Mutual Daily Mutterings
Quote of the day…
“Some people always know the price, but not the value”– Oscar Wilde
Chart du jour…10-year yields…
Overview…”the rise of Omicron…”
- Heightened financial market risk aversion is the dominant theme on concerns the rapid spread of a new coronavirus variant, named after the new Transformer toy I think, Omicron, will derail the global economic recovery. A sell-off kicked off in our time zone, which rolled into Northern Hemisphere markets Friday night our time. A tough day on the tools for sure, especially for stocks as volatility surged – the VIX closed up from 18.6 to 28.6
- Thought to be more transmissible than the Delta variant, the new mutant strain doesn’t appear to be any more sinister in a symptoms sense, but given the number of mutations may be resistant to current vaccines. Nonetheless, it’s rise is causing select European nations to consider dusting off the ‘lockdown’ playbook. Consequently, safe haven bonds rallied hard across the board, and market pricing for rate hikes next year moderated. Credit spreads drifted wider, but it wasn’t a rout. Oil was well and truly smoked, down -11% as fear of lockdowns threaten the prevailing demand-supply dynamic.
- Talking heads…”the market viewed the pandemic essentially in the rearview mirror….what this unwelcome news has done is challenge that assumption. And the assumption was that we go from pandemic to endemic where we learn to live with COVID, the macro and market impact is pretty limited and diminishing over time.” To support this view, when listing their investment threats to the equity market in their year ahead outlooks, most Wall Street strategists didn’t list COVID anywhere near the top, some not even at all. And, in the latest Bank of America Corp. survey, fund managers had ranked COVID as only the fifth-biggest tail risk, behind inflation, central bank rate hikes, stalling Chinese growth and asset bubbles.
- More talking heads, a more glass half full view…”we are usually buyers of market dislocation not rooted in fundamental facts….Africa has some of the lowest vaccination rates in the world and this will most likely push more folks to get vaccinated which is a positive longer term….this should not derail the global recovery.” So, while risk tolerance was extremely high heading into this latest whoopsie-daisies moment, that backdrop is the direct result of two years of monetary policy conditioning, which has in turn rewarded dip-buyers, which has worked…so far.
The Long Story….
- Offshore Stocks – nowhere to run, nowhere to hide….93% of S&P 500 stocks sank into the red and the best performing sector was Healthcare (-0.5%), followed by Staples (-1.4%) and Utilities (-1.6%). Energy (-4.0%) was poleaxed, while Financials (-3.3%) faced some furious selling as bond yields plunged. Industrials (-2.7%) rounded out the top three underperformers. Futures are signalling more pain ahead. Apparently, it is the worst post-Thanksgiving performance for the S&P 500 since 1941. Even with the sell-off, valuations are still frothy, and if this new variant is in fact a game changer – more virulent and resistant to current vaccines – then there is still some potential meaningful downside. The market is arguably more stretched now than it was at the 2020 turning point (March) with the S&P 500’s forward price-earnings ratio around 2 points above where it was almost two years ago. While it’s too early to predict the economic and policy implications from the new variant. The next market resistance point is 4527 (-1.4% from Friday’s close), which looks likely if the tone persists, after that it’s 4480 (-2.5%), which is the 50D and 100D moving average. After that it’s a free-fall to 4289 (-6.6%), the 200D moving average.
- Local Stocks – duck and cover, duck and cover…the local market was one of the first to begin pricing in the new transformer variant, dropping -1.7% with nine-in-ten stocks bloodied and bruised. Staples (-0.6%) performed best, followed by Utilities (-0.9%) and Telcos (-0.9%). Requiring some a big hug and special TLC was Energy (-4.6%), followed by Tech (-2.3%) and Financials (-2.0%). The ASX 200 Bank index is now in bear market territory, having dusted almost -11.0% since the end of October. Over the same time frame the broader market is down just -2.0%. Despite the local market being one of the first cabs off the rank in pricing in the new variant and all the trimmings, the rout is not done yet, futures are down -1.4% and the next (possible last) resistance point is 7218 (200D moving average) vs Friday’s close of 7279, or -0.8%.
- Offshore Credit – CDS markets punched wider on the rise in volatility and new COVID fear. The CDX and MAIN were both +4 bps (and change) higher, with the EUR Snr Financials index was +5 bps and the EUR Sub Financials index +10 bps wider. In cash markets, high yield bonds had no friends, with funds losing US$1.3bn on the week (per Refinitiv Lipper data). Spreads punched wider as a consequence, with CCC credits +20 bps wider, and single-B credits +18 bps wider. Thankfully, primary markets were shut for thanksgiving.
- Local Credit – traders…”a strong risk off tone to the local market today (Friday), spurred by news of a new COVID-19 variant emerging from South Africa. Client interest was light and street liquidity greatly diminished as rates pushed higher”. Major bank senior paper closed +2 bps wider on the week for the most recent issue, the NAB Aug-26, now out to +61 bps. The Jan-25’s are +1 bps wider at +43 bps. In the tier 2 space, a little more movement on the week with the 2026 callable paper at +141 – 144 bps, or +3 – 4 bps wider on the week. The 2025 callables are wider again, +5 bps to +131 – 133 bps. While there is uncertainty around how affective vaccines are against the new variant (not very from what I’ve read), sentiment will remain subdued and spreads will potentially drift wider until there is some clarity.
- Bonds & Rates – inflation be damned, bonds were cool again! A massive rally in everything north of the 3-year part of the curve as the omicron COVID variant put the fear of god into investors. Despite the strong rally, implied rate hike pricing hardly budged (chart below), although other sources of rate hike pricing have loosened up a bit. On the assumption that many investors were short heading into this situation, it’s safe to say this rally may have some legs as said investors scramble to cover shorts. In offshore markets, it was much the same, a massive rally with US treasuries (10-year) falling the most since March last year. The rally will likely continue today.
- Macro – a busy week or macro data this week, although depending on how bad the new COVID variant really is, this data could be irrelevant. We have Q3 GDP locally, with market median forecast for a -2.5% QoQ print. We also get building approvals, housing finance and RBA Deputy Governor Debelle is on a panel at the 2021 Symposium on Indigenous Economies. Credit growth is also out tomorrow. For Europe we get updated inflation data while in the US there is payrolls while Fed Powell is giving a joint testimony with Treasury Secretary Yellen before the Senate and House on Tuesday.
Click here to find the full PDF from our Chief Investment Officer’s daily market update.
Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907