Mutual Daily Mutterings
Quote of the day…
“I don’t smoke. I just don’t sleep, man; there’s the trouble. I gotta sleep sometime. But, there’s too much happening, why sleep man? I might miss a party!” – Janis Joplin
Periodic spread changes…
Source: Bloomberg, Mutual Limited
“Jobes, jobs, jobs…”
- Overview – the main focus overnight was the release of the FOMC minutes and in a market’s context, it was a fizzer, i.e. no surprises. The board elected not to signal any changes to its bond-buying program anytime soon and policy rates were all deemed appropriate. Stocks did, well, not much by the end of the day, although intra-day US markets moved around a little, with the emphasis on little…volumes again subdued. Bond yields were plus or minus a couple of basis points globally, certainly not breaking free of recent trading ranges. Credit did its thing, with offshore primary markets active. The FOMC indicated it would likely be some time before conditions are conducive to scaling back the Fed’s asset-purchase program. Uncertainty around the growth outlook (vaccine efficacy and evolving COVID variants must be causes for concern) is enough to keep policies accommodative for the foreseeable future. The recent surge in treasury yields was considered reflective of improved economic prospects rather than the inflation risk narrative being touted by markets collectively…i.e. policy makers see inflation risks vs growth as balanced. Either way, it’s another choose your own adventure! Talking heads…”the rate side is still somewhat front and centre, and probably the biggest risk to what is going on with equity valuations…clearly, there’s been a repricing of inflation expectations higher this year, and at times, the stock market has struggled with it. I would say that’s to me the biggest risk at this point — that inflation readings start to come in to the point where the Fed potentially has to alter their plans.” Yep, what he said. Further, “if yields are going up because the economy is reopening and massive real growth is expected, that won’t bother the economy or the stock market…but if interest rates are going up because of inflation – so a loss of purchasing power – that’s a problem for the economy and the stock market, and we’re going to continue to have that debate.” Nothing really new here in the overall narrative, more of the same, but we’re just waiting on some data / evidence to signal which narrative is more ‘right’ than the other.
- Offshore Stocks – a mixed bag, but with only a handful of meaningful moves. Across the S&P 500, around two-thirds of stocks closed lower, while across the various sectors it was reasonably balanced, five up, six down. Leading the gainers were Telcos (+0.7%), Tech (+0.5%) and Energy (+0.5%), while at the other end of the tables, Materials (-1.8%), Industrials (-0.4%) and Healthcare (-0.2%) took home the participant’s ribbon.
- Local stocks – another solid session in local markets, with the ASX 200 closing at new post pandemic highs, 6928, +52% from pandemic lows, but still -3.3% short of pre-pandemic peaks (7162 on 20-Feb-20). ASX 200 forward PE’s remain elevated, 19.4x vs 19.1x recorded just prior to the market correction in March last year. Nevertheless, the index is well below pandemic peaks, 22.6x (Nov-20). Current forward PE’s remain well above historical averages (2004 – 2021) of 15.4x, with a range of 9.4x (Oct-08) to 22.5x (Aug-20). Forward EPS forecasts (Bloomberg) are running at $356/per share, up +18.7% YTD as the street factors in a buoyant and aggressive recovery, aided by vaccine rollout (eventually!) and continued policy stimulus and support. Forward EPS forecasts troughed at $269/per share over the past 12 months, down some -29.0% from pre-pandemic expectations ($380/per share as at Jan-20). Back to yesterday’s action, it was a reasonably board rally, with 67% of the ASX 200 closing in the green, while all sectors closed higher. Energy (+1.4%), REITS (+1.3%) and Tech (+1.0%) were top of the leader board, with the participants ribbon going to Telcos, Financials, and Industrials, which were all up around +0.3%. Futures are pointing to another firm opening.
- Offshore Credit – reasonably active, and still quite constructive. Across US IG markets, US$4.1bn was priced from six companies. Borrowers paid negative concessions, driven by order books that were 2.9x oversubscribed on average, which translated into 26 bps in spread tightening from IPT to launch. Weekly volume has reached US$15.3bn with supply on track to meet expectations of US$20bn for the week. European markets saw a bumper day of primary action with €20.2bn priced. Deals were 4.1x covered on average, with spread tightening of 12.4 bps, which is modest by recent standards. Reflecting the slumber party in stocks, CDS similarly was dozy, less than a basis point movement across the main indices.
- Local Credit – Traders talk…”liquidity yesterday was in line with what we saw on Tuesday, if anything flows were on the lighter side. Reassuringly this theme is ringing true not just in the AU secondary credit market but also the broader fixed income complex”. Surprisingly also on the flow front, i.e. there was little, even amidst ANZ retiring $2.825bn in senior unsecured paper. “Whilst yesterday’s volume underwhelmed, we expect the redemption related flow will eventuate shortly as investors are spurred by the density of upcoming maturities and inevitable cash overhang”. Yeah, what he said. Major bank paper, both senior and tier 2 remain unchanged. It has now been 455 days since the last major bank senior deal in A$…ignoring the recent ANZ 1-year line, that doesn’t count. This absence of major bank issuance (senior) has been caused by the RBA’s Term Funding Facility, which is scheduled to expire at the end of June. Assuming funding markets remain constructive, I see no reason for the facility to be extended, so there is hope of seeing the majors active in primary markets again. As for the TFF, the RBA’s recent minutes indicated that ADI’s had drawn $95bn of the facility, with a further $95bn available to be drawn. Moody’s commented yesterday that an expected growing funding gap would see major banks active in markets sooner rather than later, fuelled by a falling savings rate (ergo increased spending rates), and strong housing market conditions expected to spur credit growth. Spreads yesterday across major bank senior and sub were unchanged.
- Bonds & Rates – minimal movement in yields following the FOMC minutes overnight. Expanding on the asset-buying program, the FOMC minutes indicated the Fed believe it’ll “likely be some time” before the economy recovers enough to begin tapering. Markets are less convinced, which is not a new narrative – it’s being playing out over the past 4 – 6 months, with interest-rate futures pricing in the probability of a rate hike in the second half of 2022, well in advance of what the Fed so far has indicated. Overnight US 10-year yields drifted a touch higher, and with a ~70% correlation between local bonds and US treasuries, there’s a good chance local yields will drift a touch higher also.
Macro – again, referencing the FOMC minutes, “Inflation? Nothing to see here, move along“, which appears to be the Fed’s prevailing mantra. They chant it while holding hands around the Fed board room table before each meeting, sandwiched in between the Lord’s Prayer and Kumbaya. A post pandemic surge in consumer prices is expected, likely “well in excess” of 2.5%, however the Fed’s base case is they’ll settled back down in subsequent quarters. I’m not sure markets are buying it – the question becomes, for my mind, whether the surge in costs (shipping costs, raw materials, etc) represent a one-off lift, as an adjustment to changed post-pandemic operating conditions, or the start of incremental and sustained run up in costs. The jury is still out on this one for me, I can see arguments and counter-arguments for both. At this stage, consensus average US CPI forecasts have inflation spiking to 2.5% in 2021, then moderating to 2.2% over 2022 and 2023. Between 2014 and 2020, inflation ranged between 0.1% and 2.5%, averaging 1.5%. Similar trends are evident in the Australian CPI expectations.
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Scott Rundell, Chief Investment Officer
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