Mutual Daily Mutterings
Quote of the day…
“Accountant: noun [uh-koun-tnt], someone who does precision guesswork based on unreliable data provided by those of questionable knowledge”…happy financial new year eve
Chart du jour… spread changes, global…
“Out of Work(ers)…”
- Stocks, bonds, and pretty much everything else traded with little direction overnight, although the key US stock indexes and most European bourses were able to hold on to small gains. Whether this is just month-end, quarter-end and half-year rebalancing, or lack of conviction headed into Friday’s US jobs report or the start of northern hemisphere summer doldrums, remains to be seen, but tactically markets are experiencing some aimless trading.
- At risk of being labelled a ‘Henny Penny’, resilience in markets is astounding, with risk of correction or some downward momentum elevated. Valuations are running well ahead of average, yet we’re in the midst of what many expect to be the peak in the post pandemic earnings recovery. The Fed has drawn a mildly hawkish line in the sand, so monetary policy is likely as good as its going to get. And, we’re seeing yet another rise in covid cases globally, a particularly more virulent strain. Amongst all this, stocks are notching up new all-time highs and credit spreads are at or near all-time tights. Bond yields on the other hand remain accommodative, but well off their lows.
- Talking heads….“investors are probably taking a minute to reassess their near-term outlook…with momentum fading, stocks likely need a meaningful catalyst from here.” And, its really hard to identify what catalyst will be. But, if you think it’s not going to get any better, where do you go? Bonds? If inflation is truly a problem, then no. Under the mattress? See inflation conundrum? Have you heard about our saviour, FRN’s?
- Some end of financial year humour, aka space filler because it was a slow news day. “I’m glad I learned about parallelograms at school instead of how to do taxes. It’s really come in handy this parallelogram season”…
- Offshore Stocks – US stocks moved sideways in choppy trading amid concerns over elevated valuations and rising delta variant infections in different parts of the world. Volumes also tapered off, which is kind of ‘normal’ for this time of year – northern hemisphere summer – although the lull usually starts the second week of July and runs through the end of August. This year is probably not a normal year with uncertainty surrounding the Fed direction, and the like, normal trends are maybe put on hold. Any-hoo, last night the three main indices were able to keep their noses above water, just, and in most instances they did have to hold their breathes briefly earlier in the session. It was only a ‘surface’ rally, with a look under the hood causing some tsk, tsk, tsking from the mechanic! Just over half of the S&P 500 closed lower on the day, and only three sectors advanced, Tech (+0.7%), Discretionary (+0.2%), Healthcare (+0.1%). Utilities (-1.7%), Telcos (-0.5%), and Energy (-0.5%) were the main protagonists trying to upset the applecart. Financials also lost some favour, down -0.3% despite dividend increases. E-mini’s are marginally up.
- Local stocks – a very modest down day in local markets yesterday with 55% of the ASX 200 stocks closing lower. Despite the fall in the index, more sectors gained than fell, six to five with Tech (+0.7%), Healthcare (+0.5%) and Staples (+0.4%) trying to keep the party pumping. However, Utilities (-1.3%), Energy (-0.8%) and Materials (-0.7%), among others, were intent on ending the party. Volumes, as expected for this time of year (eve of FYE) were lower than average. With one day left to go in the financial year, the ASX 200 is up +23.8%, led by Discretionary (+42.0%), Tech (+40.0%) and Financials (+35.7%), while Utilities (-20.4%) is the only sector in the red. Futures are signalling a firm open.
- Offshore Credit – the main event was a US$8bn issue from Salesforce, for M&A purposes, which was 3.5x oversubscribed. Minimal new issue concession was given and spread compression was -21 bps. The deal, the only one on the day, makes up around half of the low end of this week’s projected issuance, US$15bn – US$20bn. Over the past year, some US$795bn has been priced in US IG markets, down -31% YoY, but last year wasn’t normal and Q2 2020 was characterised by record issuance as firms cashed up to deal with the evolving COVID pandemic.
- Local Credit – very quiet the day before the day before financial year end, probably reflective of traders bunkering down at home in Sydney to avoid the zombie apocalypse covid outbreak unfolding outside their door. Today is also the end of the RBA’s Term Funding Facility, ADI treasurers will be collectively holding a wake at 2pm, and a minute’s silence is requested. Major bank senior spreads are heading into financial year end at their post GFC tights, with the Jan-25’s at +32 bps and 3-year paper at +24 bps. In the tier 2 space, no change yesterday, +127 – 129 bps for the 2026 calls and +118 – 122 bps for the 2025 calls. Now the bets start on when the first major bank senior deal will come, and from whom.
- Bonds & Rates – on US treasuries, some comments from NAB…”bonds in limbo as rate hikes still some way off and data surprise is mixed. US data surprise has essentially been drifting side-ways since early April and is currently near the lower end of this range. Aside from the recent re-pricing post the FOMC meeting the lack of clear upside or downside surprise in US data is contributing to the range bound trading in US treasury yields”. Locally yesterday, a modest rally and a bull flattener as the local covid situation looks to deteriorate. US treasuries are offering nothing in guidance for local markets. ACGB 10’s started the financial year at 0.87%, hit lows of 0.72%, highs of 1.92% and will open today at 1.53%, so +66 bps higher. The ACGB 3’s have been on a similar journey, started at 0.25%, hit highs of 0.43% (recently), lows of 0.10% and is now around 0.41%, so +16 bps higher, meaning the 3s10s have steepened +50 bps. Predicting what the year ahead will do is fraught with danger given all the uncertainties, but for what it’s worth consensus expect the cash rate to be at 0.10% this time next year, so no change. The three-year bond is expected to be back at +0.24%…I’m calling unlikely on that one, while the 10’s are forecast to rise to 2.09%.
- Offshore Macro – the main data print this week (for offshore markets) is probably the US non-farm payrolls (Friday). Consensus expect +700K jobs to be added, up from +559K last month and for the unemployment rate to drop to 5.6% from 5.8%. If correct, this is reflective of strong employment growth and further evidence the US economy is returning to relative normal (their normal). With employment a major consideration for the Fed, this is further evidence, again if correct, of the Fed being pushed closer to tapering, and ultimately tightening. While there are still ‘millions’ of Americans out of work, the pace of improvement suggests employment gaps will close quickly as the vaccine rollout reaches critical mass and the economy truly opens up. “All told, the strength of the labour market means that the Fed is well on track to announce tapering by August or September. The risk is that the Fed starts raising rates next year, a possibility the equity market seems too happy to ignore at the moment” (Bloomberg).
- Local Macro – today we have private sector credit growth (for May), with consensus at +0.3% MoM and +1.6% YoY, an improvement on April’s +0.2% MoM and +1.3% YoY. In the same vein as bonds above, consensus macro expectations for the year ahead (high level). CPI (YoY) is forecast to be +1.8% (+1.1% last), under the RBA’s target range, which looks tough to follow given some recent price trends, however the ‘transitory’ theory is defendable…until it’s not. Unemployment is forecast to fall to 4.7% (5.1% last), which is easily defended and in my mind, likely. GDP growth is forecast to hit +3.4% YoY by June 2022 vs +1.1% last, again defendable given base effects if nothing else.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907