Mutual Daily Mutterings
Quote of the day…
“We are all here on earth to help others; what on earth the others are here for I don’t know” – W. H. Auden
Periodic spread changes…
Source: Bloomberg, Mutual Limited
(*) note, 3 year now referencing Nov-21 vs Apr-21, which the RBA has been targeting as part of its Yield Curve Control policy
“Oil under pressure…”
- Overview – we start the new trading week with a slightly firmer risk tone, aided by a stronger US payroll’s print on Friday, continued vaccine roll-out and expectations of broader fiscal stimulus from the US government. On the latter specifically, investors are watching the progress of debate over President Biden’s US$2.25 trillion infrastructure proposal. Republicans have expressed some guarded support for the package, or more stimulus at least, but they’re pushing for a more limited plan, i.e. smaller government, not bigger. So far, the response in bond markets has been relatively muted, “with inflation concerns easing amid doubts over the viability of more-generous spending, even as central banks remain committed to keeping interest rates lower for longer”. A headwind, albeit increasingly modestly so is the pace of third wave infections across Europe and parts of the US. These spikes in infection rates are having only modest impact on investor sentiment, suggesting perhaps that markets are numb to COVID headlines, and with the abundance of market liquidity and expectations of governments doing whatever it takes to ensure growth, “the only way is up, baby, for you and me now, the only way is up”…I can’t believe I remember that song, so ashamed! Oil took it in the neck on waning demand because of COVID effects (working from home etc), and OPEC decisions to expand production. Late last week, the IMF and World Bank kicked off their spring meetings, with markets expecting the IMF will probably upgrade its forecast for 2021 global GDP with its latest economic report tomorrow. In January, it predicted an expansion of 5.5%. On the day, stocks up, bond yields up, credit tighter…risk on for now.
- Offshore Stocks – talking heads…. “the repricing of inflation risk and US rates, which will impact discount rates of future earnings and the way stocks are being valued is a source of uncertainty…the other uncertainty is the pace of the vaccinations and the virus.” Be that as it may, solid gains across global stocks just prior to Easter and then again overnight. In US markets, it was a broad-based rally, with four stocks up for every one down. Thematically, the growth vs value continues to oscillate, with growth again ascendent over the past two sessions. With most sectors up, value still gaining under the weight of liquidity, but less so than growth stocks. Discretionary (+2.3%), Telco (+2.3%) and Tech (+2.3%) led from the front, while only one sector was in the red, Energy (-2.0%). Futures are moderately in the green across the board.
- Local stocks – a reasonably buoyant end to the week with 68% of stocks within the ASX 200 closing higher, and six of eleven sectors in the green (Thursday’s close). Sectors in the red were only modestly down. On the green side of the ledger, Tech (+2.5%), Materials (+1.5%), and Utilities (+0.8%) the three best performers, with Materials contributing around half of the broad index’s gains. The ASX 200 closed toward the top end of its YTD trading range, 6829 vs 6587 – 6917, and ahead of its 50D moving average. Markets needs some new catalysts to break materially higher, with most of the existing ‘good news’ priced in, and much of the ‘uncertainties’ are largely priced out (i.e. not evident in stock valuations). Futures are marginally in the green.
- Offshore Credit – indices generally tighter across offshore credit indices….talking heads (Bloomberg) “strong investor appetite for floating-rate debt — which offers a hedge in a rising rate environment — is fuelling issuance in the loan market. CLOs, which bundle leveraged loans and sell them to investors, have seen a record first quarter for sales”. They’re playing our tune, FRN’s are our jam! And this…”acquisition financing is on the rise, accounting for about 24% of total leveraged loan launches in the first quarter, and the deals are expected to gather pace as the economic outlook brightens”. Thing to note here is its ‘acquisition’ financing, not expansionary financing…the former inflates asset values, the latter creates the potential for sustainable growth….and this on the high yield space “the junk bond market is coming off a record quarter and issuance is expected to continue at a blistering pace in the US and Europe as companies look to lock in low yields before they rise further and investors bet on economies reopening.”
- Local Credit – from the mouths of traders…”a fairly lacklustre day (Thursday), unsurprising given the forthcoming Easter break. Local markets did not replicate spread tightening seen in offshore markets overnight and participation from domestic accounts remains light. April sees a number of redemptions in both financials ($8.5bn) and corporates ($1.3bn) so it’s reasonable to assume that a number of accounts will be keeping powder dry for potential primary supply”. Major bank senior spreads closed unchanged with Jan-25’s at +33 bps and 3-year at +25 bps. In the tier 2 space, the “new quarter brought the expected uptick in activity with a number of domestic real money accounts taking the opportunity to reduce. Flows skewed to client selling though we doubt this was linked to the MQGAU news, more likely an expectation of primary issuance post Easter.” Tier 2 spreads closed +1-2bps wider across the majors, while MacBank tier 2 was +5 bps wider…”but in truth this is really just a function of secondary market liquidity coming back online”. We picked up clips of IAG 36-26, CBA 30-25, WSTP 29-24, NAB 29-24 and ANZ 29-24.
- Bonds & Rates – a decent rally in US treasuries to end the trading week, with a -7 bps drop to 1.67% (10Y), but then bond markets were open on Good Friday, and last night, giving back some of these gains. Closing at 1.71% (10Y). Fed watchers will pour through FOMC minutes on Wednesday for clues on inflation views and tapering…needle, meet haystack! Fed Chair Powell is scheduled to speak at the IMF event on Thursday and there are at least four other Fed speakers this week. US PPI will be closely watched Friday for signs of developing inflationary pressures. Locally, the RBA meets (today), but no one is expecting any change to policy settings or any indications that the RBA is worried about inflationary pressures.
- Macro – reasonably light week of data in local markets, just some PMI data, and offshore we have the above (FOMC minutes etc). In US at week’s end, US non-farm payrolls smashed expectations, with 916K jobs created vs +660K expected and +379K last month. Unemployment dropped to 6.0% from 6.2% last month, and in line with expectations. Participation rate was unchanged at 61.5%.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907