The FOMC remains confident the lift in inflation will be transitory and it will therefore look through the increase in inflation. And Chair Powell made it clear overnight he is in no hurry to raise interest rates: “we will – very gradually, over time, and with great transparency, when the economy has all but fully recovered – we will be pulling back the support that we provided during emergency times”. Looking backward, US annualised QoQ GDP came in at +4.3%, beating consensus estimates of +4.1% and same for the prior reading. Initial jobless claims came in at +648K, down on +730K expected, and +770K recorded last week. Continuing claims have dropped to 3870K from 4124K and consensus of 4000K
Click here to find the full PDF from our Chief Investment Officer’s daily market update.
Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907