Mutual Daily Mutterings
Quote of the day…
“I asked my old man if I could go ice-skating on the lake. He told me, “Wait til it gets warmer.”.…Rodney Dangerfield
Chart du jour…..global spread changes..
Overview…”choppy-choppy, chop, chop…”
- A moderately choppy end to a reasonably volatile week on Friday. The DOW and S&P 500 eked out some very modest gains on the day and week, while the NASDAQ was largely unchanged. The STOXX had a down day, but was able to advance on the week. The main events from a market’s perspective were firstly Evergrande default risk (=meaningful stock sell-off early in the week), followed by a solid rally on the belief the risk had been kicked down the road (coupons to be met…but not yet received in some instances), and then some clarity around the Fed’s tapering timetable toward the second half of the week (=meaningful curve steepening). Solid gains in commodities and oil on the day and week, while offshore credit spreads tightened – possibly with investors kicked into gear by the move higher in yields.
- The Fed articulated it’s taper timetable, which will kick off before year end and ‘likely’ end before mid-2022, which is a pretty aggressive timetable vs consensus…all assuming no market calamity befalls us. This ‘aggressiveness’ was reflected in last week’s curve steepening. Talking heads…”inflation expectations are starting to become unanchored. And that has spooked the Fed. While still expecting inflationary shocks to be transitory, the Fed now believes the inflationary risk is high enough that it needs to end quantitative easing sooner rather than later. They believe ending QE sooner will give the Fed the flexibility it needs down the line to deal with any non-transitory inflation.”
- The Evergrande saga is likely not over yet, although according to market observers well versed in China corporate defaults, or near defaults as the case may be, events of this nature tend to drag on in China, often for years. If history repeats itself here, then there is a chance markets will become bored with its new play-toy and it’ll fade from the narrative and just become lingering part of the back drop. Having said that – caveat warning – Evergrande is not your bog-standard Chinese corporate, it is one of the largest, if not the largest, property developer in the country and property plays a big part in the Chinese economy.
- Offshore Stocks – the week-on-week changes are more interesting than what happened on Friday, which wasn’t much. It was a choppy day, with the DOW and S&P 500 oscillating between gains and losses throughout the day, but in the end, not much in the way of change. Despite all the volatility and earlier Evergrande hand-wringing, the S&P 500 advanced +0.5% through the week with Energy (+4.7%) and Financials (+2.2%) the star performers, the latter buoyed by steepening yield curves. Tech (+1.0%) rounded out the podium. At the other end of the return spectrum, REITS (-1.5%) suffered a nasty flesh wound, reflecting the significant steepening of bond yields. Joining REITS in the naughty corner were Utilities (-1.2%) and Telcos (-0.7%). The S&P 500 is seemingly through the triple-witching threat and re-engaging with prior upward trajectories, although I remain wary. The mid-month pull-backs we’ve witnessed around option expiry periods seem to be getting deeper, and the dip buying less enthusiastic. I have no data or hard evidence to support this, just a gut feel. Caution is the word for me.
- Local stocks – a very choppy week, some days of hope and wonder, yet also some days when markets were smacked every which way but Sunday. Despite some strong leads from offshore on Thursday night, the local market had a down day. Two-thirds of stocks retreated and all but three sectors were in the red, the worst hit being REITS (-2.1%), no doubt belted because of the rout in bond yields. Materials (-1.3%) and Healthcare made up the bottom three. At the top of the table, Energy (+1.4%) fought valiantly, as did Financials (+0.7%) and Staples (+0.3%). Over the week, the ASX 200 had three down days and two up days with a net fall of -0.8%. The index is hovering half way between its 50 day and 100 day moving average and seemingly aimless, with conviction in either direction non-existent. Futures are indicating very, very modest gains in the ASX 200 this morning.
- Offshore Credit – some commentary out of the US via Bloomberg on Friday….”the Chinese government’s crackdown on cryptocurrencies and the debt crisis at China Evergrande Group continues to keep investors on edge. Several holders of Evergrande’s dollar bonds said they haven’t received a coupon payment that was due on Thursday, though there is a 30-day grace period before a default can be declared.” US IG markets were expecting US$25bn of deals last week, they received $14.5bn as market volatility caused issuers to flinch.
- Local Credit – traders…”the largest one day sell off in domestic rates for many months helped bring outright buyers back off the sidelines. A very difficult week for traders as global risk sentiment turned on its head with liquidity conditions at their worst. This week will be much the same, though if rates stabilise at current levels we would expect to see better buying of fixed rate paper from offshore accounts.” Following APRA’s CLF announcement, post the initial move wider in bank spreads – yet minimal volumes traded, sentiment has stabilised. Over the week major bank senior spreads drifted a basis point wider, with the Aug-26’s at +45 bps, Jan-25’s at +32 bps and the 24’s around +28 bps. Not a lot of movement in tier 2 either, with the 2026 callable cohort at +123 – 130 bps, and the 2025’s at +117 – 120 bps.
- Bonds & Rates – “holly bear-steepening curves Batman”…local bonds ripped higher and steeper on Friday, following strong leads from US treasuries, in turn reflecting a mix of rising inflation concerns and the Fed articulating with some greater clarity its tapering intentions. The view amongst many, and one I share, is the Fed wants to get QE out of the way and normalise monetary policy settings so as to combat rising inflation with traditional measures, i.e. tightening / raising official rates. US treasuries continued to steepen on Friday night our time, albeit at a more leisurely pace than that witnessed Thursday. We’ll likely drift higher and steeper today also. Local bonds have overshot Q3 consensus levels (1.33%), probably just dragging forward Q4 steepening expectations (1.53% by the end of December).
- Offshore Macro – I found some commentary from CostCo’s recent (Q3) earnings release on inflation that are interesting and worthy of note…”now, I was asked back in March in our second quarter earnings call at what level we found inflation was running overall on the sell price side. I stated and our best guess at the time was somewhere between +1.0% and +1.5%. I updated that 16 weeks earlier — 16 weeks ago — on our May 26 third-quarter call, and we estimate to be in the +2.5% to +3.5% range. As of today, and talking with our senior merchants, we would estimate overall price inflation of the products we’re selling to be in the +3.5% to +4.5% range.” Reflecting that perhaps inflation isn’t as transitory as the Fed first thought, or hoped. The offshore data calendar for the week ahead is fairly light. Key for markets will be China manufacturing data, Eurozone CPI and US ISM manufacturing. Other data scheduled includes US home sales data while in Europe there is German retail sales and Eurozone consumer confidence. There is a plethora of FOMC and ECB members scheduled to speak while the US debt ceiling will be in the news ahead of a potential US government shutdown on Friday should the debt ceiling not be raised…outlook commentary borrowed from NAB.
- Local Data – for the week ahead the calendar is full of second tier data with retail sales, building approvals and housing finance. Consensus expectations and last month’s prints tabled below:
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907