Mutual Daily Mutterings
Quote of the day…
“On Halloween, the parents sent their kids out looking like me.”.…Rodney Dangerfield
“Yeah, Real Funny…”
- European stocks closed largely unchanged, while US markets were cautiously buoyant on earnings optimism as some heavy-weight tech stocks are set to report over the next week or so – although Facebook could be a drag given its recent content issues. It wasn’t all one-way traffic though, in US markets, with the S&P 500 whipsawing between gains (earnings optimism) and losses (supply chain concerns). In the end the S&P recorded its eighth gain in nine days. Oil inched higher on tight supply concerns, while commodities had a solid day.
- Talking heads…. “so with the market demonstrating that it’s favouring earnings reports over economic reads…we could be in for a ride this week with a deluge of big tech earnings—some of the biggest market-cap companies out there.”
- Treasury yields did very little, a very modest steepening with much of the action, if you can call it that, at the front end, likely on the back of Fed Chair Powell’s concession last Friday that higher prices may linger longer than initially expected. The downside risk to fixed rate bonds continues to build as inflationary expectations become more entrenched and rates are forced to rise. Somewhat concerning on the inflationary impulse and its primary driver, supply-chain issues, is monetary policy is ineffective in combatting it.
- Fed-speak…kind of, former Fed-speak technically with Treasury Secretary Janet Yellen on the wires. The diminutive treasury head (she’s 5’1’’ tall) said she expects price increases to remain high through the first half of 2022, but rejected criticism that the US risks losing control of inflation. In her mind, inflation is expected to ease through 2H’22 as supply bottlenecks, a tight U.S. labour market and other factors arising from the pandemic improve. She doubled down on the transitory narrative, stating the current situation reflects “temporary” pain.
- Offshore Stocks – the S&P 500 set a new record high close again over night, with the index well through its 50, 100, and 200-day moving averages, which has seen its relative strength indicator (‘RSI’) approaching the ‘overbought’ bounds (66.9 vs 70.0). On the day Discretionary (+2.1%) ruled the roost, aided by a trillion-dollar valuation for Tesla – the single top performer in the S&P 500. Energy (+1.4%) and Materials (+0.9%) were also star performers, the latter buoyed by optimism around potential progress for Biden’s economic agenda. Utilities (-0.4%) and Financials (-0.2%) were the only two sectors failing to get out the gate. As for why Tesla performed so strongly on the day, from Bloomberg “Hertz ordered 100,000 Teslas, the first step of a plan to electrify its rental-car fleet. It’s the single-largest purchase for EVs and represents about $4.2bn of revenue for Tesla. Its Model 3 was the top-selling vehicle in Europe last month, the first time an EV has outsold rival models with gasoline engines. It’s also the first time a car made outside Europe has claimed the crown”.
- Some additional commentary on US reporting season thus far, signalling that it’s not all one way traffic….”on a stock-by-stock level, this earnings season so far hasn’t delivered the blowout results analysts anticipated. And yet, on a broader level, they’re giving this reporting cycle a pass. That seems to be the message of analysts covering S&P 500 firms. So far this month, they slashed the number profit-estimate increases to 54% of total changes, the lowest level in 15 months, data compiled by RBC Capital Markets show. Meanwhile, earnings forecasts for the broader index went up for this and the next two years. Analysts’ moods soured on sectors like industrials and materials amid supply-chain bottlenecks. Yet technology — the S&P 500’s heaviest sector and bigger than the second- and third-largest groups combined — has remained in an uptrend, supporting the index-level EPS estimates on the way up”.
- Local stocks – a modestly up day yesterday, with the ASX 200 gaining ground (+0.3%). At the stock level it was a mixed day, with an equal number of winners vs losers, while across the main sectors, only two lost ground. Namely, Tech (-0.7%) and Industrials (-0.5%). On the winners podium it was Energy (+2.6%) again dominating, followed by Utilities (+1.3%) and Materials (+1.7%), the latter being the single largest contributor (sector wise) to the broader index’s gains on the day. The ASX 200 is now trading above its 50, 100, and 200-day moving average as US reporting season boosts earnings confidence, while inflation concerns have been left behind for the time being (likely a temporary lull in inflation rhetoric). Major bank reporting season kicks off on Thursday (28th), with ANZ first cab off the rank (yesterday I incorrectly said WBC was first, next Monday). Being such a major component of the ASX 200 (~30%), markets will be hanging on the bank’s outlook comments. Modest offshore leads translate to modest gains in the futures, +0.2%.
- Global credit – syndicate desks are calling for around US$15bn of fresh supply this week (a touch below recent averages), with several big borrowers including Amazon, Apple, Caterpillar and Coca-Cola expected to report earnings and become candidates to sell bonds. Spreads in US IG secondary markets have drifted a touch wider over the past week, but nothing too meaningful.
- Local Credit – trader’s comments…”opening the week with modest levels of participation across AU secondary credit. Secondary cash spreads close broadly unchanged with the bulk of yesterday’s trades in the SSA and corporate sectors.” ADI spreads took a breather from their recent drift wider…”whilst we didn’t see much of yesterday’s $1.5bn Westpac redemption redeployed in secondary, it was enough to afford spreads some near term support. We closed the curve unchanged after a week of seeing marks eek wider. In the regional space, local real money was seen drip selling FRN lines and we closed these curves +1-2 bps wider.” I suggest this reflects the market drifting to meet the new ‘equilibrium’ set by the BOQ 5-year deal last week, which priced at +80 bps (recall, this was +10 bps to their curve). Bloomberg has the paper now down to +76 bps. In the tier 2 space….”no flow of note yesterday, both clients and the street were equally quiet. Spreads unchanged but remain under pressure from the level of street inventory.” While street inventory levels remain elevated, secondary liquidity will be constrained, making spreads susceptible to widening, albeit modestly so (expected).
- Bonds & Rates – not a lot happening in local bonds yesterday, much of the tone coming from offshore leads, albeit diluted. The main focus will likely be tomorrow’s CPI print. Bloomberg lists consensus expectations at +2.8% YoY on one page and +3.1% YoY on another, but I suspect the former is stale. As I said yesterday, risk is to the high side. Markets are pricing in rate hikes next year, so I doubt a modest miss to the high side should move yields too much, the risk is if we have a Kiwi like print where it’s an out of the box miss, which may spook markets and send yields higher again. A miss to the down side would likely see a decent rally. Suspect markets will tread water today, no meaningful movement in either direction.
- Macro – AU CPI tomorrow, comments above will suffice for now. Nothing too meaningful in offshore data today / tonight.
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Scott Rundell, Chief Investment Officer
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