Mutual Daily Mutterings
Quote of the day…
“Money doesn’t always bring happiness. People with ten million dollars are no happier than people with nine million dollars.” – Hobart Brown
Periodic spread changes…
Source: Bloomberg, Mutual Limited
“Oscillating mildly …”
- Overview – a slow news day, in fact it was the slowest trading day for the year across US stocks, which saw prices do very little, oscillating between gains and losses, ending marginally in the red. Bond yields dropped in the US, but rose across European markets. Credit remains constructive. The fallout from the Archego Capital implosion continues, with Credit Suisse announcing a US$4.7bn hit, resulting in a likely US$1bn pre-tax loss, give or take. Around half of the hit comes from litigation provisions, while street analysts are suggesting a further US$4bn in hits is likely. Consequently, executive bonuses have been scrapped, dividends cut, and two senior executives sent to the old executive farm, including the head of risk. CS stock is down 24% over the past month, dusting US$9bn in market cap…market losses also reflect the impact of Greensil exposures. Some interesting observations from some Bank of America survey data…paraphrasing Bloomberg here…“US hedge funds see something in the reflation trade they don’t like. The vehicles — on average — have shunned energy and financial shares despite a rally of at least 40% over the last five months, favouring instead companies seen as resilient during an economic slowdown. Their exposure to cyclical shares sits at one of the lowest levels in a decade relative to defensive ones”.
- Offshore Stocks – with the S&P 500 hitting new all-time highs in eth previous trading session, some very, very modest softness overnight. It was very marginally with a touch over half of stocks up, while six of the eleven sectors closed up – all moves were less than a percent. Leaders included Utilities (+0.5%), Staples (+0.3%), and Discretionary (+0.3%), while at the other end, the laggards were Tech (-0.4%), Healthcare (-0.4%) and Industrials (-0.3%). Relative strength indicators (RSI) are indicating the S&P 500 is getting toppy at 67.9, with any RSI above 70.0 suggesting stocks are ‘overbought’. The last time the index’s RSI hit 70 was the first week of January, although the index didn’t necessarily sell-off, not straight at least. A couple of weeks later it drew back around 5.0%, and again in mid-February when the RSI was approaching 70.0, we saw a modest sell-off, another -5.0% or so. Markets are ripe for a modest pull back over coming months, say -5.0% – 7.0.%.
- Local stocks – solid gains from the get-go yesterday despite offshore futures dipping into the red (marginally). A touch under three-quarters of stocks (ASX 200) closed up on the day, with only two sectors in the red, and only marginally so, Energy (-0.1%) and Utilities (-0.2%). At the top of the leader’s board were Tech (+5.1%) – driven by AfterPay (+10.0%), Industrials (+2.3%) and Discretionary (+1.4%). While the S&P 500 RSI is approaching 70.0, the ASX 200 is still sub-60.0, although the two indices are highly correlated (~70% over the past 2 years), so if the S&P 500 corrects, the ASX 200 will go with it.
- Offshore Credit – just under US$7bn priced in US IG markets, while in secondary spreads were a touch tighter. European markets reasonably active also. With secondary liquidity continuing to be supported by accommodative monetary policies, there are no imminent threats to credit markets in general, although storm clouds are forming – rising defaults, rising borrowing rates etc, which form sources of risk.
- Local Credit – trader talk….”a low volume day in AU secondary credit markets as many investors opted to ease back into proceedings following the Easter break. Domestic participation remains light with much of yesterdays flow accounted for by scraps of offshore index tidying late in the day. The Major bank senior curve closed unchanged with all flow focused in fixed. ANZ kicks off April’s sizeable FI redemptions today, returning $2.85b to investors, we expect a decent portion of this cash will be redeployed across secondary in the coming days”. The tier 2 curve also remained unchanged. Our outlook for spreads, tactically and particularly around major bank paper across both senior and sub, is a to remain range bound.
- Local Bonds & Rates – no action from the RBA yesterday, leaving all policy rates unchanged. A copy of the statement can be found here. As for the content of the statement, nothing new really, certainly nothing ground breaking. The RBA continues to remain committed to accommodative monetary policy, until such time that inflation is sustainably and actually within their 2% – 3% range. While a near term spike into this range is expected for Q2’21 (+3.2% cons) and Q3’21 (+2.1%), thereafter inflation is forecast to slip back into the +1.6% – 1.7% YoY range. The RBA sees excess capacity and slack in the economy, which is suppressing wage inflation, which they see as crucial for a sustained increase in inflation. On the broader economy, it’s recovery and doing faster than they envisaged, but at the same time characterised the recovery as uneven. On housing, strong price growth was acknowledged, but while growth in valuations is coming without an undue increase in credit growth, the RBA seems sanguine. They will be watching lending standards, although this is APRA’s turf. On the 3Y YCC, the board has yet to determine whether they’ll target the Nov-24’s (0.33%) vs the Apr-24’s (0.11%). A decision will be made later and no rate hike is expected until 2024 “at least”. With the RBA a neutral influence on rates at present, the main influence on local bonds will remain offshore factors. ACGB 10-year yields closed -6 bps tighter at 1.79%. The Apr-24’s, the bonds the RBA has been tinkering with closed at 0.105%, while the Nov-11’s closed at 0.28%. If the RBA decides to switch their buying from the April to November bonds, then the 16.5 bps gap will crunch in. Under normal circumstances, 16.5 bps pick up for 7 months is pretty sweet, especially around that part of the curve.
- Offshore Bonds & Rates – some interesting moves in bond ETF positioning. While US treasury yields have settled around their pre-pandemic highs, short interest in the $14bn iShares 20+ Year Treasury Bond ETF has climbed to about 20%, a four-year high. This suggests some degree of scepticism amongst investors around the prevailing trading ranges in bonds. While yields have moved significantly to reprice a more positive growth outlook, and have settle somewhat, the short positioning in the above ETF implies a degree of volatility is likely to return as economic data is rolled out over coming months.
- Macro – from Bloomberg…”the IMF predicted the best global economic growth in four decades in its latest World Economic Outlook (link). The fund raised its forecast for world GDP this year to +6.0% from a January outlook of +5.5%. The US estimate was raised to +6.4% from a prior +5.1% and China’s to +8.4% from +8.1%. Even the laggardly euro area will expand +4.4%, the IMF said, up from +4.2%”.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907