Mutual Daily Mutterings
Quote of the day…
” For God’s sake, this man cannot remain in power …” – Joe Biden on Putin
Overview…”We are all thinking it…”
- Moves: risk on (generally) … stocks ↑, bond yields ↑, credit spreads ↓, volatility ↓ and oil ↑….
- Modest moves across stocks on Friday night our time, while bond yields continued to march higher after the Fed’s John Williams added more fuel to the +50 bp rate hike fire, saying such a hike was on the table. Oil continued its trend higher as an Iranian nuclear deal looks less than imminent – a deal would free up Iranian oil and in turn ease pressure on prices. Additional supply disruptions also impacted the market. Offshore credit spreads continued to grind tighter with the war effect largely priced out now.
- “Treasury yields have been driven past a trend line that’s effectively served as a ceiling since the late 1980s. And despite the rout, the war, Fed tightening and inflationary threats, stocks were barely feeling the fear last week. So, what gives? Many have warned risk assets — and growth — won’t be able to resist the pull of a higher discount rate. Yet a growing number are betting equity indexes have already priced in bearish bond moves, and signs suggest the U.S. economy remains in decent health…” (Bloomberg)…yep, I know, agreed….
- The main event on the Russia vs Ukraine situation is President Biden’s off-the-cuff comment that Putin can’t remain in power. Morally the vast majority of the western world would likely agree with Biden, but you can’t go around as the President of the United States saying such things. As satisfying as it would be, world leaders can’t be talking regime change at this stage, especially when the head of said regime is on the record for threatening nuclear Armageddon for anyone who crosses them.
- The week ahead…”US inflation and jobs data may strengthen the case for bigger rate hikes. The PCE report, due Thursday, will probably show the Fed’s favoured inflation gauge accelerated to +6.4% in February from +6.1%. Figures due the next day may reveal that employers added 490K jobs in March, while the jobless rate dipped to 3.7%.” (Bloomberg)…not a lot to suggest any easing in yields with 8 hikes by the end of 2022 now priced in. Locally we have February data for retail sales (+0.8% MoM cons.), Private Sector Credit (+0.6% MoM cons.), Building Approvals (+7.5% MoM cons.), and Home Loans Value (+1.5% MoM cons.).
The Long Story….
- Offshore Stocks – a mixed end to the week with a smattering of reds and greens across the main indices globally. Regardless, movements in either direction were modest, all less than one percent. On the week, US stocks closed higher, led by the NASDAQ (+2.0%), then the S&P 500 (+1.8%) and the DOW (+0.3%). European bourses were largely in the red, with the STOXX 50 down -0.9%, the DAX (-0.7%) and the IBEX (-1.0%). The FTSE bucked the trend, although it’s no longer ‘part of Europe’, rising +1.1%. Within the S&P 500 on the day, gains were led by Financials (+1.3%) and Energy (+2.3%). Over the week, Energy (+7.4%) led all comers, followed by Materials (+4.1%) and Utilities (+3.5%). Only Healthcare retreated on the week, -0.2%. YTD it’s a much more-narrow picture. Energy up +42.3%, followed in distant second by Utilities (+1.7%) and then Financials (+1.2%). Beyond these three, it’s a sea of red.
- “How long can equity markets ignore surging hike expectations? Global equity markets are so far proving remarkably robust to rapidly rising expectations of where policy rates will go over the next year or two. Bloomberg points out that the S&P 500’s performance in the 10 days since the Fed started hiking is its best such performance since WW2. Of course, investing in bonds or equities are substitutes, and some of the money flowing out of the reeling bond market may well be finding its way into equities. However, in the bigger picture, higher interest rates are not a positive for economic growth and thereby earnings outlooks and equities. Inflation, war and pandemics are also generally considered to be bad news, but equities so far remain resilient.” (ANZ)
- Local Stocks – very modest gains on Friday for the ASX 200 (+0.3%), although gains were reasonably well balance with 65% of stocks advancing. Four sectors closed in the red, Healthcare (-0.8%), Financials (-0.5%), Tech (-0.5%), and Staples (-0.1%), although Financials provided the bulk of any headwinds. At the other end of the spectrum, Materials (+1.3%) led the charge and covered any losses generated by the previously mentioned sectors…and then some. Utilities (+1.0%), REITS (+0.9%) and Energy (+0.9%) also had a strong session. On the week, Utilities (+5.7%), Materials (+5.5%) and Energy (+5.1%) all put in good showings, while at the bottom of the performance tables we had Healthcare (-2.5%), Industrials (-1.2%) and Telcos (-0.9%). All other sectors advanced. Relative Strength Indicators continue to creep toward overbought territory, signalling a potential pull-back to some degree. Futures are pointing to strong gains today, +0.9%.
