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Mutual Daily Mutterings

Quote of the day…


“As they say in my country, the only thing that separates us from the animals is mindless superstition and pointless ritual”.…Andy Kaufman







Chart du jour…….China property bubble




“False Prophet…





Overviewcontainment …”

  • A mixed session offshore, but generally stocks were mostly lower with noticeable weakness across real estate and health care stocks offsetting strength in energy and financials.  Oil prices climbed to three-year highs, amid a global energy crunch.  Yields on 10-year treasuries briefly flirted with levels above 1.5%, a level not seen since June, as three Fed voters spoke of moderating bond buying and rate hikes. Credit was firm.
  • A slew of Fed talking heads out and about preaching the good word (monetary policy).  Much of the talk reinforced the message that tapering is imminent, but that rate increases are another matter.  Brainard said the labour market may soon meet her yardstick for scaling back asset purchases, but “no signal about the timing of lift-off should be taken” from that. Evans predicted one hike in 2023 and “a very gentle incline after that.”  Williams cited progress on both the inflation and labour market front in arguing for “a moderation in the pace” of bond buying.  Powell and Yellen will give their views in Senate testimony tonight (Bloomberg).
  • Still with the Fed, some shuffling of deck-chairs with two regional Fed presidents resigning / retiring, namely Rosengren and Kaplan.  This follows “embarrassing” revelations of stock trading last year at the height of the pandemic.  Recent disclosures indicated each president had showed they held and traded financial assets while the Fed was actively supporting markets through the pandemic crisis.  And they weren’t token amounts either, seven figures!
  • Evergrande hasn’t yet faded into obscurity yet, still populating the narrative to a greater or lesser extent.  To this end, the PBOC has vowed to ensure a “healthy property market” and protect the lawful rights of property owners…comments no doubt aimed at minimising any Evergrande contagion to other property developers. To this end, real lending rates are being lowered, because the recovery is “still not solid and not balanced.”  The Chinese property market is kind of a big thing…see ‘Steak Knives’ below.


  • Offshore Stocks – a mixed bag offshore, some modest gains (DOW & NASDAQ) and some equally modest losses (S&P 500 & STOXX 600).  The S&P 500 spent much of the day with its head underwater, coming up only briefly for some air.  By day’s end the index closed down -0.3% with the uppers and downers almost equal, 53%:47%.  Energy (+3.4%) was again the standout, buoyed by rising oil prices.  Financials (+1.3%) were stronger, underpinned by rising and steepening yield curves, while Materials (+0.8%) also had a better day.  REITS (-1.7%) came under pressure because of higher yields and steeper curves, while Healthcare (-14.4%) and Utilities (-1.4%) also came under some selling pressure.  Tech (-1.0%) at 28% of the index represented the largest headwinds on the day.
  • Local stocks – a modest rally in local stocks yesterday with two-thirds of ASX 200 stocks advancing, and only a handful of sectors in the red, namely Healthcare (-1.0%), Tech (-0.7%) and Utilities (-0.2%).  At the top of the heap, we had Energy (+1.8%), Financials (+1.5%) and Discretionary (+0.9%).  The expected pull-back seems to have come and gone, peaking…or troughing more accurately at down -5.0% from the mid-August peak to last week’s low. Dip buyers have driven an almost +2.0% rally since mid-last week.  This tells me there is still plenty of liquidity sloshing around the system and it’ll remain in place for at least another six months, and be added to with continued QE – albeit at a declining rate.  So, we’ll likely see more of the same over the coming quarter – two steps forward, one and a half steps backwards as investors deploy capital, with brief periods of angst and hand-wringing.  The TINA trade lives on (There Is No Alternative).  Of course, the caveat to this is “all other things being equal.”  Mixed leads from offshore, but futures (-0.6%) are taking a glass half-empty view.



(Source: Bloomberg)




