Mutual Daily Mutterings
Quote of the day…
“I feel much better, now that I’ve given up hope” – Ashliegh Brilliant
“Patience is a virtue…?”
“Risk appetite gathering momentum…rightly or wrongly…”
- Overview – the world is an incrementally happier place overnight according to risk markets with stocks generally up across the board, with the likes of the S&P 500 and NASDAQ setting new record highs. Treasuries continued their recent steepening run, which will place steepening pressure on the local curve, and to this extent we’re seeing some 1.5% calls for the ACGB 10’s by year end (vs 1.23% close yesterday). I can see it happening too. Especially if global vaccine deployment continues to roll on with only minimal set-backs, as well as continued containment success. Add to this the expectation the Fed and her posse of fellow central banks globally will keep the bar-fridge stocked. Not to mention the market benefits of another (expected) fiscal-adrenaline jab from Uncle Joe, equal to 8% – 9% of US GDP. In the words of Abraham Lincoln, “Party on dudes!”
- Offshore Stocks – US stocks extended their rally into a fourth day as investors cast a favourable eye over a flurry of corporate results, and data released suggesting the US labour market may be gradually improving. Banks (↑0%), Tech (↑1.1%), and Industrial (↑1.0%) were the best performances on the day, although tech stocks accounted for over a third of the S&P 500’s gains, banks added around a quarter of the gains. The steepening treasuries curve no doubt helping the bank’s cause. On the earnings front, Q4’20 data suggests some bottoming in the pandemic impact, with aggregate sales growth of ↑2.4% QoQ and earnings up ↑6.1% QoQ, but still down ↓2.6% and ↓13.7% respectively vs Q4’19. Relative to expectations, aggregate sales have surprised ↑3.7% to the upside, while aggregate earnings have surprised to the upside by ↑18.3%. Across some select and well-known names (especially in my household), EBay Inc. and PayPal Holdings Inc, a couple of my wife’s favourites, surged on upbeat forecasts, while Netflix Inc (my boy’s favourite, and mine) gained on news the streaming giant is raising the price of its service in Japan. Europe also had an evening of steady gains. Volatility continues to moderate with VIX at 21.8%, lapping at post pandemic lows of 20.6%. Valuations are frothy and from afar the froth is being whizzed up into a frenzy by the Johnny-comely-lately retail cohort, which often signals we’re close to end of a bull run than the start…but the froth can last a while
- Local Stocks – I’m old enough and ugly enough to know better, and I’ve been around the block also. Just when you talk a market up, i.e. the ASX 200, it falls out of bed. A wide spread, albeit modest-ish pull-back in local stocks yesterday. Nevertheless, I think it will be short-lived and we’ll rebound today, which is what the futures are telling us (↑0%). I should clarify, I still think stocks are expensive in a historical context and given the underlying fundamentals, caution is warranted – see comment regarding retail punters, it’s a relevant theme here also. However, its not all about the fundamentals, technicals are also important and at the moment they be in charge. For the moment, fundamentals are trussed up in the boot with a sweaty gym shock taped over their mouth, while valuations are sitting quietly, yet nervously in the back seat. The trick is technicals can turn on a dime, fundamentals, less so.
- Offshore Credit – US IG saw another US$5.4bn of primary action, mainly from Alibaba, taking WTD levels to $45.3bn, ahead of initial estimates for the week. From memory, primary activity on payroll Friday’s tends to be muted, so not expecting much to be added tonight. Despite anti-China sentiment across the US, the Alibaba deal was well supported with spreads 30 – 40 bps tighter from launch to final pricing. In EU IG, €3.1bn priced with coverage of 1.9x and spread compression of just ↓7 bps, modest by recent standards – which would be a function of Banco Santander being amongst the issuers. The Spanish bank’s results earlier in the week were terrible, with net income down ↓90%. Market must have been expecting something much worse, because their stock price is up ↑4% MTD. Secondary spreads continue to grind tighter across IG and HY.
- Local Credit – not a lot happening in primary, which is unlikely to change any time soon. Again, I’m pilfered, with some editing, commentary from ANZ’s trader, and former colleague of mine from CBA and someone whose views I respect…”positive momentum continues to build in the AU secondary credit market as investors are seemingly starting to react to the very slow start to the year for primary issuance….decent buying across all sectors as investors put cash to work.” On banks specifically….”very-strong demand for sub 2yr major bank paper as cash funds extend their duration in an attempt to increase spread/yield, and 3-4yr major bank spreads unchanged today with no reaction to the indication yesterday by Governor Lowe that that RBA won’t be extending the TFF past the June 30 expiry (yay!)”. Nevertheless, don’t expect a gush of issuance in July. The banks are awash with cold-hard cash, lending growth is still relatively subdued, and the banks still have close to $100bn of the TFF to draw upon in coming months. Major bank senior paper unchanged, while tier 2 curve continues to grind tighter, which is playing nicely into our hands.
- Bonds – treasuries steeper again overnight, a trend that has been entrenched since July. US 10-year yield increased as much as 2 bps to around 1.16%, close to the highest since March Per the popular narrative, drivers include improving prospects for another round of fiscal stimulus as well as rising expectations for consumer-price gains, reflected in higher break-even rates for inflation-linked debt. Oil’s climb to a one-year high has also fed into the underperformance of longer-maturity debt, which is more vulnerable to the eroding effects of accelerating inflation. Despite the steepening trend, the rise in long-term bond yields is still being tempered by the ongoing support of the Fed, which is buying around $80bn a month of Treasuries. Fed officials again sent another strong signal earlier in the week that they aren’t close to ready to reduce their massive bond purchases. Local bonds are steepening on similar thematics, while the RBA is active also in buying – albeit at the front half of the curve.
- Macro – data out overnight indicates that US state unemployment benefits fell to the lowest since November, indicating that job cuts are starting to slow as COVID infections slowly subside. Jobless claims printed at 779K vs 830K estimated, while continuing claims also fell, 4592K vs 4785K estimated. Another key gauge on the US economy is the US Non-Farm Payrolls figure, which is due out tonight. Consensus expects about 100K jobs were added in January, vs a 140K drop in December. In other data, such as weekly consumer-confidence readings and restaurant bookings, signs of some strengthening are emerging. Locally, and I’ve lifted this from a NAB morning email “there will be a lot of interest in RBA Governor Philip Lowe’s parliamentary testimony, particularly as the AFR today leads on speculation of a raging bull in stocks and housing driven by the expectation of continuing low interest rates.” Retails Sales data out today locally, for December, with consensus calling for a ↓2% MoM drop and ↑1.9% QoQ (ex-inflation).
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Scott Rundell, Chief Investment Officer
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