- Offshore credit – another solid session for US and EU IG markets. Most of the core indices tightened on Friday and all are tighter on the week, by 4 – 8 bps. Month to date, US IG is -1 bps tighter in the corporate space, but still a fraction wider still in financials (+1.5 bps). Despite being physically closer to the Russia vs Ukraine conflict, EU IG has outperformed their US IG brethren, -5.7 bps tighter in the financial space and -8.0 bps in the corporate space. Issuance on Friday was minimal, but it’s been a busy month with US$200bn expected to be priced in the US$ IG credit space by the end of the month, a level only reached on three prior occasions (according to Bloomberg). Primary issuance this week is forecast to be in the order of US$25bn vs US$37bn raised last week. Synthetics were mixed, with the CDX (US) +1.3 bps higher at 72 bps (+7 bps CoW), while MAIN (EU) closed largely unchanged at 80 bps (+9 bps CoW).
- Local Credit – traders…”a fairly quiet end to another difficult week, undoubtedly the toughest period e have seen in the last 2 years. Are we past the worst, will we see local credit markets replicate some of the strength seen offshore…? Tough to tell, we outperformed on the way out and we are underperforming on the way back in. Flows are picking up, the cheap bonds have been bought and investors are continuing to add.” I have underlined a key point. In my 28 years in credit (yes, I’m that old), this behaviour – outperform on the way out, underperform on the way in, is very common for A$ credit markets. The reason for this behaviour is a mix of technicals and psychology, in my opinion. On the way-out investors want to make sure it’s a meaningful change in trend before selling – because it’s difficult to get paper back if they’re wrong. On the other side, investors are wary of catching falling knives and again wait to see that any correction tighter is sustainable.
- Major bank senior credit was largely unchanged on Friday – just the 5-year tightened a basis point (to +88 bps), while the rest of the curve was unchanged. On the week, major bank senior is -2 bps tighter in the 5-Yr, -1 tighter in 4-Yr and +3 bps wider in 1-Yr. And, unchanged everywhere else. In tier 2, no change on Friday, but -1 bp tighter across the curve over the week. The 2026 calls are +174 – 179 bps, the 2025s are +156 – 157 bps and the 2024s are +124 bps. On the week, with yields marching higher, fixed again took it in the neck relative to floaters, -0.94% for the AusBond Credit Index (Fixed) vs unchanged for the AusBond Credit Index (FRN). It’s a similar story on a month to date basis, -2.71% down in fixed and only -0.28% down in FRN’s. Month to date, fixed spreads are +12 bps wider, while the FRN index is +14 bps wider, both underperforming offshore credit.
- Bonds & Rates – a very modest sell-off on Friday (+1 – 2 bps), and a meaningful sell-off on the week with the 3’s +29 bps to 2.215% and the 10’s +20 bps to 2.785%. What’s the chances were get to 3.00% by year end? Two weeks ago, I would have said negligible, now, I’m less convinced. I’m still of the opinion yields have overshot the run-way because of growth headwinds, but you can’t ignore the momentum higher. Consensus has 10’s at 2.04% by quarter end, but we know that won’t happen, and the 2.16% forecast by the end of the second quarter has to be seriously questioned (forecasts per Bloomberg, last updated 23 March). Local yields will be pressure higher again today after US treasuries rose (yields) again on Friday night.
- In US treasuries, the 2’s were up +13 bps to 2.27% and the 10’s up +10 bps to 2.47%. The 5’s 10’s curve remains inverted, by around 8 bps. “The big news in the bond market is not the staggering rise in yields across the Treasury curve from the two-year all the way to the 30-year. What matters most now is that the Fed’s preferred measures of recessionary risk and traditional market measures are moving in diametrically opposite directions. As long as these gauges continue to diverge, there will be a lot of volatility in bond markets until either the Fed’s sanguine view or market worries are proved right.” (Bloomberg)
- Macro – we have the Federal Budget tomorrow night and with an election in the wings, it’ll be a ‘spendy’ one, which could threaten higher deficits and imply higher yields. But, we have to consider the national revenue benefits of higher commodity prices, which for now seem sustained…from BAML this morning…”Reports suggest govt will slash fuel excise by between 10c and 20c (of the 44c total) for six months to give immediate cost-of-living relief for Australian motorists and lock in $17.9bn for nation-building projects ($7bn new projects) when he delivers his fourth budget on Tuesday. Cost of excise cut would be $3bn – $6bn depending on size, but likely have a muted impact on 2Q CPI. First-home buyers will also be given a significant boost in the budget, with the home guarantee scheme expanded from 20,000 places a year to 50,000 a year.”
Source: Bloomberg, Mutual Limited
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Scott Rundell, Chief Investment Officer
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