Mutual Daily Mutterings
Quote of the day…
”I can resist everything except temptation …” – Oscar Wilde
“Can we stop talking about Will Smith now…?”
Overview…”a quiet news day…”
- Moves: risk on … stocks ↑, bond yields ↔, credit spreads ↓, volatility ↓ and oil ↓….
- Most European bourses gained ground, as did US markets by, but it was a choppy session and there wasn’t a lot of conviction in either direction with the narrative suggesting “investors weighed risks to the economic recovery from inflation and tightening monetary policy.” No @#$% Sherlock. It was a slow news day, and light on data.
- Oil sunk as Chinese demand took a hit because of expanding COVID driven lockdowns. While we rile against the lockdowns we had in Victoria under the jackboot of Chairman Dan, no one does a lockdown like China. It’s effectively house arrest for entire cities. Despite elevated prices, OPEC+ still sees no need to adapt its supply plans, and is expected to ratify another modest hike on Thursday.
- Bond yields saw movement in either direction out the long end, with some meaningful intra-day swings (±7 bps) vs where they started. US ten-year yields hit session lows of 2.41% and session highs of 2.55%. In the end, a very, very modest rally by the time traders put down their HP 12CP calculators down. At the front of the curve however, two-year yields rose following a weak overnight auction. Also, the 5s30s curve inverted intra-day for the first time since 2006.
- Talking heads…”this is a difficult market to make sense of because it’s unusual that we have so many factors at work. But I think at the end of the day, the American economy remains strong. American consumer demand remains strong. We’re seeing continued improvement in the job market. All of those indicators do seem to imply that there is a healthy foundation in terms of the US economy.” A glass half full view of the world…must be an equity investor.
- Sarcasm aside, more and more of the smart-money posse seem to be coming to the conclusion that markets (stocks) have already largely priced in bearish bond moves. Members here include Goldman Sachs and JP Morgan, both of whom have reassured their client base that there’s no need to fret about the US treasury curve “just yet.” Meanwhile, over at Citi, they think the Fed’s Powell is trusting the wrong yield curve to justify possible +50 bp hikes, suggesting the Fed is ignoring the fact that forward curves are deeply inverted, signalling recession risk. They see odds of a US recession in the next year at 20% (vs 9% in February.
The Long Story….
- Offshore Stocks – European stocks closed modestly higher, although momentum into their close was weak / negative. US markets took note of that momentum and opened firmly in the red, but then bounced and rallied into the close….not sure of the catalyst to be honest. Around 60% of the S&P 500 gained ground and only three sectors failed to advance. With oil plunging, no surprises in seeing energy as the underperformer on the day, down -2.6%. Materials (-0.5%) and Financials (-0.3%) were also headwinds for the broader market. On the greener side, Discretionary (+2.7%) led all comers, followed by REITS (+1.3%) and Tech (+1.2%). Despite all the headwinds and uncertainty with inflation, monetary policy tightening and the war, the S&P 500 is only -4.6% off its all-time highs (set in early January this year).
- Local Stocks – very modest gains yesterday in the ASX 200, up just +0.1%, closing well off its intra-day highs. The rally was as shallow as it was positive. More stocks fell than gained, 60% vs 40%, and the only reason the broader index gained ground was Materials (+1.3%) and Financials (+0.6%), who occupied the top two grid positions. Beyond these two there wasn’t much joy in the market on the day. Tech (-2.7%), Telcos (-1.2%), and REITS (-1.2%) occupied the bottom of the league tables. Despite Materials and Financials (both representing ~50% of the ASX 200) falling in US markets, local futures are pointing to yet another positive session today, +0.5%.
- Offshore credit – modest tightening across the board, a basis point or two here and there in cash markets, but no meaningful change in any observable narratives. Similar in synthetics with both the MAIN (EU) and CDX (US) tightening 1 – 2 bps. Senior Financials (CDS) fell -1.3 bps, while Subordinated Financials (CDS) fell -3.6 bps. Primary action was modest, just US$4bn across two deals announced. Borrowers paid about 6 bps in new issue concessions on order books that were 3.3 times oversubscribed. “March supply is 48% above $135bn consensus estimates with three more potentially active sessions as the spectre of rising funding costs and war-induced uncertainty have incentivized borrowers to accelerate funding plans.” (Bloomberg)
- Local Credit – not a lot to talk about today, at least with regard to secondary market action – major bank senior and major bank tier 2 both closed unchanged. The highlight, or most interesting event on the day was Suncorp Group Limited (A+/A2) launching a 15.2-NC-5.2 year tier 2 line. This is out of the holding company, so will likely be on lent to the insurance business. While it’ll carry the same security rating (BBB+) as major bank tier 2 (but one notch lower at the issuer level), we expect it to come at a premium to the major curve. How much so remains a point of conjecture. No guidance provided at this stage, but for me, my gut says +225 bps area, give or take – the longest dated major bank tier 2, the NAB Nov-26, is quoted around +178 bps. The SUN deal is expected to be around $250m, so small and most of the line will likely find its way into the bottom draw.
