Mutual Morning Mutterings

Quote of the day…

“Remember when you were little and you’d fall on the trampoline and everyone would keep jumping so you couldn’t get back up?  That’s how adult life feels” – anonymous

Themes … “carnage, keep your head down for now…”

Overview – risk assets closed off their intra-day lows on Friday (USD), aided by Fed Chair Jerome Powell stating the Fed would cut rates if necessary…for what little it’ll do.  Some parts of the market are even predicting emergency cuts before the next meeting (19 March).  Despite risk assets closing the week with a bit of a wet sail, developments over the weekend will likely see us face another tumultuous day / week.  Chinese February manufacturing data puked, which can’t be too surprising.  However, the plunge in activity was worse than expected with the PMI down to 35.7, the lowest on record (remember <50 = contractionary).  The WHO ramped up its risk assessment of the virus to very high and warned the window to contain the virus is getting tighter.  We had the first virus related death in the US and Australia, while the number of infected in Italy spiked 50%.  Liquidity will remain elusive and prices volatile.

Stocks – Friday was looking like being another bloodbath with the S&P 500 down over 3.0% at one stage.  Powell’s soothing words added a little life to risk sentiment, but it still ended up being a down day and it was the worst week since the financial crisis.  The S&P 500 closed down 11.5% on the week.  European bourses were smoked, down over 3.0% on average on Friday, extending their weekly losses to 11.0% – 12.0%.  The ASX 200 is down 9.8% on the week, but with futures in the red this morning will likely extend these losses today.  A buying opportunity is coming, but its not yet.  If we don’t see any retaliatory strikes from fiscal or monetary sources, I see another 5.0% down from here at least.

Bonds – US treasuries are finding new lows as investors head for cover in safe haven assets. US 10Y yields fell 11 bps on Friday, while 2Y yields dropped 15 bps (curve of 23.5 bps) as investors now price in up to four Fed cuts this year – Feds Funds Rate to fall from 1.6% to 0.6%.  Bloomberg’s rate cut probability tool is now indicating a 152% probability of a rate cut at the next meeting.  Now, I’m no mathematician, in fact I struggle to even spell it, but I’m confused as to how probabilities can exceed 100%.  Probability of a rate cut tomorrow from the RBA has also skyrocketed to 97% from 7% just a week or so ago.  Not that a rate cut should do any good other than inflate asset prices.  The volume of negative yielding debt globally has risen from YTD lows of US$10.9 trillion to US$14.6 trillion.

Credit – synthetics took it in the neck again (from a long perspective), CDX (US) was +1.9 bps wider at 68 bps, while MAIN (EU) was +8.2 bps at 65 bps.  The Senior Financials index was +9.5 bps on the day, while Sub Financial index was +19 bps.  The Japanese iTraxx closed +10.7 bps wider.  High Yield continues to widen, +31 bps in the EU HY index.  Closer to home, the local index was smashed, +13 bps on Friday and likely to open wider again today.  Before the open the local index was 69 bps (Bloomberg CMAN).  Cash saw spreads march wider offshore, with USD HY +30 bps, corporates and financials +3 – 8 bps wider, with similar moves in Euro.  Locally AUD credit spreads are +1 – 2 bps wider on average (AusBond indices), but actual traded volumes have been muted.

Data – in addition to the manufacturing PMI falling further than expected (per above), non-manufacturing PMI fell to 29.6 from 54.1 in the prior month and against consensus expectation of 50.5.  Whoever compiled that consensus number must have been running a fever and not thinking straight.  I can’t imagine how consensus could expect an expansionary figure given what has been going on in China through the month.  On Friday we also had US GDP data, which came out bang on consensus, +2.1% QoQ annualised.  Markets really didn’t pay any heed to this data.  They were occupied elsewhere.  Next month’s data will be of more interest given it will reflect the progress of the virus in the US.  For what it’s worth, Personal Consumption was on consensus, +1.7% QoQ, but down on the previous period (+1.8%).  Core PCE, the Fed’s preferred inflation gauge, came in at +1.2%, missing consensus (+1.3%) and last month’s print (+1.3%).  Durable Goods Orders fell less than expected, -0.2% vs -1.4%, while capital goods ordered rose +1.1% vs +0.1% consensus.  Initial jobless claims were up a touch, 219K vs 212K consensus and 210K prior.

This day in history – Mon 2 March:  1709 – British sailor Alexander Selkirk is rescued by William Dampier after being marooned (voluntarily) on an uninhabited island 600km off the coast of Chile for 5 years.  His story inspires Daniel Defoe’s Robinson Crusoe.

Note to readers – as per usual, feel free to share etc.  Later today, all things going well, I’ll put out a weekly note.  The note will cover similar themes to the daily, just a few more charts and longer-term perspective on key thematics.  As always, appreciate any feedback, good, bad or otherwise.

Click here to find the full PDF from our Chief Investment Officer’s daily market update.

Contact:

Scott Rundell, Chief Investment Officer

T: +61 3 8681 1907

E: Scott.Rundell@mutualltd.com.au

W: www.mutualltd.com.au

Interest Rate Futures

• 3m Bank Bills – implied yield 0.81%
• 3yr Govt Bond down 5pts– implied yield 0.51%
• 10yr Govt Bond down 3pts– implied yield 0.82%
• 20yr Govt Bond down 3pts– implied yield 1.12%

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