Mutual Daily Mutterings
Quote of the day…
“My opinions may have changed, but not the fact that I’m right” – Ashleigh Brilliant
“It was always going to end in tears…”
- Overview – risk on with stocks globally running hard with most indices sporting a rather racy shade of green YTD after briefly opening the year sluggishly. Treasuries dipped with yields inching higher on the belief tomorrow, next week, next month and next quarter will bring a better macro back drop and with it increasing inflationary pressure. Silver lost its ‘Reddit’ lustre, dropping ↓9% on the table. In the US, the Dems are expected to kick off the process to approve Joe Biden’s $1.9 trillion fiscal stimulus plan without Republican support if necessary, which also put a spring in investor step and their willingness to add risk. This round of stimulus represents around 8% – 9% of annual US GDP, and if we add it to the fiscal support already pumped into the US economy as a consequence of the pandemic, it equates to more than 25% of annual GDP. If the rubber can hit the road, that’s a serious adrenaline hit for the economy. Just for giggle’s sake, the Democrats tabled their case for Trump’s impeachment, the trial of which kicks off next week. Locally the RBA met, did nothing on the cash rate, but extended the lease on the QE program, another $100bn of semi’s and ACGB’s to be purchased at $5bn a week ($52bn in the tin already from the initial program).
- Offshore Stocks – up and up into new nose-bleed valuations, with stocks in line for their biggest daily rally in three months. The sustainability of the recent ‘Reddit Rout’ was always questionable. You can’t bid up pariah stocks indefinitely. At the end of the day, they still smell and bidding the share price higher to teach Wall Street a lesson simply won’t improve a stock’s fundamentals – perhaps briefly shore up liquidity (share sales), but that’s it. GameStop plunged another ↓60% overnight, losing $28bn in market cap, while other gilded pariahs also fell. AMC dropped ↓41% and Express dumped ↓36% in value. If the hedge funds wanted some payback, I’d smash these stocks again, short them until the cows come home. More broadly, signs of progress toward fresh US stimulus and expanding vaccination programs boosted sentiment. Google and Amazon report after the bell.
- Local Stocks – to infinity and beyond, a strong rally in local and regional markets yesterday. Strangely, while the local market ignored, or at least seemed to, the ‘Reddit Rout’, it got in on the rebound action. All but Healthcare (↓4%) was sporting new season green, front and centre on the runway, strutting its stuff was IT (↑4.0%) and Afterpay the designer’s darling, up ↑10.8%. Industrials followed, up ↑2.5%, then Materials (↑1.7%) and Consumer Discretionary (↑1.7%). With another solid offshore lead, futures are pointing another ↑0.9% – 1.0% of gains today, which take the ASX 200 to post-pandemic highs.
- Offshore Credit – Apple hit the market earlier in the week with a monster deal (US$14bn), last night Boeing got in on the act with US$10bn three-tranche deal. Across the ditch, a solid day in EUR IG markets with a touch over €14bn priced, across 11 issuers (including some SSA deals). The collective book across these deals was €95bn for a coverage ratio of 4.8x, stonkingly strong. Average spread tightening from launch to print was a solid ↓20 bps. YTD EUR issuance has reached €234bn, marginally (+2%) ahead of last year’s run rate. Spreads continued to grind tighter in secondary, on average a basis point across both US$ and EUR IG markets, and across corporates and financials. High yield also tighter, with US HY ↓18 bps and EUR HY ↓6 bps tighter.
- Local Credit – very, very, very little to say here. The RBA’s $100bn QE extension announcement yesterday was probably a tad earlier than many expected. Regardless, the announcement immediately sent semi-govts bingo bid and back to their November 2020 tights. Given the prevailing technical backdrop, no immediate reaction in credit markets. Nevertheless, “the strong performance in a spread product like semi-govts is bound to boost sentiment in credit markets, with SSAs the most likely beneficiary” (ANZ). Also, from ANZ “the dovishness from the RBA possibly also increases the prospect of a further extension of the Term Funding Facility (TFF) which matures in June. If this does occur, then the impact on credit markets will be meaningful”. Given the starting point and shortening duration because of no new issuance, scope for meaningful gains in senior paper amongst the banks, especially majors, is limited. I’d expect tier 2 to perform
- Bonds – in a surprise to absolutely no one, the RBA decided to maintain its targets of 0.10% for the cash rate and the yield on the 3-year Australian Government bond, as well as the parameters of the Term Funding Facility. In line with growing expectations, the board also decided to purchase an additional $100bn of ACGB’s and Semi’s when the current bond purchase program is completed in mid-April – this was a little bit of a surprise, coming sooner than some expected. These additional purchases will be at the current rate of $5 billion a week. ACGB ten-year fell -2.3 bps to 1.13%, and the 30-year is at 2.15%, or -2.5 bps lower. At the front of the curve the three-year was largely unchanged at 0.12%, a couple of basis points above the RBA’s target. Any rate hikes are far off into the distant future…”the Board will not increase the cash rate until actual inflation is sustainably within the 2% – 3% target range. For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market. The Board does not expect these conditions to be met until 2024 at the earliest“.
- Macro – yesterday’s RBA statement include these comments… “the outlook for the global economy has improved over recent months due to the development of vaccines. While the path ahead is likely to remain bumpy and uneven, there are better prospects for a sustained recovery than there were a few months ago. That recovery, however, remains dependent on the health situation and on significant fiscal and monetary support. Inflation remains low and below central bank targets”. The RBA’s central growth scenario is for the domestic economy to expand by ↑5% in both 2021 and 2022, while unemployment is expected to continue to fall, down to 6.0% by year end and then 5.5% by the end of 2022.
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Scott Rundell, Chief Investment Officer
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