Mutual Daily Mutterings
Quote of the day…
“You know horses are smarter than people. You never heard of a horse going broke betting on people”.…Will Rogers
Chart du jour…AU CPI vs yields…
Overview…”A quiet offshore session…”
- Solid gains across European markets, with the Stoxx Europe 600 close to record gains. US markets enjoyed a solid tail wind on the open, but then markets lost their mojo, weighed down by a decline in interactive media and services stocks, led by Facebook, and tumbling aerospace and defence shares. By day’s end, US markets closed off their intra-day lows, booking modest gains. The front half of the treasuries curve sold off (yields rose) on data surprises (upside). Headlines are suggesting that approval of Biden’s fiscal stimulus package is imminent, which will inject US$1.5 – US$2.0 trillion into the US economy.
- US reporting season update…a smidge under 30% of the S&P 500 has reported with aggregate sales up +15.6% on the pcp and aggregate earnings up +40.9%. Again, meaningful base effects in these numbers. Only Utilities (-8.7%) has failed to fire on the sales front, but only one stock out of 28 has reported thus far. All sectors have reported earnings growth with Staples (+3.1%) the slowest. Against expectations, aggregate sales are up +1.9%, while earnings are up +11.3%. Any misses have been modest. Some heavy hitting tech stocks report after close tonight, including Alphabet (Google) and Microsoft.
- Talking heads…”I don’t think anybody’s too worried about the big tech names, their performances are all incredibly strong in absolute standards that the bar is just so high for them at this point that it can be harder to meet expectations”.
- Evergrande remains in the news. Chinese authorities have ‘asked’ its billionaire founder to use his own money to help pay the company’s debt. I like that, authorities ‘asked’, I wonder if they were threatening to pull his finger nails out with plyers when they put that proposal to him. The article this was sourced from comes with the usual caveat, “according to people familiar with the matter.” In other articles on the matter, authorities ‘told’ the founder to use his personal wealth to repay the group’s debt, although there is doubt he has the cheddar to stump up. Evergrande debt is trading around 20 – 30 cents in the dollar.
- Offshore Stocks – choppy day in US markets, but the core indices generally kept their heads above water. Across the S&P 500 a little over half of stocks advanced and only two sectors retreated, Telcos (-0.4%) and Industrials (-0.3%). Winners on the day included Utilities (+0.8%), Energy (+0.7%) and Healthcare (+0.7%). The S&P 500 has advanced +5.0% since JPMorgan kicked off the earnings season nine days ago, in the best start to a reporting cycle since the dot-com mayhem some 21 years ago. Along the way, the index slipped only once, with a -0.1% drop last Friday doing little to derail the benchmark from its best month since the last election. “Now institutional investors with large stock and bond holdings will need to balance out their positions, buying dips on losers and taking profits on winners. A regression analysis done by strategists at BNP shows that the outflow needed to compensate for a divergence between this month’s drop in the bond market and rally in stocks ‘could’ translate into a 2.6% decline in the S&P 500 when the rebalancing takes place”. The S&P 500 closed at yet another record high (4582) and its relative strength indicators are on the cusp of flashing ‘overbought’ (68.4 vs 70.0 threshold).
- Local stocks – the local index jumped out of the gate like a horse with Vicks Vaporub smeared on its delicates, up +0.4% in the first 30 minutes of trading. The mood turned to custard shortly thereafter and the index spent the rest of the day giving its early gains back, with a few brief moments slumming it in negative territory, before a last-minute gasp saw the index up +0.03% at the close. More stocks closed down than up, while the sector winners and losers were largely even. Tech (+1.3%) carried the torch, followed by Discretionary (+0.6%), and then Healthcare (+0.1%) a distant third best. Utilities (-1.3%) didn’t win any friends, while Staples (-0.8%) and Energy (-0.4%) were the other smelly kids of the class. With less than convincing offshore leads, futures are largely unchanged.
- Global credit – a bit boring in IG space, so some commentary on the shallow end of the credit gene pool…”spreads on triple-C rated corporate bonds are at risk of surging wider still, after correcting higher by about 21% since July lows. The relatively modest scale of widening since the summer indicates a bigger correction awaits, though the time frame is less certain. Yet spreads may tighten again first. Interim corrections in CCC bond spreads, depending on scale, historically beget renewed tightening either to new tights or to a higher-low that can metamorphose into a more aggressive risk-off cycle. Nominal spread levels and pandemic debt loads, along with monetary-policy and economic uncertainty, would argue for a selloff. Yet a dovish pivot in policy and successful fiscal wrangling in Washington could enable more spread tightening. Larger intermediate corrections of 30% or more gave way to new cycle tights in the mid-2000s, and again in 2010 and 2011”.
