Mutual Daily Mutterings
Quote of the day…
“If you are travelling in a spaceship that is travelling at the speed of light, and you turn on the headlights, does anything happen?” – Steven Wright
“Pushing @#$% Up Hill”
Overview…”US markets closed…”
- Moves: risk on… stocks ↑, EU bond yields ↑, curve ↑, credit spreads ↓, volatility ↓ and oil ↑….
- US markets (physicals) were closed for the Memorial Day long weekend, although futures were active. Both NASDAQ and S&P 500 future rose, suggesting perhaps the recent run of up-days may have some legs yet. The S&P 500 has erased its May losses and as of Friday last week halted a run of seven weekly declines. Some end of month institutional rebalancing has helped the cause. No movement in US treasuries, yet European bonds took it in the neck (+7 – 9 bps in 10Y) after German inflation came in hot and heavy (all-time high), stoking fears the ECB will have to tighten monetary policy more aggressively than previously expected. European stocks shrugged off inflationary fairs, although they did pared back gains. Nevertheless, European markets remain on a heater and should book their best winning streak since March. Brent crude surged past US$120/bbl (+1.9%) amid EU haggling and as China eased lockdowns.
- “Traders are pondering whether the bottom of the sell-off is near as investors have been buying the dip after one of the worst starts to the year for equities. However, a wall of worries remains from hawkish central banks underscoring fears of a recession escalating food inflation from the war in Ukraine and China’s lockdowns stunting economic activity.” (Bloomberg). Speaking of inflation, I was out buying bits and pieces for Sunday’s roast and was floored at the cost of green beans. Normally I don’t take note of vegetable prices, but at $28/kgs, that’s a bit rich, even if they are my wife’s favour vegetable!
- Talking heads…”we are in the middle of a bear-market rally. I think the market is going to be trading range-bound trying to figure out how soon is that recession coming or how quickly is inflation going down?” On the latter, for what it’s worth, consensus has the peak in inflation in the rear vision mirror, although risk of being wrong here is elevated in my opinion.
- Fed speak…”Fed Governor Christopher Waller said he wants to keep raising interest rates in half-percentage point steps until inflation is easing back toward the US central bank’s goal. “I support tightening policy by another 50 basis points for several meetings,” he said in remarks prepared for delivery on Monday in Frankfurt. “In particular, I am not taking 50 basis-point hikes off the table until I see inflation coming down closer to our 2% target.” (Bloomberg)
- Some welcome regulatory changes for European banks…”banks based in Europe’s banking union would see cross-border exposures within the bloc treated as domestic ones, which are considered less risky, according to documents from the Basel Committee on Banking Supervision.” (Bloomberg). The planned changes may also facilitate cross-border takeovers. European bank shares rose.
The Long Story….
- Offshore Stocks – having some technical difficulties this morning with my Bloomberg, so borrowing some comments from elsewhere rather than formulate my own inane drivel…”after opening higher, European equities managed to close on the green led by gains in consumer discretionary (+1.96%) and IT sectors (+1.5%). European banks also traded with a positive tone after global regulators agreed to start treating the euro area as one market in determining capital requirements for its top lenders (regional banks closed +1.47% higher). The Stoxx 600 index ended day +0.59%, its fourth consecutive day of positive returns. US equities futures followed a similar pattern to European equities, eking out small gains on Memorial Day. The S&P 500 mini closed +0.52% higher while the NASDAQ 100 mini was +1.043%.” (NAB)
- S&P 500 relative strength indicators
- Local Stocks – solid gains yesterday in the ASX 200, up +1.5% with a solid across the board rally, 85% of stocks gained ground. Only Utilities (-0.7%) struggled to get out of bed, while Tech (+4.6%) bounded out of bed like it had been poked with an electrified poking device. Materials (+2.3%) did all the heavy lifting though, accounting for ~40% of the broader index’s gains. Healthcare (+1.9%) had a good day, as did Financials (+0.6%) – the latter being the second largest contributor to the market’s gains. Not that it’ll have any immediate impact on markets, but the Labor party formally gained majority control in parliament yesterday, with the party controlling 76 seats out of 151. After a few positive sessions, the ASX 200 has surpassed its 100D moving average and is closing in on its 50D and 2100D moving average, although as a s sign of how uncertain the outlook is, and recent tight trading ranges there is little distance between the 50D, 100D, and 200D moving averages, 7256 – 7323. Still a lot of uncertainty reflected in trading behaviours. ASX 200 futures are down a smidge.
- ASX 200 relative strength indicators…
- Offshore credit – donuts in the cash space given the long weekend in the US, while in CDS land, and only in MAIN and Senior & Sub Financials, CDS is lower by a couple of basis points.
- Local Credit – the main event of note yesterday was Macquarie Bank Limited holding investor calls ahead of a likely new 10-NC-5 tier 2 deal, which we suspect will launch sometime this morning. Elsewhere it was very quiet with small mirrors placed under sleeping trader’s noses to check they were still awake. They were, just. In the senior space, no notable change to the curve. Bloomberg has the recent WBC May-27 line at +103 bps mid, yet some traders have the line quoted at +110 bps. Major bank senior 3-year paper is running around at +86 bps per Bloomberg. Optically major bank senior curves are pretty linear (chart below), which suggests the recent NAB 3-year remains cheap to the curve, or alternatively the recent WBC 5-year, which is being quoted at +103 bps, is expensive – thus the +110 bp quote from some traders. What we can observe from the chart is an absence of 4-year maturing paper…not a common tenor for bank issuance, but you never know.