- FRN’s outperformed Fixed Credit yesterday, by a healthy margin. The Bloomberg AusBond Credit (Fixed) index returned -0.74% yesterday, with MTD losses at -3.26% and QTD and YTD losses at -4.84%. All representing monthly, quarterly and YTD record losses for fixed rate credit. On the other hand, the Bloomberg AusBond Credit (FRN) index returned just -0.01% yesterday, taking MTD losses to -0.29% and QTD and YTD losses to just -0.28%. Unlike its fixed rate credit sibling, FRN’s have had a worse month (-0.93%, March 2020) and quarter (-0.65%, Q1’2020) in the past. With BBSW rising, the income component of FRN returns will continue to improve, with only modest capital impact. At this stage I’d like to remind readers that Mutual Limited has a range of FRN funds, with varying degrees of risk and return targets.
- Bonds & Rates – as Herb Morrison once said, “oh, the humanity…,” local bonds took it in the neck, back and a swift but brutal kick to the delicate undercarriage yesterday. Taking leads from US markets on Friday night, local yields spiked +10 – 11 bps on the open, pulled back a bit for a breather and then went hell bent for leather higher. Three-year yields surged +18.5 bps to 2.41% and ten-year yields rose +12.5 bps to 2.91%, within spitting distance of that 3.00% level I mentioned recently. BBSW 3M also rose to above 0.20% for the first time since Q1’2020, with OIS markets now pricing up to two rate hikes by July 2020. We might, just might, see a modest reprieve today with treasuries dropping a basis point or two overnight, but it was negligible, and mainly in the back end. The front of the curve actually sold-off (UST 2’s +5 bps).
- A$ duration managers would have been slaughtered in an outright sense yesterday. The Bloomberg AusBond ACGB index (BATY0 Index) lost -0.79% on the day, taking MTD losses to -4.36% (and -6.59% YTD), while the Semi’s index (BASG0 Index) lost -0.73% on the day, or -4.00% MTD (and -6.35% YTD). Carnage. At this stage, fixed rate indices, so credit, ACGB’s and Semi’s, are all substantially in the red and on track to report the worst Q1 return by a comfortable margin. For example, the ACGB index is down -6.6% with two days left in the quarter. The prior worst Q1 was last year, -3.9%, and before that the worst was -0.7% in Q1’2009.
- Macro – “Australian retail trade for February is released today (11:30am Sydney time). But focus will likely be on the 2022/23 Federal Budget, which our Australian economic team expect will show a deficit of $A70bn (7:30pm Sydney time). The Budget will be important to watch for the future of the cash rate. Specifically, looser fiscal policy could generate more inflationary pressures in the economy which could in turn see the RBA take the cash rate into a contractionary territory. Our baseline is for the RBA to raise the cash rate to 1.25% in early 2023.” (CBA)
- Another view…”substantial improvement in the deficit: We expect the 2022-23 Budget to be announced this evening to show a substantial improvement in the fiscal position, with the deficits revised down by around AUD90bn over the five years from 2021-22. This improvement is not driven by cuts to spending with around AUD25bn of new policy spending expected. Though this Budget will show a faster tightening in fiscal policy than at MYEFO, fiscal policy settings are still stimulatory for this stage of the economic cycle.” (ANZ)
- And…”as for the Federal Budget, we expect the numbers to reflect a shift in the government’s fiscal strategy away from emergency support towards stabilising or reducing debt-to-GDP, but with some scope for additional spending given the pre-election nature of the budget and the focus on cost of living (note the next election must be held by 21 May and given the 33-day notice period between calling and holding the election, we expect the election to be called within two weeks of the budget). The press has leaked that the government will introduce a temporary reduction in fuel tax excise for the next 6 months, to reduce the cost of petrol for consumers and businesses – and give low- and middle-income earners and pensioners and welfare recipients a one-off cost of living payment. There is also likely to be more infrastructure spending announced – including increased defence spending. For the underlying cash deficit, we forecast $77bn in 2022-23 (from $98.9bn), falling to $55bn in 2023-24.” (NAB)
Source: Bloomberg, Mutual Limited
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907