Mutual Daily Mutterings
Quote of the day…
“Common sense is like deodorant. The people who need it most never use it.” – Bill Murray..…
Chart du jour…value vs growth
Source: Bloomberg, Mutual Limited
“It’s A Jungle Out There…”
Overview…”I’m a lumber jack, yes I am…”.
- Bad, or not as good as expected, is good again. You with me? US Non-Farm Payrolls rose on Friday night, but missed consensus estimates to the downside, which for risk markets signalled reduced likeliness of the Fed easing back on policy largesse…for another day, or perhaps week at least. Wage’s growth came out ahead of expectations, but market attention seemed to hone in on the jobs miss. US factory orders missed estimates also, while durable goods orders were inline, both perversely supporting the risk on tone. Bond yields rallied strongly also, closely just a couple of basis points shy of twelve-week lows in the ten-year treasuries.
- Despite the near-term respite in policy risk, the latest investor survey conducted by Evercore ISI (in the US) indicated that either inflation or higher interest rates represented the biggest risk to equities. In the poll, released Friday night our-time, the proportion of respondents seeing the next 10% move in the stock market as being up has fallen to 51% from 66% six months prior.
- A new term is doing the rounds, ‘meme-stocks’. The most famous being the struggling retail gaming business GameStop, which rallied as retail investors took it to hedge funds who were actively and aggressively shorting the stock. Recall the stock rallied 1,600% over two weeks. The next ‘meme-stock’ the retail hordes are furiously at work on is AMC, a US cinema business. Shares in the stock surged more than 80% and at one point the ailing movie-theatre chain saw its market value surpass that of half the companies in the S&P 500. Cray-cray.
- Talking heads…“the action in AMC shows that today’s stock market is not a healthy one…when the liquidity becomes less plentiful, as it looks like it is going to become in the not-too-distant future, there will be a reckoning.” Oh yes there will be, but when?
- …and that is the $64 billion dollar question, when that happens, will the broad market be able to hold up? Or, will it completely soil the bed. Talking heads… “for now, the S&P 500 has managed to withstand a series of mishaps, including the retail-fomented short squeeze on hedge funds in January, Archegos Capital Management’s blow-up and the carnage in speculative stocks like unprofitable technology firms”.
- Offshore Stocks – European markets delivered modest gains on Friday, which gave US markets a firm lead to begin with, but then weaker than expected jobs data drove risk assets higher for the reasons already touched on. Tech stocks have benefited most from Fed largesse over the past 12 – 18 months, so it makes sense that when risk of Fed tapering or tightening moderates, then Tech rallies hardest. Within the S&P 500 Tech (+1.9%) drove almost half of the broader index’s gains, followed by Telcos (+1.4%) and Discretionary. Only utilities failed to see the light, dropping a modest -0.2%. Growth stocks (+1.39%) outperformed value stocks (+0.36%) by over 100 bps. Despite the rally on the day, I liked the sentiments of this comment from Bloomberg “for all the kookiness going on adjacent to more stolid stocks, the recent history in American risk markets is one of psychological retrenching. Institutional managers are reining in exposure. People are buying a lot more protection. Even flows to equity funds are slowing”.
- Local stocks – modest gains locally with the ASX 200 up +0.5%, taking the index to new all-time highs (7295). Financials (+1.3%) led the way, accounting for the vast majority of gains. Other sectors to perform on the day included Utilities (+1.4%) and Healthcare (+1.4%). Materials (-1.5%) was a meaningful drag on the day despite modest gains in commodity prices, with only thermal coal down on the day. Tech was also a drag, down -0.5%. Relative strength indicators are approaching ‘overbought’ territory, 68.0 vs 70.0. Positive leads from offshore were dominated by tech stocks, a small component of the local market (10% vs 4%), and a larger portion of the Australian market is classified as ‘value’ stocks vs the US, so leads should have a more modest impact locally. This is reflected in the above chart, the ASX 200 is more closely correlated to the S&P 500 value index and MSCI value index, as opposed to the respective ‘growth’ indices. Nevertheless, technicals could trip over into ‘overbought’ territory…for what it’s worth, if you’re into that kind of thing. Futures are indicating a very modest advance on the open.
- Offshore Credit – as is often the case when US jobs data is released, no new issuance. On the week, US$21bn was priced (vs US$20bn – US$25bn projected), with over 50% of lines trading tighter in secondary. While primary deals performed well, broader secondary markets were a touch wider on the week +2 bps across Financials and Corporates. US HY was well supported, closing -9 bps tighter. In EU IG, better performance in secondary, unchanged to a basis point tighter across Financials and Corporates, while HY closed -6 bps tighter. Spreads are generically around post-pandemic tights.
- Local Credit – not a lot to say, a quiet end to the week heading into the important US jobs data. Trader talk…”local risk appetite remains robust and we found it a challenge to keep risk in the book. We favour adding where possible, most notably in corporates and offshore financials.” Major bank senior paper closed unchanged on the day, but the Jan-25’s edged a basis point tighter on the week to +33 bps. Tier 2 tightened further on Friday, another basis point on the day to +122 – 126 bps for the 2026 callable lines, some 6 – 7 bps tighter over the week. On the supply front, Teachers Mutual mandated banks for a 5-year A$ deal, with fair value curves suggesting +65 – 70 bps pricing area. Likely this week’s business, and at a guess, a $200m – $250m in volume. A drop in the ocean compared to the $30bn (give or take) of major bank supply that has not been forthcoming because of the TFF. The TFF is set to expire at the end of the month, after which it will be a matter of time before local ADI’s become regular issuers again. Good riddance to the TFF I say. Generically, A$ credit spreads were -2 bps tighter over the week across both fixed and floating.
- Bonds & Rates – a strong rally in US treasuries on Friday as bond markets factored in less Fed tightening on tapering pressure on the back of weaker than expected jobs data. Ten-year yields ended the week at 1.55% (-7 bps on the day, and -4 bps on the week) vs a two-month trading range of 1.54% – 174% and average yield of 1.61%. Consensus forecasts have yields reaching 1.72% by the end of the month, but I’d suggest that level is stale. By year end consensus has US ten-year yields at 1.88%, with some in the street forecasting 2.00% and higher by year end. Local bonds ended a touch lower (price) with yields a few basis points higher. Likely short lived with the offshore influence to drive local yields lower, maybe 3 – 4 bps at a guess.
- Offshore Macro – US jobs growth accelerated through May, but the pace remains below expectations, the second monthly miss in a row. Nonfarm payrolls rose +559K after April’s revised but still underwhelming +278. Consensus was expecting +650K. The unemployment rate fell to 5.8% from 6.1%, while the participation rate was largely unchanged. Talking heads….”All else equal it could have been stronger…the fact that it wasn’t is likely a function in large part to supply constraints and labour shortages.” For the week ahead, US CPI data is out. Not the Fed’s favoured measure of inflation, but a measure nonetheless. CPI is forecast to rise +0.4% MoM (vs +0.8% MoM last) and +4.7% YoY (vs +4.2% last), or +3.4% YoY ex-food and energy.
- Local Macro – NAB Business Confidence (26 last) and Conditions (32 last) are out tomorrow. Both measures hit all time highs at their last print, fuelled by the pace and momentum of the post pandemic recovery. No consensus numbers for this series, but depending on when the survey is done – it’s for May, yet another Victorian may sap confidence somewhat. Westpac Consumer Confidence is also out, on Wednesday, with the last print reflecting a -4.8% drop. Also no consensus forecast, and again, Victoria may drag on consumer confidence.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907