Mutual Daily Mutterings
Quote of the day…
“I’m not satisfied. The silver medallist is the first loser.” — Koen Verweij, speed skater and silver medallist, sounds similar to Ricky Bobby’s famous line, “if you’re not first, you’re last” –
Chart du jour…AU CPI vs 10Y Yields
Source: Bloomberg, Mutual Limited
“Spare Some Gains?…”
Overview…”CPI today, FOMC tomorrow… ”
- A modest risk-off session in EU and US stocks overnight, with more meaningful moves in the NASDAQ ahead of some major tech stock reporting (Apple, Microsoft, and Google reporting after the bell). US listed Chinese stocks were taken behind the wood-shed for a beating again with another day of heavy losses. Over the past three trading days, the Nasdaq Golden Dragon China Index – which tracks 98 of China’s biggest firms listed in the US – has fallen more than -19%, its biggest such drop on record. The plunge coming on the back of sweeping policy changes by the Chinese government.
- Chinese stocks were also roughed up yesterday with the Hang Seng down -4.2% and the Shanghai Comp down -3.5%, the only two major equity indices sporting YTD loss, down -4.2% and -4.5% respectively. Talking heads…”we do not see a buy-the-dip opportunity. China’s recent regulatory crackdowns are the beginning, not the end, of increased control and command by Chinese leaders,”
- With the risk-off tone we saw another rally in US treasuries, with the 10’s dropping 5 bps, while the local bonds inched higher yesterday. As I’m typing the NSW government has extended the staycation lockdown a further four weeks as the case numbers continue to get out of hand – should pressure yields lower. On the matter of lockdowns, and their economic impact, CBA released a report earlier today detailing their forecast for the Australian economy. They’re expecting it will contract -2.7% through Q3 following a forecast +0.6% increase in Q2. They then expect a rebound of +1.9% in Q4.
- Lifted straight out of Bloomberg…the IMF maintained its outlook for global economic growth of +6.0% this year, but reduced the forecast for emerging market expansion on disparity of vaccine access. The UK got the biggest bump among major economies and the fund also raised its outlooks for the US, the euro area, Latin America and the Middle East and Central Asia. “We warned of a dangerous divergence, and we are seeing that getting worse” between developed and emerging economies, IMF Chief Economist Gita Gopinath said.
- Australian CPI today and FOMC tonight, the two main events.
- Offshore Stocks – a modest risk off session for pretty much all global indices. The S&P 500 dropped from the get-go, with soft leads out of Europe, however the index did claw back some lost ground, closing down -0.5% vs intra-day lows of -1.1%. A smidge over half of stocks closed in the red (52%), while more sectors gained (6) than lost (5). The leader board was headed up by Utilities (+1.7%), followed by REITS (+0.8%) and Healthcare (+0.4%), while the class clowns included Discretionary (-1.2%), Telcos (-1.1%) and Energy (-1.0%). E-mini’s have carried the same tone into after close trading.
- Local stocks –modest gains for the local market yesterday, although the winners vs losers balance was pretty even with 52% of stocks lower on the day. Six sectors gained vs five that lost ground. Materials (+1.6%) for the second day in a row carried the flag, as did Financials (+0.6%), both of which accounting for the vast majority of gains for the broader index. Energy also had solid gains (+1.3%). Bottom of the tables was occupied by Tech (-1.0%), Healthcare (-0.6%). Futures are down a touch, -0.3%.
- Offshore Credit – from the traders…”credit spreads about +1bp wider, with USD IG primary activity solid but not impacting spreads much. A total of US$4.6bn was issued across five issuers. Books were about 2.4x covered and new issue concessions ranged from -5bp and 3bp. Key indices: US IG cash +0.83bp; CDX IG +0.96bp; S&P Fut -0.71%; UST 10y/5y -4.9bp/-2.3bp; Eur Main +0.62bp”
- Local Credit – “holy constrictive underwear Batman”, major bank senior paper tightened again, -1 bps across the curve. The Jan-25’s now down to +28 bps, which is -4 bps tighter over the past couple of weeks. Not much in a spread sense, but that’s more than 10% tighter. The Three-years are now at +20 bps. Major bank tier 2 also got in on the act, with 2026 callable paper grinding a basis point tighter, pricing around +122 – 124 bps. Tactically this very constructive tone should persist despite broader headwinds. I hope the bank treasurers are listening….
- Bonds & Rates – sideways to slightly higher in local bonds (yields) yesterday, but no real conviction in any direction. Treasuries last night fell on the back of a broader risk-off tone. The FOMC meets tomorrow, and there’s an asymmetric risk of US rates rising following the meeting, given the current bond level of bond yields, i.e. extremely low. Reading the between the lines of the market narrative, it seems the baseline assumption is for a modest curve steepening if Powell remains dovish, which is itself likely given the spread of the Delta variant. However, given Powell’s Congressional testimony post the last meeting, and lack of meaningful data or additional comments since, it’s hard to identify any significant sources of surprise. Key focus points for markets will be language around tapering, and the degree of concern expressed around the spread of the COVID Delta variant. I expect tapering will be kicked down the road a bit, more likely to be a ‘live’ discussion point for the September meeting in Jackson Hole. COVID will weigh on sentiment, and underpinned continued cautiousness and dovish tone.
- Local Macro – yesterday, Australian ANZ Consumer Confidence fell to 100.7 vs 104.3, which should have been a surprise to no one. This is a -3.5% fall from the prior print, which can be almost completely pegged to the lockdown in Sydney, and then Melbourne. The four-week moving average fell to 105.7, which is modest considering the sudden stop to activity. All components recorded large falls this week and inflation expectations rose +4.3%. This is the lowest since November 2020 when Victoria entered its long second lockdown. CPI out today, as a reminder, core is expected to come in at +0.7% QoQ for Q2 vs +0.6% QoQ for Q1, or +3.7% YoY vs +1.1% YoY as at the end of Q1 – the range within consensus numbers is wide, from lows of +2.3% to highs of +4.1%. A big jump, and outside the top end of the RBA’s range, but remember base effects from the pandemic in Q2 last year. Consensus estimates, as well as RBA forecasts, have CPI falling back toward +2.0% by year end, and then +1.6% to +1.8% for 2022.
- Offshore Macro – overnight (curtesy of CBA), “US data was overall stronger but some indicators were below expectations; durable goods orders ex Transport up 0.3% MoM (0.3% prior, 0.8% exp), capital goods orders up 0.5% MoM (0.1% prior, 0.7% exp) and house prices rose 1.81% in May and 17% YoY (Corelogic 20-city index). The Conf Board consumer confidence (129.1, 123.9 exp, 128.9 prior) rose slightly, reached a new post pandemic record and is now in line with pre-pandemic levels. The expectations measure was stable (108.4) but the prior month was revised to 108.5 from 107”.
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Scott Rundell, Chief Investment Officer
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