Mutual Daily Mutterings
Quote of the day…
“You don’t win friends with salad”…Homer Simpson
Chart du jour… two cartoons coz its Friday…
“Hooked On Pixie Dust…”
- Markets opened on a cautious footing ahead of tonight’s (our time) Fed meeting and then turned south with a little more vigour after news of explosions at the Kabul Airport hit the wires. The explosions, which have been blamed on ISIS at this stage, killed 12 US service members and a number of Afghans, although the death toll is rising. Volatility spiked and treasuries pared losses (yields dropped) on the Kabul attacks, and the seven-year treasury auction saw decent demand with the bid-to-cover coming in higher than the average of the last six sales. Oil futures are also sliding on the reports. Credit was quiet.
- A tragic day, but focus will now be firmly focused in the Fed tonight. In this regard, three non-voting Fed presidents made “sooner rather than later” comments regarding the timing of tapering through the day, which some suggest drove markets more so than the Kabul attacks. The attacks can’t have helped, but I’d suggest the taper comments carried more weight, at best a bit from column (a), a bit from column (b) I’m thinking.
- As for the meeting itself, given the coverage and analysis over recent weeks over whether they announce something now or not, the outcome of the meeting is almost a binary event. Either the Fed gives a very clear indication that they intend to taper by the end of the year, or they don’t. Keep in mind, like an old cranky man with a heart-condition, the Fed hates surprises (to markets). So, to have any chance of a taper by the end of the year without surprise, the flares would have to go up now. If they dither, and then we do get a taper this year, markets could get a little hectic.
- Talking heads…“longer term, we see an environment where yields will remain low. I struggle with the narrative that yields are going to jump post-Fed taper, post-economic activity that is off the charts, peak inflation….all those sorts of things are in the rear view. I’d be shocked to see it happen after the fact.”…and this “we are in a symbiotic relationship where low yields allow equities to outperform….a low, stable yield environment is broadly supportive of growth, probably supportive of earnings, and should be broadly supportive of risk assets.” Hmmm, lets agree to disagree.
- Offshore Stocks – markets hit daily lows within the hour of the open for reasons already covered, and stayed there for much of the day. Attempts were made to claw back some lost ground, but they failed with indices closing at or near intra-day lows. Around four out of every five stocks retreated and only one sector, REITS (+0.1%), was able to gain ground, and only just. Energy (-1.5%), Discretionary (-0.7%) and Telcos (-0.7%) were the main underperformers. US reporting season is coming to a close and as a sign of how resilient markets are, valuations remain broadly similar to where they were before the start of reporting season – even with last night’s sell-off. It’s also worth noting that the S&P 500 has notched up ten record high closes through August….and forward EPS expectations have been upgraded +4.5% since the beginning of reporting season.
- Local stocks – a modest sell-off across the ASX 200 with two-thirds of stocks retreating and nine of eleven sectors in the red. Telcos (+0.6%) and Discretionary (+0.3%) were the only sector to put up a fight, as ineffectual as it was. The worst of the worst was Utilities (-2.2%), Materials (-1.6%), and Tech (-1.2%). So far, we’ve seen 137 of the ASX 200 report (annuals) with aggregate sales missing by -1.0% to the downside, and aggregate earnings surprising by +88.0% to the high side. Aggregate sales have grown +3.8% vs the pcp and aggregate sales have grown +162.0% vs the pcp. Just over 68% of companies have reported sales / revenue growth and 64% have reported earnings growth. Forward consensus earnings expectations remain largely unchanged vs the beginning of reporting season, but this will likely change as analysts revise their models in coming weeks. Futures are pointing to a mo0destly weaker open.
- Offshore Credit – nothing done ahead of the Fed meeting, as you were for now.
- Local Credit – traders EOD commentary….”spreads little changed on the day although we did see better client buying across most asset classes, aided by higher yields. We await the outcome of today’s Jackson Hole Symposium (US time) for any change to near term sentiment…subdued interest in Major Bank FRN’s sees the curve close unchanged. Major bank fixed continues to garner interest from accounts…two-way interest yesterday in tier 2 space and we closed having net lost stock. No move in spreads and we would suggest levels remain range bound until more sizeable buying returns”. None of this commentary or my own observations changes my views on credit, we’ll remain range bound for the immediate term. The Fed meeting tonight might move the risk dial if they come out all guns blazing on the taper front, but I doubt they will, they’ll likely announce future plans, which is largely p-riced in. Tapering is expected at some stage, markets have generally accepted that, so any announcement on exact timing shouldn’t cause any undue stress.
- Bonds & Rates – local bonds inched higher yesterday and over the week we’ve seen a gradual, but persistent sell off with 10-year yields +10 bps, a move which has mirrored US treasuries. Likely positioning ahead of the Fed meeting tonight. Confirmation of the tapering agenda shouldn’t have a meaningful impact on yields, but some movement would be expected as tapering expectations are not universal and some would have positioned for a no-taper announcement. We’ll know more tonight.
- Offshore Macro – some US GDP data out last night, but given other events was largely ignored. Annualised QoQ GDP (Q2) came in at +6.6% vs 6.7% consensus and +6.9% last, while personal consumption grew +11.9% through Q2, a miss on consensus’ +12.2% expectations. Jobless claims also missed, with 353K vs 350K consensus and +348K last. Tonight…”the US PCE deflator for July is likely to have minimal implications for FOMC tapering outside of a large miss (10.30pm Sydney time). The outlook for tapering is predominantly driven by the labour market recovery because inflation is already comfortably above the FOMC’s 2%/yr target. Nevertheless, a moderation in monthly price growth can push USD modestly lower tonight ahead of Powell’s speech” (CBA).
- Local Macro – private capex data out yesterday, borrowing some words form NAB…”private capex in Q2 rose 4.4% QoQ against 2.6% expected (NAB +3.7 %). All asset types rose with machinery & equipment +4.3% q/q and buildings and structures +4.6% q/q . Strength was driven entirely by the non-mining sector (+6.0% q/q) with mining capex only up only slightly (+0.4%). Within non-mining, strength was driven by ‘rental, hiring and real estate’ (+15.9%q/q), ‘media and telecommunications’ (+14.5%), retail (+13.9%) and ‘transport and warehousing’ (+9.3%)”.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907