Mutual Daily Mutterings
Quote of the day…
“If you happen to make money, pull the original investment out and play with the house’s money” – Jordan Belfort (aka The Wolf of Wall Street)
“Don’t hate the player, hate the game…”
“And the (risk) game resumes…”
- Overview – a risk-on session overnight as several strategists opined the recent explosion of speculative retail buying won’t derail the bull market in equities. Bonds did little, while oil was up and about. Credit did its thing, fractionally tighter. Silver jumped +13% to an almost eight-year high, extending a surge that started with the retail-investor frenzy sweeping through markets. The highly paid strategists within the Wall Street establishment have all, almost to a man, women and child, expressed the view that the battle between retail-traders and hedge funds is unlikely to cause a setback for markets. Talking heads (JPM)…”the retail versus hedge fund conflict unfolding currently should be much less severe than the roughly 10% drops that have been occurring almost annually for the past two decades….our bubble tracker based on extreme price momentum, valuations and investor leverage isn’t flashing red at the asset class level, even if it might at the security level”. Elsewhere, “the tug of war between the forces of reflation and concerns over the slow vaccination rates in most advanced economies will continue to rattle financial market sentiment…” (CBA London). US reporting season continues, with a few of the big tech stocks reporting tonight, Amazon and Alphabet (aka Google). Fiscal stimulus discussion in the US continue, although with the Democrats having effective control of both houses, not sure negotiations matter.
- Offshore Stocks – a broad-based rally in the US markets as recent jitters around the Reddit Rebels vs Old Guard Wall Street bruhaha fade. All sectors flashing a confident shade of green, led by IT (+2.9%) with Staples bringing up the rear (+0.4%). Over 85% of stocks in the S&P 500 rallied on the day. Volatility cooled its jets, with the VIX dropping back below 30%, or down 10% on the session. The poster-child for the recent retail revolt, GameShop (GME), gave up some of its meteoric gains, down -27% as brokerage houses removed some trading restrictions…but the little fella is still up +6,100% over the past 12 months. Short positions in the firm have now dropped from 114% to 39% (of free-floating stock), which is still chunky. It’s been fun kids, but time to leave the casino I’ve thinking. Stay long in this basket case of a firm and it’ll end in tears. European markets also had a good Monday with miners leading the charge – reflecting the Reddit horde moving on from pariah game retailers to the shiny stuff. Tech stocks also attracted some love.
- Local Stocks – the ASX 200 shrugged off the weak Friday leads from offshore markets, up +0.8% yesterday, underpinned by gains in HealthCare (+1.7%) and Materials (+1.3%). Only two sectors dragged their feet, and only marginally so, Utilities (-0.6%) and Industrials (-+0.1%). While the broader market was up on the day, over a third of ASX 200 stocks were still softer on the day. Despite protestations that the bull run can continue, which it probably will, fuelled by stupidity, FOMO-ism and confidence that central banks will bail markets out an any turn, I’m still wary of a correction. But, the market is awash with cash and it has to find a home. With bond-yields still near lows, equities is as good a place as any…stay nimble though and don’t extend too far outside of your risk-comfort zone. Futures are pointing to a +0.6% open in the ASX 200.
- Offshore Credit – Apple is back in debt markets, issuing $14bn across six tranches, including a 40-year offering at T+95 bps, in from initial guidance of +115 – 120 bps. This is Apple’s third bond sale since May, and comes as the company pursues aggressive share buybacks and dividends. All up $22bn priced in US IG overnight, with solid deal metrics. Quieter in EU IG primary, just €3.8bn priced, across four deals…all cleared easily. Spreads in secondary across both markets were a touch tighter. Modest moves tighter in synthetics overnight, although YTD CDS is +4 – 7 bps wider.
- Local Credit – not a lot to say about our own back yard, still no movement in major bank senior paper, which has the Jan-25’s averaging around +24 bps, and three-year around +18 bps. Extrapolating from these numbers, a five-year line would likely settle around +29 bps (historically cheap…for the banks). Tier 2 paper is also moribund, the recently issued WSTP Jan-26 call is at +154 bps, marginally inside reoffer (+155 bps). From the traders (ANZ)…”a day for admin…with the first day of the month sidelining many domestic accounts from trading. The limited flows we did see however were skewed to better buying. In particular, in the corporate and T2 sectors. Offshore equity weakness/volatility having no impact on local credit markets.” Broader credit indices (Bloomberg AusBond) were unchanged yesterday, but +5 – 6 bps wider YTD.
- Bonds – it’s all about the RBA today with the policy meeting and then the SOMP later in the week. From one of the market’s talking heads (CBA)…”the market has clear expectations here. An upgrade to economic growth and employment forecasts and a modest lift in inflation. It seems too early for any changes in the RBA’s markets programs to be contemplated, but this could also come out (the RBA is halfway through its six-month $100bn bond buying program). We see the risks still skewed to the way the RBA spoke last year. They’d sooner do more stimulus than less and that could be a game stopper for the curve steepening trade.”
- Macro – in US economic data, the ISM manufacturing index eased from 60.5 to 58.7 in January (consensus: 60). Construction Spending rose +1.0% in December (consensus: +0.9%). Yesterday we had a selection of local data prints, including….”the CoreLogic home value index, covering the eight major capital cities, which posted another robust +0.7% gain in Jan, following rises of +0.9% in Dec, +0.7% in Nov and +0.2% rise in Oct. Prior to this, prices had recorded five consecutive monthly declines. Prices are now just +0.4% below their pre-COVID peak and +1.4% below the peak in late 2017” (Westpac). Also, “December was another strong month for housing lending (+8.6% MoM). Accommodative government policies and building grants continue to fuel very strong housing lending growth, particularly for the construction of new dwellings by owner occupiers (+119% YoY)” (ANZ). Lastly, “ANZ Australian Job Ads rose +2.3% MoM in January, the eighth consecutive monthly gain, pushing annual growth up to +5.3%. Job Ads is now at its highest level since April 2019”. (ANZ). Today, we get weekly consumer confidence at 9:30am, and updated payrolls data at 11:30am. Outcomes from the RBA meeting will be released at 2:30pm.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907