- Back to the MacBank tier 2 deal, the bank launched as I was about to send. We expected the deal will come with initial price talk of +250 – 270 bps, but it came at +275 bps. Given the starting point, I’d say +260 -265 bps is likely final price, with the final level dependent up whether they print to demand or leave a little on the table. Under normal circumstances, I would say fair value is around +250 bps, however, given constrained market conditions, we’re seeing more on offer. MacBank has two outstanding A$ tier 2 lines, a $750m May-25 call (at +215 bps) and a $750m Jun-26 call (at +226 bps). Against its own curve, a deal around +260 – 265 bps is fair to good value, offering +35 – 40 bps of pick up for the extra year. Note, under normal circumstances, my rule of thumb is +10 – 15 bps per ratings notch and same for each year of extra tenor (in the investment grade space). However, given prevailing liquidity conditions and underlying risk sentiment, an additional premium is warranted. As to how much this is, well that’s quite subjective at the moment. Also worth noting, the deal could include a fixed tranche, which would likely see a coupon just shy of 6.0%. When was the last time you saw BBB risk for 5 years with a coupon approaching 6.0%?
- Comparing to major bank tier 2…while we’re seeing CBA’s Apr-27 quoted at +217 bps in EOD trader’s commentary, we also saw it being peddled around markets are +223 bps yesterday. If we split the difference and say +220 bps for the CBA deal, adjust for the additional month’s duration and one notch rating difference (BBB+ vs BBB), we think +260 – 265 bps for the new MacBank deal is still fair to good value, a +40 – 45 bps pick up over the CBA line. MacBank has signalled it will do one tier 2 deal annually in A$ (and one offshore) as it builds its TLAC requirement. This new deal will likely reprice major bank tier 2 spread wider also, which is less than ideal.
- Elsewhere in the tier 2 space, trader EOD commentary signalled minimal spread change on the day…traders…”we close the curve unchanged though note light inquiry from local accounts on the day and expect levels will reset upon the release of MacBank IPG’s tomorrow. With the majors having secured sizable funding via senior/covered issuance and much of the investor base waiting for primary supply to clear the air, we expect that a sensibly priced deal should help restore secondary liquidity in this asset class.”
- Major bank senior curve…
Source: Bloomberg, Mutual Limited
- Major bank tier 2 spreads…
Source: Bloomberg, Mutual Limited
- Bonds & Rates – US markets closed overnight and with no leads of any significant from Friday night, local bond markets did little yesterday. I’ve pilfered some comments from my former colleague Martin ‘McFly’ Whetton’s Daily Wrap yesterday, who has articulated the current situation in bonds well, as he often does. “There’s been a cooling of asset markets as leading data has softened, making the case for a slower path for rate hikes. 50 bps will still be delivered by the FOMC and RBNZ, while the RBA should stick to 25 bps moves. Talk of inflation peaks is likely to bring a steepening of curves as the front ends reduce the 2023 cycle. Outright markets have calmed, at least in the sense of the directional bias. The flame for higher yields hasn’t fully been extinguished, but right now appears to be doused by a few rumblings on forward looking data. Picking through the entrails of the US reporting season, the buoyant US consumer, enjoying solid wage gains against having a fixed rate mortgage is not as carefree as some would have you believe. Discretionary spending is peeling back, a lesson for all watching.”
- A$ Fixed Income Markets…
- Local Macro – local credit growth data for April due out later this morning (11:30am) with consensus expecting +0.5% MoM (vs +0.4% MoM in March) and +8.0% YoY (vs +7.8% YoY in March). At +8.0% YoY private sector credit is running below long run averages, but is well up on recent levels – particularly post GFC averages of +4.2% YoY. The data is at the end of April, so no RBA rate hike impact or election result effects, so take with a grain of salt. I’m more interested in May, or even June data to see have the RBA rate hike has cooled borrowing intentions or not. We met with CBA treasury yesterday and they advised that mortgage applications had slowed post the rate hike.
- RBA Private Sector Debt Growth….
- Offshore Macro – “German inflation hit another all-time high, adding pressure on the ECB to scale back stimulus. Consumer prices jumped 8.7% in May from a year earlier, accelerating from April’s 7.8% clip. Consensus was for an 8.1% advance. German bonds declined, with benchmark 10-year yields rising 8 bps to 1.05%. Up next: Euro-area CPI probably rose 7.8% year on year, up from 7.5%.” (Bloomberg). “China’s PMI readings may justify Premier Li Keqiang’s anxiety over second-quarter growth, spurring the government and PBOC toward stimulus, Bloomberg Economics said. While the indexes are likely to be better than in April, they probably remained mired in negative territory in May — consensus is for 49 for manufacturing and 45 for non-manufacturing. The pressure on the services sector is a clear negative for employment, BE said.” (Bloomberg)
Source: Bloomberg, Mutual Limited
Click here find the full PDF from our Chief Investment Officer’s daily market update.
Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907