Mutual Daily Mutterings
Super Bowl Quote of the day…
“Nobody in football should be called a genius. A genius is a guy like Norman Einstein” – Joe Theisman..I believe Albert was pretty smart too
“Super Bowl LV vs the ‘Rona”
Source: the google….
“Break out the beer and hot wings…”
- Overview – a mixed session in offshore markets on Friday night, following on from a solid session across Asian markets, including the ASX 200. European stocks were mixed, while US stocks extracted modest gains with US payrolls missing to the downside (more below), and again, bad news is good news for markets. The employment miss implies a bigger fiscal aid package. The S&P 500 hit yet another record, closing up ↑7% on the week and ↑7.0% over the past 12 months…what pandemic? Yields increased across the board and curves steepened. Oil and gold both advanced. On the US fiscal front, Biden’s US$1.9 trillion aid package was voted through the Senate with both sides voting along party lines – VP Harris casting the deciding vote. Congress now has until 16 February to draft up the legislation. The key identifiable risks to rise sentiment here and now include any setbacks in the global distribution of vaccines and any re-acceleration of infection rates, necessitating economic lockdowns. Of course, if the four Horseman of the Apocalypse come galloping over the horizon, that’d upset the risk applecart also, but that’s an extremely left field risk.
- Offshore Stocks – a modest end to the week, but a strong week nonetheless with both US and European stocks closing up on the week ↑0% – 5.0%, with the S&P 500 hitting yet another record high. Steepening bond yields are helping boost investor optimism. With the next wave of fiscal moments away, volatility continued to wane. The VIX dropped to 20.9%, a fraction above the post-pandemic lows (20.6%, Nov 30), but still ~30% above pre-pandemic levels (13% – 14%). Short of a major shock of some kind, the fiscal stimulus adrenaline shot will likely keep volatility low and declining. Add to this the existing abundance of liquidity and sentiment should remain relatively buoyant for the near term. But, I’m still cautious on valuations, which are maxed out relative to historical relativities and underlying fundamentals.
- Local Stocks – a solid end to the week locally. IT (↑1%), Financials (↑5.7%), and Consumer Discretionary (↑4.4%) were best performers, although Financials dominated ASX 200 performance. Offshore themes have been arguably dominating local sentiment, but local reporting season kicks off this week, so we’ll get a better gauge of how much damage the pandemic has done – notwithstanding fiscal support muddying the waters. Several REITS are reporting which will garner a lot of attention – especially retailers. The one I’m most interested in is CBA (1H’21), specifically to see what they’re doing with provisioning and what credit costs are looking like (Feb 10). Futures are pointing a very modest (↑0.1%) open.
- Offshore Credit – “tioght, tioght like a tioger”….no, that’s not a typo, that’s me trying to type with an accent, specifically a Dutch accent, more specifically “Goldmember”, from one of the Austen Powers movies. Secondary spreads continue to grind tighter despite still very healthy primary action. Alibaba, the “Amazon of the Orient”, priced a four-tranche US$5bn deal – including an ESG* bond. Book cover was almost 8.0x ($38bn), and while the ESG bond had the lowest cover ratio, it tightened 33% more than the other three lines. In aggregate the deal tightened ↓40 bps from launch to final pricing, suggesting the political dynamics surrounding the name were or are of little significance. *”While it’s long been argued that green bonds trade ‘technical’ in the secondary – typically larger, more price-insensitive investors are willing to pay extra in the secondary market to own ESG bonds in their portfolios – we’re beginning to observe outperformance in the primary market also” (Bloomberg). Volume on the week reached US$45bn vs US$30bn projected.
- Local Credit – a relatively quiet end to the week. According to our friendly traders in the street, “underlying sentiment remains firm with better buying across all sectors”. Asian accounts also returned, actively buying in AUD credit in more meaningful size than recent weeks. The aforementioned trader opined that “perhaps” Asian buyers were “buoyed by the massive rally this week is USD Asia and the relative underperformance of AUD credit. Offshore financials and corporate paper proving most popular.” Major bank senior paper is stuck in the mud and seemingly not going anyway in a hurry. The Jan-25’s are at +24bps, while the three-year part of the curve is around +18 bps. Major bank tier 2 however continued to tighten, another couple of basis points on Friday, and all the 2026 calls are pricing sub-150 bps (+147 – 149 bps). Expect more tightening here, while seniors won’t do much.
- Bonds – curves continue to steepen across the globe, a theme that persisted on Friday and over the week with US treasuries 2s10s 11 bps steeper on the week. ACGB’s followed the trend, but with less vigour with 3s10s ↑7 bps steeper on the week. Steepening yield curves reflect the perceived better economic growth prospects and negative yields, in some instances, reflects expectation that policy rates will stay low for a long time. On Friday, treasury yields inched higher again on Friday with two-year yields matching their May 2020 record low, weighed down by demand from investors looking to park an abundance of cash. Local bonds (10-year) hit post pandemic highs on Thursdays, 1.23%, just 2 bps behind consensus expectations for the end of the year. They eased off on Friday, dropping to 1.20%.
- Macro – US jobs data underwhelmed on Friday, giving a boost to Joe Biden’s push for an outsized stimulus package (over and above what’s already in the pipes). January non-farm payrolls rose just ↑49K, less than half of consensus expectations, while December’s decline was revised to a miserable ↓ The unemployment rate slipped to 6.3% from 6.7%, partly because some Americans gave up looking for work. Almost 600K positions in the restaurant and lodging sector have been lost in the past two months. The next cab off the rank for US data is CPI (Thursday), with consensus at +0.3% MoM and +1.5% YoY. Locally, we have NAB Business Conditions and Confidence tomorrow and Westpac Consumer Confidence on Wednesday…apart from that, pretty quiet on the data front.
- Super Bowl – I normally watch one NFL game a year, usually Super Bowl, but since joining Mutual I find myself watching more….it’s popular here, although there is a degree of indifference this year, no one’s team is playing. For those who have only a passing curiosity, this year it’s between Kansa City (Chiefs) and Tampa Bay (Buccaneers). With only a modicum of care, I’m ‘rooting’ for the Chiefs, who have reigning bragging rights from last season. As for why I’ve chosen them to support this year, well it’s very complicated and somewhat scientific. Firstly, I have Chief in my title, so that’s a start. Secondly, I don’t like Brady, the Tamp Bay quarterback. He has too many things going for him, looks, wealth, a super-model wife, and a cupboard already full of silverware…so yes, a bit of tall-poppy syndrome creeping in. Time to let someone else have some fun in the sun. The Chiefs are favourites at $1.61 vs $2.34 for the Buccaneers per SportsBet.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907