Mutual Daily Mutterings
Quote of the day…
“If a book about failure doesn’t sell, is it a success” – Jerry Seinfeld
“Which way is it to the promised land…?”
- Overview – a largely directionless day in markets with stocks mixed globally, some up, some down…which ironically is what ‘mixed’ means. Stupid! Either way, news flow was on the lighter side, nothing ground breaking and nothing to really move the dial on risk appetite, or risk apathy for that matter. After a few sessions resembling a headless chook, yields stabilised. An interesting snippet from Bloomberg “last week, the correlation between real yields and US equities dropped to its most-negative level in five years. That strong inverse relationship suggests inflation-adjusted Treasury rates have reached a point where further gains could quickly send the S&P 500 lower — as they feed into steeper borrowing costs and lessen the appeal of other assets”. It’s becoming increasingly obvious that the pandemic is “soooo last season darling, everyone who is anyone, sweety, is talking about inflation and what the Fed et al will do about it”. The bigger philosophical question being, should they do anything about it? Some might answer, damn right…it’s their mess to begin with. That’s a leap, but not a huge one, loose monetary policy post the GFC has caused broader problems, but that’s the topic of a thesis, too heavy for consumption or pondering over your morning coffee and bagel
- Offshore Stocks – European markets delivered modest gains, while US markets saw earlier losses pared back, buoyed initially by gains across Materials (+0.6%) and a couple of other sectors, but the weight of pessimism became more broad based and all other sectors closed in the red. Tech (-1.6%), which has become a meaningful contributor to the index’s day to day movements, was the main drag for the day, ably assisted by Discretionary (-1.3%). On average, stocks down on the day overshadowed those up on the day, 60:40. Despite all the anguish and hand wringing over rising yields and what it means for the trajectory of growth assets, i.e. stocks, the S&P 500 is still only -1.4% below its all-time, ding-dong, highs! On this point, “bullishness among Wall Street strategists is approaching levels that have already presaged potential trouble for stocks”, according to a Bank of America Corp. gauge. “The measure assesses the average recommended allocation to equities and is close to triggering a sell signal”
- Local Stocks – a marginally softer tone for RBA Tuesday (details below) with stocks down a touch in a magnitude sense, but the tone was broad based with 64% of stocks in the red and nine out of eleven sectors in the red. Energy (-1.9%), Materials (-1.5%) and Industrials (-1.0%), sectors typically leveraged to cyclical upturns, all dragging the chain. Only Staples (+0.8%) and Financials (+0.4%) were able to walk tall on the day. While the end to end move in US stocks is moderately weaker, ASX 200 futures are sporting a modestly optimistic shade of green (+0.3%).
- Offshore Credit – a thumping start to the week in US IG markets, another $22bn across 13 deals priced, taking WTD issuance to $46bn, already surpassing dealer’s expectations for the week. Deal metrics were firm, while in secondary the weight of supply is a modest headwind for spreads, +1 – 2 bps wider. Synthetics have done little, largely unchanged.
- Local Credit – given commentary from traders, investors are still a bit wary of the risk backdrop following recent shenanigans across global yields. Monday night provided some solid leads, but local buying action was muted “an unsavoury mix of rates volatility, building street inventories and poor liquidity conditions continue to suppress secondary market flows”. Major bank senior curves stabilised, unchanged on the day with Jan-25’s at +34.5 bps, around +10 bps wide of recent tights. Believe me or not, but after seeing tier 2 spreads unchanged on Monday I verbalised internally here that we’d hit the tactical (jargon for near term) wides and was time start buying again…seems I wasn’t the only one with major bank tier 2 tightening 4 – 6 bps yesterday. WBC Jan-26 calls are now at +136 bps (-3 bps), while NAB’s Nov-26 calls are +139 bps (-5 bps). Trader talk…”the nascent buying that we remarked upon yesterday rapidly turned into a buying frenzy with other buyers looking to join the fray. Street inventories likely to be considerably lighter as we close the day.” In a case of “missed it by that much” CBA launched a USD tier 2 deal, which probably contributed to the firmer local tone. I say ‘missed it by that much’ because the AUD-USD basis has turned for local borrowers heading to US markets for funding. For example, the 10-year basis widened from +16 bps in mid-January to +30 bps last week, but has tightened a touch to +28 bps. So, all other things being equal, CBA will be paying +12 bps more this week than last week…and we’ve had a week of softer secondary spreads.