  • Offshore Credit – US IG primary markets came back to life with four deals and almost US$7bn priced.  Borrowers paid less than 4 bps in concessions on order books that were 3.1x covered on average.  The backdrop in the broader markets has significantly improved since the China Evergrande sell-off early last week – although moves in secondary spreads was modest.  Cautious optimism on Evergrande containment, in conjunction with the Fed’s bullish commentary around growth, have sparked a rally in risk assets.
  • Local Credit – meh, a dull old day.  Flows were reportedly light and interbank liquidity constrained – again, it’s a time of the year thing.  No change in major bank senior or tier 2 for that matter.  Bank issuance hasn’t exactly flooded the market since the expiry of the TFF, despite accelerating credit growth (moderately).  With lockdown situations in NSW and the Socialist Republic of Victoria keeping households cautious and saving, as such deposits remain elevated.  Banks have been active issuing offshore because it’s relatively cheap to local markets, so make hay while the sun shines.  Local markets will either have to catch up (tighten) or offshore will have to widen…I’m thinking the former near term, but as we head into 2022 technical support will wane as issuance normalises, and spreads will likely drift wider.  This is a good thing for FRN funds…as long as its gradual and not aggressive.
  • Bonds & Rates – nothing to really talk about on local markets yesterday, minimal movement in yields.  Overnight, the recent sell-off in treasuries continued, which will place similar pressure on local markets today.  US 10-year yields peaked at 1.51% intra-day, +6 bps, but clawed back some losses with yields at 1.49% as I write, +4 bps on the day.  The 10’s have not tested these levels for three-months.  Two-year yields continue to drift, now at 0.28%, or +1 bps on the day.  It was a busy day in primary with two-year and five-year auctions, the latter attracting solid demand, while the shorter dated auction was scotty-no-mates, demand was limp.  Demand for shorter dated bonds in primary is heavily dependent upon perceived policy trends, so the lack of love for the two-year line is telling.  The bid/cover ratio on the two-year line was just 2.3x, the lowest since December 2008.



(Source: Bloomberg)




  • Macro – data flow was light with the focus on Fed speakers – as touched on above.  Today we have retail sales for August, with consensus expecting -2.5% MoM vs -2.7% MoM in July.
  • Steak Knives: why the focus on Evergrande, and by extension Chinese property markets?  In short, property is kind of a big thing there.  It’s big here too, probably more so in Sydney than Melbourne (just).  While I was born and raised in Melbourne, I lived in Sydney for 17 years up until the end of 2019…yep timed the move back home perfectly!  In Melbourne when you meet someone for the first time, talk generally moves to who you barrack for.  In Sydney the conversation veers onto property pretty quickly.  And the saying goes if you own just one property in Sydney, you’re neutral rather than long.  So, yeah, it’s a big thing here.  But, it’s much, much more in China.  According to data published by Bloomberg, “not only have prices been soaring, but real estate makes up nearly 30% of GDP”.  This compares to 19% for the US at the peak of its housing bubble.
  • To follow are some interesting outtakes form said Bloomberg opinion piece…obviously of interest given how much of Australia’s natural resources it buys to fuel it’s property machine…
  • Making this frothier is the fact that possibly a quarter of China’s housing is just sitting there empty, as Lara Williams pointed out this weekend. We’ve all heard of China’s ghost cities, but it turns out there are also ghost towns, ghost suburbs and ghost duplexes. And with China’s population growth slowing, ghosts may be the only residents ever to inhabit these places. Too much supply plus too little demand equals goodbye, bubble.”
  • “That brings us to China Evergrande Group. We’ve established that this massively overleveraged developer won’t be the next Lehman Brothers. Of course, we still don’t really know what banks are exposed to it and similar Chinese firms, or by how much?”. This might be a nice thing to fix before another crisis happens.  Just spit-balling here! Worse, there are many more Chinese firms that rely too much on complex supply-chain financing as Evergrande did”.
  • “But hopefully we can count on Beijing to grease the financial gears and avoid a repeat of that day in 2008 when all of the money suddenly caught on fire. At the same time, Beijing has conflicting desires that won’t make its job any easier. It wants to unwind the leverage in its system, while also shucking its reliance on fossil fuels. These are admirable goals, but they also happen to attack the two pillars of China’s economic growth for the past few decades. How will it replace these load-bearing structures?”
  • “Arguably less admirable is Xi Jinping’s reassertion of Communist Party dominance over the economy.  This, as much as any bubble or decarbonization, may be the real threat to growth. Again, this may not be a fair metaphor, but what springs to mind is that intoxicated teen on stilts trying to take off a T-shirt. He could do it, but you wouldn’t want to bet money on it”






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Scott Rundell, Chief Investment Officer

T: +61 3 8681 1907



Mutual Limited Daily Update

Mutual Funds

MCTDF – Mutual Cash Fund
Gross running yield: 0.26%
MIF – Mutual Income Fund
Gross running yield: 1.40%
Yield to maturity: 0.74%
MCF – Mutual Credit Fund
Gross running yield: 2.51%
Yield to maturity: 1.59%
MHYF – Mutual High Yield Fund
Gross running yield: 7.33%
Yield to maturity: 5.51%