- Local Credit – an unremarkable day by all accounts. From the traders at the close yesterday…”curve closing unchanged. Client flows remain light, though the street felt more engaged today. Our base case is that the widening and steepening has further to go, perhaps another +5 bps. We think that the majors will continue to access offshore markets in all formats with no one willing to risk printing a ‘dud’ in A$. If we are right, then the supply drought will help contain the move wider. The next few weeks will be critical as we see what bank treasuries do as they emerge from earnings blackout period”. I’ve been espousing similar views recently on the cheapness of offshore markets and likely effect on A$ spreads. Other traders also of a similar view…”expect the major banks to continue to exhaust primary opportunities in offshore markets where they can achieve ~10 bps better funding then domestically even with cross currency basis moving ~7 bps wider since early September.” In the tier 2 space, a modest widening (+1 bps across the curve) on the day, primarily a function of “street indigestion”…from the traders… “reasonably comfortable running elevated inventory, we do not have any concerns with the credit, nor any concerns about the prospect of new supply, this is an oft seen indigestion issue that just need a bit of time to resolve”. The 2026 callables are at +130 – 135 bps, the 2025’s at +124 – 126 bps and the 2024’s at +99 bps.
- Bonds & Rates – local bond markets reacquainted themselves with rising yields, albeit modest. The Apr-24’s – the RBA’s YCC poster child – has again drifted away from the RBA’s 0.10% target, closing up almost +3 bps to 0.15%. Possibly some last-minute jockeying ahead of today’s CPI print. A lot, inflation wise, is already baked into rates at the moment, so it would take a sizeable upside miss to push yields meaningfully higher. The risk that the data undershoots materially is pretty low. Some thoughts on this matter from NAB…”given current market pricing for the RBA – OIS curve pricing circa 60 bps tightening by end 2022 (with 25 bps priced by August) and 130 bps by end 2023, it is hard to see rate hike expectations for 2022 brought forward any further. The risks for the rates market on today’s CPI print are asymmetric, with a bigger rally on a low print.” CPI is scheduled to be published at 11:30am with consensus at +0.8% QoQ and +3.1% YoY.
- Offshore is providing little guidance, with only a basis point movement in either direction across the curve. Fed speak…former Treasury Secretary Lawrence Summers said officials are unlikely to deal with “inflation reality” successfully until it’s fully recognized. Talking heads…”we’re coming off a 40-plus-year bond-bull market, and right now we’re looking at interest rates that should be a lot higher from here. So, with duration as high as it is in the fixed income market, you have to be very cautious around fixed income.” Agreed, and the key word there from our perspective is ‘fixed income’…here at Mutual we play in the FRN space, the perfect place within the fixed income world to park your hard earned, so give us a bell or come on down as they used to say in pre-pandemic days.
- Local Macro – from the chats yesterday….”AUSTRALIA ANZ CONSUMER CONFIDENCE FALLS TO 106.8 VS 107.0 Modest decline in confidence this week driven by the outlook for the financial situation and the economy in the year ahead. However, time to buy a major household item increased as did inflation expectations. The monthly average remains above 100, which means consumers are optimistic”. The main event today is the CPI data, although if the RBA is to be believed, wage growth is more important (next updated November 17), with CPI a first derivative of wages…I think that’s how it works, I failed year 11 maths. Seriously, I did.
- Offshore Macro – US consumer confidence also published last night…”concerns on the state of households pushed a little further into the distance, as the Conference Board consumer confidence survey showed an unexpected pop to 113.8 from a revised 109.8. This is still well-off recent peaks, but nevertheless represents the first rise since May. That being said, the 12-month inflation expectation took another leg up to 7.0% from 6.5%; however, the University of Michigan survey tends to be much more sensitive to inflation than the CB measure. The underlying message here is that confidence remains below its pre- and post-pandemic peaks, but at least isn’t deteriorating any further. That should be good enough for a stock market enjoying another earnings party”. (Bloomberg)
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