- Bonds & Rates – the RBA met yesterday, their statement here. “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… even so, the recovery remains dependent on the health situation and on significant fiscal and monetary support. Inflation remains low and below central bank targets.” No change to the cash rate (0.10%), the TFF rate (0.10%) or YCC target levels (0.10%), which is pretty much what every man, women and child active in the markets expected…while children do not normally work in the markets, unless they’re Dougie Howser’s offspring, it could be argued that some adults behave like children at times. Official rate decision aside, the main focus for investors and the broader market was around QE, specifically the recent spike in RBA secondary market buying, $3bn last week and then $4bn this week. Was the buying part of the existing QE program, just brought forward – which should be neutral for yields, but it’s likely some in the market punted on this not being the case (all other things being equal), in that case = upward pressure on yields. Or, was it indicative of an expansion of the QE program – which would likely put downward pressure on yields (all other things etc etc). It was the former, just the program dragged forward to calm markets…which saw yields drift higher after the RBA statement, with the 10’s +5 bps to 1.72%, back to levels seen last Thursday. And, what a trip it’s been…a +30 bps range (end of day) over the week, +35 bps if you go back to last Tuesday, lows of 1.56% and highs of 1.92%. Overnight treasury yields were stable, with the 10’s unchanged at 1.42% as I type.
- Macro – Australian Q4’20 GDP data is due out today (SYD: 11:30am) with consensus median at +2.3% QoQ (vs +.3.3% QoQ for Q3’20). The range of estimates, all updated on February 24 is varied, with lows of +0.8% QoQ (Barclays) to highs of +3.0%. I’ve excluded the tails, there is one loon, who I’ll not name, that has a forecast of -1.6% QoQ, albeit that number is a tad stale (last updated January 2021). Annual consensus growth is, well not growth, but a contraction of -2.0% YoY (vs -3.8% YoY as at Q3’20), underpinned largely by weak household consumption (cons. -3.6% YoY), partially offset by an abundance of government spending (cons. +7.8% YoY vs prior prints in the +1.4% – 3.0% range). Across the annual consensus numbers, most optimistic amongst the contributors is -1.3% YoY (Moody’s), while the most pessimistic is -3.5% (Continuum Economics…must admit, never heard of them). The RBA’s central case is for annual GDP to rise to +3.5% over 2021 and 2022, while inflation (CPI) is “to be 1.25% over 2021 and 1.50% over 2022. CPI inflation is expected to rise temporarily because of the reversal of some COVID-19-related price reductions”.
- Warning, some blatant chest beating and trumpet blowing to follow…yesterday I pumped up the tyres of our ‘lowest risk’ product, the Mutual Income Fund, or MIF. Today I’m pushing the up-sell and flagging the performance of the Mutual Credit Fund (or MCF), which just hit its 1-year birthday. Born just over a year ago now, yes, right on the eve of the pandemic induced market meltdown, the fund started out as a robust and healthy $300m sized fund and over the year is just shy of double the size, $596m. The fund targets a net return of BBSW+2.20% and is populated with FRNs only, with minimum 60% in APRA regulated entities – so banks and insurers, across senior and subordinated. The remaining 40% is spread across RMBS / ABS (max 30%) and non-APRA regulated entities (i.e. corporate), with a max of 10%. At least 80% of securities in the fund are required to be investment grade rated. For February the fund generated a return (net) of +0.49% and even though it’s the fund’s birthday, it was the one handing out the gifts with a one-year return of +3.52% (net). Not bad, eh? Perfect for times like these, where yields are under rising pressure.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907