Mutual Daily Mutterings
Quote of the day…
”Those who love peace must learn to organise as effectively as those who love war”…Martin Luther King. Jr
“In The Ring…”
“It’s Getting Chilly…!”
Overview…”still room for the bears to roam …”
- Moves: risk back on…stocks ↑, bond yields ↑, credit spreads ↓, volatility ↓ and oil ↓….
- European and then US markets jumped out of the gates to erase most of the week’s losses. Bond yields jump also as the safe haven trade lost its lustre…but that’ll change today. Cash credit did little, while CDS rallied in line with stocks. Oil eased off its earlier gains, all of which was on the back of softer than expected sanctions being imposed on Russia.
- The ‘situation’ escalated over the weekend, with the US, UK and others tightening the screws on their sanctions on Russia. Some of Russia’s banks are to be denied access to the Swift payment system, and limitations will be imposed on Russia’s central bank to make use of its foreign reserves (~$643bn worth). This is the first time in history that a G20 country has seen its banks excluded from Swift; Iran, Venezuela and North Kora being the only three examples since its inception in 1973. These latest sanctions will add an extra layer of uncertainty to what is already likely to be another volatile week for markets.
- With regard to the Swift sanctions, some details on what this really means…from Credit Suisse…”excluding Russian lenders from SWIFT could lead to missed payments and giant overdrafts within the international banking system, and spur monetary authorities to reactivate daily operations to supply the market with dollars. Drawing comparisons with the 2008 Lehman Brothers failure and the pandemic-related market seizures of March 2020, Credit Suisse warned that “central banks should stand ready to make markets on Monday again.“
- On the battle itself, it has been slow going for the Ruskies who are encountering more resistance than they probably expected, which has Putin’s panties in a twist, at least that’s the narrative we’re seeing from western media outlets. Putin upped the ante also, ordering Russia’s strategic nuclear forces put on higher alert, which he claimed was on the back of “aggressive” statements from NATO leaders.
- “On the data front it was a busy session for the US with data generally providing upside surprise. Of note was the PCE report – the Fed’s preferred measure – which rose by 6.1% on an annual basis in January versus the Fed’s 2.0% target (the PCE measure if the Fed’s preferred gauge of inflationary pressures).” (NAB).
The Long Story….
- Offshore Stocks – if the strong rally on Friday was in fact on the back of hitherto softer sanctions, then the weekend’s activity on the sanction front will likely take some wind out of the market’s sails. If, on the other hand, the rally was on the premise that through modern times wars and conflict have only had short term impact on markets, then perhaps markets are already looking beyond the conflict and will run with Friday’s more optimistic theme today. We’ll see…I’m expecting a softer day. Going through the motions, only 3% of the S&P 500 failed to advance on Friday and the weakest performing sector, Tech, still delivered a daily gain of +1.4%. While we’re here in the ‘loser’s tent’, the other two sectors to round out the bottom three were Telcos (+1.5%) and Discretionary (+1.9%). Materials (+3.6%), Financials (+3.2%) and Utilities (+3.1%) were top of the pops.
- Local Stocks – very modest gains on Friday in the ASX 200, just +0.1%, with the index down -3.1% on the week. Just under two-thirds of stocks gained ground, yet the split of sectors that gains vs those that retreated was more evenly balanced. Looking more closely, if not for strong gains in the Tech space (+8.1%), it would have likely been a down day. A handful of tech names I’m not remotely familiar with rallied 11% – 32% on Friday, Block Inc, Life360 Inc and Tyro Payments. REITS (+1.6%) and Discretionary (+1.0%) rounded out the podium. Back in the sheds with the wooden spoon was Financials (-1.0%), which was by far the most significant influence on the broader index. Staples (-0.8%) and Healthcare (-0.6%) also had poor days. Futures are pointing to strong gains this morning (+2.4%), but I’d suggest my feed is stale.
- Offshore credit – I’d expect US investment-grade and high-yield issuers will be eyeing off any window of stability to issue debt this week even as geopolitical tensions continue to roil global bond markets. According to Bloomberg, Wall Street syndicate desks project between US$20bn and US$25 bn in fresh high-grade sales for this week, a modest volume by recent standards. Cash and CDS spreads were optimistically tighter on Friday.
