Mutual Daily Mutterings
Quote of the day…
”Right now I’m having amnesia and déjà vu at the same time. I think I’ve forgotten this before” – Steven Wright
“Buy High, Sell Low…”
“Yep, please neurolise me, so sick of this story…”
Overview…”All we are saying is give peace a chance…”
- Moves: risk on … stocks ↑, bond yields ↔, credit spreads ↓, volatility ↓ and oil ↓….
- A fairly robust rally in stocks overnight, led by European markets with US markets taking the baton and running with it. Optimism around Russia vs Ukraine peace talks has been thrown at the wall as the core catalyst for gains, and it seems to have stuck for now. Bonds were mixed, with yields drifting wider across European markets, but a modest rally in US long end treasuries following optimism that “peace” will ease pressure on oil prices (so far so good) and inflation expectations (time will tell). The front of the treasury curve actually sold-off with the 2s10s further inverted. While I hope for peace, I’m sceptical.
- The war…”prospects for scaling back the war in Ukraine boosted risk sentiment. Talks between Russia and Ukraine failed to reach agreement on a cease-fire, but offered a potential pathway to a meeting between Vladimir Putin and Volodymyr Zelenskiy. Russia said it was cutting back military activity near the capital Kyiv and the city of Chernihiv, and its chief negotiator said Moscow would take steps to “de-escalate” the conflict.” (Bloomberg).
- Talking heads…”you’re getting a look at how the market might respond to de-escalation. I do think we’ll get more headlines around slow-but-sure progress and discussions of at least being willing to come to the bargaining table becoming more frequent, and that will be the driver of intraday volatility.” I’ve said in the past that the war will lose relevance for markets, which I stand by despite the modest bounce last night. However, I should have clarified that any de-escalation of the conflict will likely trigger a relief rally, but it’ll be brief – which is what we have seen last night.
- Fed speak…”Philadelphia Fed Bank President Patrick Harker said he expects a series of “deliberate, methodical” rate increases this year, but said he is open to a half-point move in May if near-term data shows more inflation.” There are seven voting members on the Fed’s Board of Governors, and I reckon at least four current voting members, including Powell, have recently (last two weeks) voiced their comfort with +50 bp rate hikes. I would argue such is presently priced in.
- And, last night we had the Federal Budget. Not a lot of surprises, with consensus that it wont really be market moving.
The Long Story….
- Offshore Stocks – solid gains in Europe and US markets given peace hopes, with some indices in Europe up as much as +3.0%. The DOW rose +1.0%, the S&P 500 by +1.2% and the NASDAQ by +1.8%. Within the S&P 500 some 87% of stocks rallied and only one sector, Energy (-0.4%) retreated. REITS (+2.9%), Tech (+2.1%), and Discretionary (+1.5%) took out the podium on the day. Futures are up.
- Street commentary…”JPMorgan sees room for more stocks upside, saying that if anything, there’s too much negativity rather than complacency in markets. Three reasons for optimism: Equity and credit have historically done well at the start of tightening cycles; the real rate is still extremely negative; and some central banks are still being supportive. Morgan Stanley is more bearish, saying the equity and credit market rally on Russia-Ukraine optimism is just a temporary blip.” (Bloomberg)
- Local Stocks – reasonable gains across the ASX 200 yesterday with 74% of stocks gaining ground and just two sectors retreating, Energy (-0.6%) and Materials (-0.2%). Leading the charge was Tech (+3.3%), Discretionary (+2.1%) and Healthcare (+1.8%). Relative strength indicators continue to edge toward ‘overbought’ territory, although at this stage there doesn’t appear to be much on the immediate horizon to potentially derail prevailing momentum. Nevertheless, I’m wary. Forward PE’s are back up to 16.5x vs pre-pandemic averages (5 year) of 16.1x. Forward EPS is up to $453/per share, up +11.6% on FY’21 actual. Ignoring my concerns, futures are up +0.8%
- Offshore credit – it’s official, US IG Corporate (-4 bps) and Financials (-2 bps) spreads are now inside pre-war levels, as are EU IG Corporates (-13 bps) and Financials (-12 bps). On the day, spreads were tighter across the board, including in synthetics. The MAIN (EU) index closed -2 bps lower, as did the CDX (US) index. Primary markets saw four deals pricing a total of US$5.1bn. Borrowers paid less than 1 bp in new issue premiums driven by order books that were 3.7 times oversubscribed. After the war in Ukraine and interest rate volatility contributed to issuers paying elevated new issue premiums (+13 bps in average weekly new issue concessions from mid-February through last week), premiums have begun to dissipate over the last few sessions.
- Some commentary from a TD piece that came across my desk on fund’s flow and performance across US fixed income markets…”the pain in fixed income markets persists amid a hawkish Fed responding to raging inflation. The Bloomberg US Agg is already down 6.9% YTD — the worst quarterly performance since 1980 — and the US corporate index is down 9%. This explains the streak of bond market outflows, with EPFR data showing 10 weeks of outflows — the longest streak since 2008. Outflows have totalled US$47bn far compared with US$56bn during the 2013 taper tantrum. However, the fixed income universe today (ex-Fed holding) is 30% larger than in 2013. Thus, outflows have not been as large so far when adjusted for market size. This may be due to the more significant flattening of the curve this time around and a longer duration of the Agg. Nevertheless, outflows reduce overall demand for fixed income assets. This will exacerbate the rate and spread move, which is particularly the case given higher cost of dealer balance sheets. This dynamic lowers market liquidity and should keep realized volatility high. MBS spreads have widened significantly, but it may not be over due to imminent QT and will likely spill over to IG spreads too.” Cheerful, yes?
