Mutual Daily Mutterings
Quote of the day…
“America is the only country where a significant proportion of the population believes that professional wrestling is real but the moon landing was faked.”…Dave Letterman
Chart du jour…US margin debt vs S&P 500
Source: Bloomberg, Mutual Limited
Overview…”which way is the wind blowing today?”
- Stocks were generally higher on the session, although the DOW dragged its feet a touch, reflecting it’s higher weighting to Financials (mainly insurers) on the back of Hurricane Ida, which made landfall around the Gulf of Mexico, although has subsequently been downgraded to a tropical storm. The main issue now is persistent and heavy rain. The S&P 500 delivered yet another closing record high, its 52nd for the year. The NASDAQ also reporting a new record, aided by Apple, which itself also hit a record high. The iPhone manufacturer is now worth US$2.5 trillion, or 1.4x more than the whole ASX 200.
- Treasuries continued their post FOMC rally with modest falls in yields. Oil edged higher as offshore explorers assessed damage from the hurricane. Investors will gradually shift their focus for oil to the OPEC+ meeting later this week. Gold slipped from the highest price in more than three weeks as the rising stock market diminished haven demand. Base metals fared better, with copper futures advancing.
- With Delta cases continuing to rise in the US EU countries have voted to subject the US to fresh restrictions on nonessential travel. Elsewhere, the US military has officially exited Afghanistan with the final flight leaving Kabul later today, ending its 20-year presence in the country.
- Talking heads…“tactical investors should tilt portfolios in favour of stocks over bonds…this certainly does not mean that an exogenous shock could not cause stocks to correct. However, when looking at the recent pace of earnings, the policy environment and market history, we fail to see a compelling bear case against equities.”…over the near term, I can’t argue with that. And another…”a good economy means good earnings, so the path of least resistance has been and likely will continue to be to the upside.”
- On a sidenote, US margin debt fell month-on-month over July, down US$38bn, or -4.3%, the first monthly decline since the start of the pandemic (chart du jour). It didn’t seem to harm markets, the S&P 500 advanced +2.3% over July. Total margin debt now stands at US$844bn, still +38% higher than a year ago.
- Offshore Stocks – a shallow rally for the S&P 500 with an equal number of stocks advancing and retreating. Hurricane Ida had the most impact on the market over the day with Financials (-1.5%) down a fair bit, mainly reflecting weakness in insurance stocks (storm claims forthcoming). Energy (-1.2%) was next on the underperformers list. While oil rallied a touch, production had to be pared back because of the weather, down over 90%. Lastly, Materials (-0.2%) declined a smidge. Keeping the index in the fight on the day was REITS (+1.2%), Tech (+1.14%) and Discretionary (+0.9%). With one more session left in the month, MTD the S&P 500 has gained +3.0%, the NASDAQ +4.0%, and the DOW bringing up the rear with +1.3%. Across the pond, the EU STOXX has underperformed its US peers, advancing just +0.1%.
- Local stocks – a bit of a roller coaster morning with the ASX 200 straight out of the gates in positive territory, only to promptly give it all back and then some. The index spent an hour or two in the red, before clawing its way into modest gains following the larger than expected beat on corporate profits (see below). Materials (+2.8%) did all the heavy lifting, with bit parts played by Energy (+0.7%) and Staples (+0.7%). On the down side, Discretionary (-1.0%) fell away, as did Utilities (-0.8%) and Financials (-0.7%), with the latter doing most of the damage. Futures are pointing to modest gains today. With one more day in the month to run, the ASX 200 is up +1.5% MTD. The ASX 200 has delivered positive monthly gains every month this calendar year, this hasn’t happened for more than 25 years. So, unless we’re hit by a rogue asteroid, or something as equally cataclysmic, the local market will deliver a new record today.
- Offshore Credit – still pretty quiet in primary. In secondary, across the core cash indices spreads are wider on the month. US Corporates are +3.0 bps wider, underperforming US Financials, +1.0 bps wider. Similar themes in European IG markets, with Financials +4.0 bps wider, and Corporates +2.0 bps wider. CDS has outperformed cash, which is to be expected when equities are up over the month, with the MAIN and CDX bother 2 – 3 bps tighter over the month.
- Local Credit – traders…”a very quiet open to the week for the local secondary market with no discernible themes at play. The focus sat on the primary side with a number of corporate issuers out on screens yesterday morning”. No change to major bank spreads in senior or tier 2. Really not sure why I bother sometimes. Month to date, the AusBond Indices are tighter with Fixed Industrials -2.6 bps tighter. The Fixed Financials Index is -3.0 bps tighter, and the FRN Financials index is -3.3 bps tighter. I can’t see that changing too much today.
- Bonds & Rates – local bonds moved to the tune set by US treasuries on Friday, and with moves lower in yields again overnight, we’ll likely see yields edge lower today. Recent lows in the ACGB 10-year were 1.08% (last month) and the recent high was 1.22%, which will likely represent the highs and lows of the near-term trading range, although if the RBA sticks to its guns on its tapering plans, then we should drift toward the top of that range over the coming month. Keeping in mind, consensus estimates for 10-year yields by the end of September are at 1.37% (median, last updated 26th August). I note the last update brought in a new bond bull, with a low of 0.90% for the ten-year yields forecast. The previous low was 1.0%. One particularly bearish interest rate strategist has a target of 1.85%. Prior to the last update to these consensus estimates, the high was 2.50%. For now (today), we’ll drift lower and then we’ll re-visit the RBA’s commitment to its tapering timetable at next week’s (Tuesday) policy meeting.
- Offshore Macro – US policy commentators have had time to digest Fed Chair Powell’s Friday speech and have started putting out their two-cents worth on where to from here for tapering etc. A resonating theme is that a formal tapering announcement will come at the next meeting (September), and tapering to commence before the end of the year. The overriding theme being that the Fed is keen to move back to rate policy as its monetary tool of choice, rather than QE. Either way, the whole process is data dependent. In this regard, the data indicates the US economy moving back to normalcy, which gives the Fed room to manoeuvre. The potential fly in the ointment is the Delta variant, which weakens the outlook slightly but shouldn’t be enough to derail the progress entirely, and the truly worst hit states are relatively minor contributors to GDP. Tapering is coming, we know that, markets know that. It’s generally accepted to be happening by the end of the year. Will markets behave themselves, or throw another tantrum like 2013. Given all the signalling, you’d like to think not, but you never know.
- Local Macro – building approvals out today, with consensus expecting -5.0% vs -6.7% last month, which shouldn’t come as too much of a surprise given half the country is in lockdown. The other data today is the RBA’s Private Sector Credit Growth for July, which is expected to show growth of +0.5% MoM (vs +0.9% MoM for June) and +3.5% YoY (vs +3.1% YoY for June). Gut feel, we could see a surprise to the upside. Yesterday we had company profit data, from CBA…”company profits rose by a strong 6.0% in Q2 2021 (adjusted for inventories). As expected, the mining sector (18.4%) recorded strong profit growth in the quarter thanks to rising commodity prices. Over the year mining profits are up by 43.4%”.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907