- S&P commented on the Russian-Ukraine bruhaha, stating…”the effects of the Russia-Ukraine conflict could come in the form of energy-supply disruptions and/or price shocks; sustained inflationary pressures; a drag on economic expansion and/or policy missteps by central banks; and risk-repricing that drives up borrowing costs or limits funding access for weaker borrowers. S&P Global Ratings also believes the economic impact from cyber-attacks on Ukraine could run to the tens of billions of dollars.” On default rates specifically… ”we expect the European trailing-12-month speculative-grade corporate default rate to rise slightly, to 2.5% by December. Most indicators point to a subdued default rate, but risks are increasing as inflation rises amid the prospect of tighter monetary policies and the ongoing Russia-Ukraine situation.”
- Local Credit – a surprisingly muted close by days end, especially after some of the intra-day pricing we saw on the chats. Traders…”finally an end to a tumultuous week which most participants, including myself, will be glad to see the back of. Flow and broader market liquidity conditions are very poor and its probable that secondary market bid/offer spreads need to adjust accordingly. With the primary pipeline poised for a period of tranquillity, the uniformity of positioning in the street and the continued skew of client flows towards better selling we think secondary spreads are likely to remain under ongoing widening pressure.” Despite the doom and gloom, major bank spreads closed unchanged in the senior space with the 5Y at +72 bps (+2 bps on the week) and 3Y at +62 bps (+2 bps on the week). Also unchanged in major bank tier 2, but it was a tough week…traders “no flow, though the preference in the street is to reduce inventory. Current levels don’t look unattractive to hold, though we will retain a defensive position until such time that buyers emerge, something we consider unlikely under prevailing conditions.” The 2026 callable cohort closed at +149 – 153 bps (+4 bps on the week), and the 2025’s at +137 – 138 bps (+4 bps on the week). I expect spreads to drift wider, which isn’t necessarily a bad thing for floaters, so we welcome it to some degree. In most instances, it’s just a normalisation of conditions post the various forms of monetary stimulus thrown at the system through the pandemic.
Source: Bloomberg, Mutual Limited
- Bonds & Rates – a volatile week in bonds with interest wavering between these wanting safe haven bets (yields ↓) and those not even remotely interested on the back of inflation and monetary tightening concerns (yields ↑). By weeks end, yields were only marginally above where they started. If I had to table an opinion, I’d expect the safe haven bid to re-emerge today…again, assuming Friday’s risk on move across markets was driven by softer than expected sanctions. The enhanced sanction over the weekend escalated tensions rather than de-escalated them, with Putin turning the nuclear amp up to eleven. Having said that, offshore bond markets on Friday evening our time were somewhat muted, with only small moves across US treasuries. “US Fed Funds futures ended Friday ascribing about 25% chance to the Fed lifting rates by 50 bps on March 16 (at one-point last week it was as slow as 10%). Fed hawks Bullard and Waller were out still gunning for 100 bps of tightening by July. Jay Powell might have something to say on the matter when he testifies to Congress this week.” (NAB)
- Macro – “inflation, whether from higher commodity costs or wages, is weighing on companies and central banks, with the stagflation risk intensifying. Friday’s US consumer spending data beat forecasts, highlighting some resilience, but sentiment remains at a decade-low amid elevated inflation concerns. Soaring commodity costs have hurt food and beverage manufacturers…” (Bloomberg). Some comments from St Louis Fed boss, James Bullard on the Russia-Ukraine conflict impact on the US economy… “The direct linkages to the U.S. economy are minimal so I wouldn’t expect that much impact directly on the U.S. economy”, though adds “Of course, we will have to watch this very carefully and see what happens in the days ahead”. He says “The fighting in Ukraine is something that has been around off and on for the last couple of decades, so in that sense it is not really that new. This is a bigger, more aggressive Russia here but I think the baseline expectation has to be there will not be a wider war associated with this. There are risks around that.” (NAB)
- Week ahead data will likely second fiddle to geopolitical developments, but nonetheless there is data to be release, to be analysed and to be acted upon. Of significance we have US ISM surveys, and US Non-farm Payrolls on Friday. Closer to home, tomorrow the RBA meets, but it’s likely a dead-rubber meeting, no change in monetary policy expected with patience further endorsed. Later this morning we have credit growth (+0.7% MoM and +7.6% YoY consensus), and then on Wednesday we have 4Q GDP (+3.0% QoQ & +3.6% YoY consensus). Building approvals are also out for January, with consensus expecting -3.5% MoM vs +8.2% MoM in December.
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Scott Rundell, Chief Investment Officer
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