Mutual Daily Mutterings
Quote of the day…
“There is no vaccine against stupidity…” – Albert Einstein
Chart du jour: Margin call pending…
Source: Bloomberg, Mutual Limited
- Overview – another meh session, with little happening in the real world or markets…although US reporting season rolled on, with some decent results, underpinning investor confidence. For this week at least. Stocks edged higher with most indices sporting a slightly optimistic, yet still cautious, shade of green. Bond yields inched higher across the board, but there wasn’t a lot in it, a few basis points. US reporting season is around 26% (up from 24% yesterday) of the way through with aggregate sales up +6.2% QoQ, and 68% of companies reporting gains. Aggregate earnings grew +45.7%, with 75% of companies sporting gains. Against expectations, sales are up +5.9% and earnings are up +33.8%. Beyond reporting season, focus will be honed in on US economic data with GDP and inflation data out later in the week, and also the FOMC meeting on Wednesday. Nothing ground-breaking expected from the Fed tomorrow – no change to the prevailing stance, steady as she goes with the monetary policy spigot turned to full speed accommodation. Although, “the latest Bloomberg survey of economists shows a shift forward in expectations of when the Fed will announce tapering” (NAB). Talking heads… “the Fed is going to likely reiterate their patient stance here…I’m anticipating that they acknowledge the recent strength we’ve seen in economic data but they will continue to highlight we are a way’s away from achieving their goal of full employment. I think they’ll continue to assure markets that Fed policy is going to remain firmly dovish for some time.” Beyond financial markets, oil retreated (-0.3%) amid concern demand from India may fall after the nation reported a million new coronavirus cases in three days.
- Offshore Stocks – modest gains, with US markets underpinned by continued constructive reporting season and expectations the Fed will keep everything monetary set to ‘warm and cozy’ at tomorrow’s meeting. The S&P 500 printed a new ding-dong, thank ya mother for the rabbits, all-time high. The index is sitting on +90% post pandemic gains, in just over a year…aided by Dr Feelgood, aka Jerome Powell, and his Federal Posse of central bankers, who have pumped in US$3.7 trillion into the US financial markets. M2 has grown US$4.3 trillion, or +28% since markets crapped themselves last year, reflecting the largest yearly gain in money supply since, well since data is available (on Bloomberg at least), which dates back to 1980. With this abundance of coin in the system, combined with outsized gains and consequential retail FOMO (plus a smattering of TINA), it is not surprizing to see the balance of US margin accounts at all-time highs, c. US$820bn (above chart). A slight misstep and a modest pull-back could precipitate a meaningful margin call, and fuel a sizeable correction.
- Local stocks – choppy from start to finish, albeit with modest swings in either direction. Nevertheless, it was “all for one, one for all”….two-thirds of stocks closed in the red and all sectors bar Materials (+0.36%) were down. Utilities (-0.99%), Staples (-0.95%), and Telcos (-0.85%) were the worst performers. The market is treading water for now, sitting on some healthy gains, and a fraction below post-pandemic high’s, (7046 vs 7095), and not too far away from all-time highs (7197, Feb-20). Forward PE’s are currently at 19.6x on the back of mainly revised EPS expectations, and have pulled back from nose-bleed levels (peaking at 22.65x). They remain well above long run averages however (17.2x 5Y average). My “a correction is due” bump is beginning to itch, the problem is it is notoriously poor at timing.
- Offshore Credit – some very modest widening in secondary across both US and EU markets, i.e. less than a basis point in it. In primary, EU markets reasonably active with another €5.4bn printed (vs €19.8bn demand and 3.5x coverage). Average spread tightening was around, well average levels (-21 bps). YTD supply is down on 2020 run rates, across both US and EU markets. Last year saw an aggressive issuance profile as companies shored up liquidity needs in the face of the pandemic. The vaccine, economic re-openings and an abundance of stimulus measures have negated the need for this liquidity.
- Local Credit – traders…”slow start to the week with NZ and a number of domestic accounts observing the ANZAC day public holiday yesterday”. Major bank senior paper, wait for it, closed unchanged with the Jan-25’s at +33 bps…ooh, hard to contain the excitement. It’s difficult to see major bank curves extracting any meaningful gains from here, the only way is up…from a weight of expectations perspective. If a major did have an irrational burst of enthusiasm and elected to launch a 5-year deal, where would it price? Based purely on the current curve, you’d say, start at +40 – 42 bps, and price around +36 bps – that’s where the linear curve is at present. However, it’d probably come wider than that, say +45 – 50 bps, as it would theoretically signal a re-opening of the A$ wholesale funding needs for the majors (i.e. volume), which would potentially come on the back of a pick-up in lending activities (and expiry of the TFF). If I were a betting man, I’d say supply will likely restart in the second half. Tier 2 paper was unchanged yesterday, and we’re anticipating some supply by the end of the quarter – noting ANZ yesterday called their A$700m May-21 (May-26 legal) line. This is not to suggest ANZ would be next cab off the rank, they’re less likely as they have been active issuers (across various currencies) and are probably ahead of schedule for this year. CBA perhaps?
- Bonds & Rates – US 10-year treasury yields rose overnight, modestly, with the narrative pointing to confidence the Fed will remain accommodative even as robust growth takes the US, the world’s largest economy, back to pre-pandemic levels. While yields have come off their highs in recent weeks, down from 12-month highs, consensus forecasts suggest they’ll resume climbing for the remainder of the year. Ten-year yields closed at 1.567% last night with 1.83% the mean forecast by year end, with a goodly number of forecasters punting on yields reaching or surpassing 2.00%. ACGB’s will be dragged along for the ride and if historical average spreads are maintained, we’ll see ACGB yields (10Y) at 2.25% – 2.50%.
- Macro – busy next couple of days with US GDP and inflation data later in the week, but before that we have local CPI data out tomorrow. Markets are punting on a +0.9% QoQ and +1.4% YoY print (vs +0.9% YoY at the last print Dec-20). Per Westpac Economics “government assistance has had a big impact on the CPI and for the next few quarters the unwinding of these packages is set to boost the CPI.” The $64bn question is whether this print, and the next (Q2), which will reflect increases in CPI are purely transitory (RBA view) or the start of a new inflationary cycle (growing market view). Time will who’s right, but for me, I’m caught between the two schools of thought, yet to nail a view to the mast.
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Scott Rundell, Chief Investment Officer
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