- Local Credit – Trader comments on majors…” Major Bank OpCo FRN paper had a day of somewhat directionless trading following the curve flattening of the last few sessions. Regional bank FRN paper marginally outperformed on the day closing -1bp better.” The main focus yesterday was primary with Suncorp Group Ltd (A+/A2) printing $290m a 15.2-NC-5.2 year tier 2 line. SUN has a $330m tier 2 line callable in October. Demand for the new deal was strong with a book just north of $1bn before guidance (BBSW+250 bps) was adjusted. A deal of $250m was expected, but the final print was $290m with pricing tightening into +230 bps at the close, +5 bps wide of where I thought it might price. Bloomberg has pricing at +226 bps this morning.
- From what I’ve seen of the SUN deal, by my analysis, the major bank tier 2 secondary curve (5Y callable) is around +185 – 190 bps vs the longest dated outstanding line, at +176 bps (NAB’s Nov-26). So, given the SUN deal (same rating as major bank tier 2, but different liquidity dynamics), I would suggest a major bank tier 2 deal, here and now, would launch in the vicinity of +200 – 210 bps, but price perhaps +190 – 200 bps range. Of course, three of the four majors are in blackout (or close to it), so no imminent deal from them will likely be forthcoming.
- Local spreads (AusBond Indices) continue to lag offshore markets, which have been tightening for the last three weeks now. Local spreads on the other hand have been drifting sideways at best, slightly wider at worst. This is normal behaviour by historical standards. Assuming offshore geopolitical risks and monetary policy themes persist as they are, A$ credit should eventually get the memo and begin tightening also.
- Bonds & Rates – the local (ACGB’s) front end was smacked around the chops again yesterday, with ACGB 2-year yields up +12 bps (1.94%) and 3-year yields up +7 bps (2.48%) by days end – levels not seen since 2014, where the average yield since has been 1.5%. We’re not in Kansas anymore Toto! Duration managers would have breathed a sigh of relief initially with yields up to -6 bps lower in early trading. But then late in the morning it all turned to custard with a +14 – 16 bps swing in yields, with the curve closing +8 – 12 bps higher vs where it opened. There was no particular catalyst that I could put my finger on to justify the 180 degree move. Just reflective of prevailing liquidity conditions, I guess.
- Today, if historical correlations with US treasuries hold fast, we’ll see further flattening of the curve today, with potentially more pressure on the front end. Overnight US 2-year yields rose +4 bps (2.38%), while 10-year yields rallied -6 bps (2.56%) with a clear-cut inversion of the 2s10s curve (-16 bps). The ACGB curve remains ‘normal’ with 3s10s at +43 bps (2s10s steeper again at +98 bps). As mentioned in the past, inverted curves imply elevated recession risk, although recessions typically occur once curves normalise. Not always, but enough to be statistically significant.
- Local markets will also need to digest last night’s Federal Budget, which implied a lower borrowing need for the government (against prior estimates), which may be a tailwind for bonds (yields lower) all other things being equal. Having said that, net debt is expected to grow meaningfully, peaking at around $820bn or 33.1% of GDP from 27.6%. Gut feel is we’ll see more flattening here, with all the action at the front of the curve.
- Week to date, pricing of RBA rate hikes has increased, with two hikes by July priced in…
- Macro – local data yesterday…”AUSTRALIA FEB. RETAIL SALES RISE 1.8% M/M; EST. +0.9%. February’s result saw retail sales reach their second highest level on record after November 2021 and turnover continuing to regain lost momentum caused by the peak of the Omicron outbreak in January. Most discretionary spending industries experienced strong rises once again as consumer cautiousness lessened, leading to an increase in mobility and improved business conditions. On the other hand, non-discretionary industries, such as Food retailing, saw their turnover contract this month.” (BAML)
- And…“AUSTRALIA ANZ CONSUMER CONFIDENCE FALLS TO 91.1 VS 91.2 A small decline but mixed outcomes with a large decline in time to buy a major household item but improvements in the financial situation component. Notably, Australian Inflation Expectations Highest Since June 2012, driven by the rise in petrol and food prices on the back of the floods.” (BAML)
- And now the budget… “last night’s Federal Budget spung few surprises and shouldn’t be market moving today or in the days ahead, beyond perhaps watching to see what impact if any it has on the Coalition’s near 10-point polling deficit to labour on a two-party preferred basis. As was the case in 2021-22, the Government has again chosen to spend a significant portion of the near-term improvement delivered by the better-than-expected economy but this is not repeated to the same extent further out in the forward estimates. The Budget forecasts the unemployment rate reaching 3.75% by September 2022, a quarter ahead of the RBA’s end year forecast of 3.75%. The unemployment rate is likely to move below 4.00% even earlier with NAB expecting a sub-4.00% rate next month. Year-average GDP growth of 3.5% is expected for 2022-23. (The RBA had 4.75% in the Feb SoMP), and a CPI increase of 4.25% YoY in June 2022, which importantly is +50 bps higher than the RBA’s Feb SoMP.” (NAB)
- “Major policy initiatives were broadly as expected: a temporary 50% cut in petrol/diesel excise for six months (worth $3bn); a one-off $250 cash payment to welfare and pension recipients (worth$1.5bn); and a one-off $420 cost of living tax offset for low-and-middle-income earnings (worth $4.1bn); $17.9bn additional for road and rail; and $9.9bn for cyber capabilities.” (NAB). And, on the deficit….”there is no attempt to reduce the budget deficit more quickly and fiscal consolidation/stabilisation will occur gradually with nominal growth in the economy stabilising and then reducing debt as a share of GDP. The deficit is expected to fall to $43.1bn in 2023-26 (from $79.8bn), equivalent to 1.6% of GDP.” (NAB)
Source: Bloomberg, Mutual Limited
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