Mutual Daily Mutterings
Quote of the day…
“The problem with cats is that they get the exact same look on their face whether they see a moth or an axe-murderer” – Paula Poundstone..…
Chart du jour…commodities heat map
Source: Bloomberg, Mutual Limited
“Yellen & Screaming…”
Overview…”Yellen whispers sweet nothings…”.
- A modestly mixed session across risk markets. In Europe, some modest gains, and yep, some modest falls. Similar in the US, with a mix of catalysts driving parts of the market in different directions, but again…no meaningful change to the narrative. The S&P 500 and DOW both turned lower after earlier climbing toward all-time highs, though the Nasdaq rose on company specific headlines. Broadly, investors are still weighing inflation risks, plus, a more recent addition to the risk soup, the potential impact of the G-7 approved minimum corporate tax that could enable foreign governments to impose levies on big American companies.
- Treasuries and European sovereign bonds dipped (yields higher), but moves were modest…there’s that word again. Local bonds yesterday saw a decent rally, in turn following leads from offshore the night before – much of the move, if not all of the move, coming well before Australia’s sovereign rating was affirmed by S&P (‘AAA’) and the outlook amended from ’Negative’ to ‘Stable’. Across commodities, oil declined while gold advanced. Asian equity futures are slightly higher.
- US Treasury Secretary, and former Fed Chair, Janet Yellen has been making some waves, maybe more like ripples, but she’s out there saying stuff. She commented that higher rates would be a plus, keeping the taper conversation alive and kicking despite the apparent reprieve following Friday’s Non-Farm Payrolls miss. At the margin this could mean that Treasury yields will have limited downside in the near term as traders await the Fed meeting next week. Yellen also encouraged President Biden to persist with his US$4 trillion infrastructure spending dream. If he achieves his goal here, there is a fear that it could make an inflation increase appear more sticky than transitory….and therefore for the Fed to taper and tighten sooner.
- Short of a seismic shift in risk appetite from some unforeseen catalyst, markets will likely tread-water or range trade through to next week’s Fed meeting
- Offshore Stocks – US markets teased new all-time highs in early trading, but the prospect of new taxes on some of the US’ largest corporate champions, including Amazon, took a droplet of jam from the market’s donut – particularly the DOW (-0.4%) and S&P (-0.1%). This was offset to some degree by solid gains in ley stocks on company specific headlines – i.e. Biogen rallying strongly on FDA approval of its Alzheimer’s treatment. Around two-thirds of stocks in the S&P 500 fell overnight, and only four sectors were able to gain ground. The top three sectors were REITS (+0.9%), Telcos (+0.5%) and Healthcare (+0.4%), while at the back of the bus causing trouble, we had Materials (-1.2%), Industrials (-0.7%) and Financials (-0.6%).
- Local stocks – on the surface a nothing day in local stocks with index down a touch, -0.2%, with the number of stocks up on par with the number of stocks down. Only two sectors bled on the day, but unfortunately for the broader tone, one of those sectors was Financials (~30% of the index) and it was a meaningful drop. NAB copped a trousers down, six of the best, down -3.2% on headlines that AUSTRAC was investigating the bank for alleged Anti-Money Laundering failures or inadequacies. Seriously? CBA, then WBC, now NAB! Just like the Victorian government, failure to learn from their own and other’s mistakes. The other major banks were down -06% – 1.3% in sympathy on the day, while Macquarie starred, up +3.2%. At the top of the table was Tech (+2.8%), mainly on the back of Altium (+39%), Nuix (+6.2%) and AfterPay (+2.0%), followed by REITS (+0.9%) and Utilities (+0.8%). Futures are pointing to very modest gains in the ASX 200 this morning.
- Offshore Credit – from Bloomberg…”high-grade companies and banks are borrowing at an increasingly rapid clip as signs accumulate that the best funding conditions since 2007 may not last. Monday’s onslaught of 12 new U.S. investment-grade deals is the biggest daily count since March 3. Historically cheap funding costs, a desire to get in before a summer lull and the Fed’s decision to unwind its secondary market corporate credit facility are all spurring companies on. They have been somewhat insulated from the impact of higher government yields by spreads over Treasuries staying razor thin”. Hmmm, yes and no. The Fed corporate buying facility is a drop in the ocean via a vis its size relative to the broader US$ credit market. That is, it would have zero interest on market technicals and pricing.
- Local Credit – big news in the local credit market yesterday with first the Australian sovereign rating affirmed (AAA) and outlook amended from ‘Negative’ to ‘Stable’. Despite the return to ‘Stable’ outlook, Australia’s Sovereign CDS widened by +4 bps to 14 bps. It was only a matter of time before the major banks followed suit, and that they did by the end of the day, all affirmed at AA- and their outlooks amended to ‘Stable’ (from ‘Negative’). The affirmations came through after 5pm, so no market impact – and the sovereign change did little either. Note, this has no impact on the major bank tier 2 ratings. Per S&P’s rating methodology, tier 2 ratings are not pegged to the senior rating, which includes uplift for implied government support. Any tier 2 ratings upside is reliant upon Australia’s ‘Bank Industry Credit Risk Assessment’ score, or BICRA, being upgraded. Possible given recent changes in underlying outlooks, but not imminent. Given the timing of the outlook changes, major bank senior paper was unchanged, and same for tier 2. Focus on the day was more around primary – trader talk… ”…Wesfarmers announced intentions to price a 7yr & or 10yr Sustainability-Linked Bond which if successful would be the first of its kind within domestic market. Charter Hall LWR was also out yesterday marketing potential 8.5yr notes, NHFIC mandated for a $100m 10yr Social Bond and AFDB for a 5.5yr Social Kangaroo Bond at ASW+23-25 bps. Secondary volumes were modest however we saw better buying in offshore financials and better selling in corporates, likely on the back of today’s announcements”
- Bonds & Rates – US treasuries closed a touch lower with yields +1 – 2 bps higher. 10’s at 1.57% – but still toward the bottom end of recent trading ranges (1.54% – 1.74%). Circling back around to Yellen’s comments on interest rates, I borrowed this from a former colleague, known as the Fonz…(coz he’s cool and looks like the Fonz)….”Treasury Secretary Janet Yellen’s comments on interest rates over the weekend were not a prediction or recommendation about the fed funds rate trajectory but a reference to a level of interest rate consistent with an economy at equilibrium. Yellen stated “if we ended up with a slightly higher interest rate environment it would actually be a plus for society’s point of view and the Fed’s point of view”. I’d expect treasuries and bonds in general to range trade until the next Fed meeting (June 16th). Local bonds yesterday closed higher (yields lower), following on from the treasury’s lead, which was in turn on the back of weaker than expected (but still solid) US non-farm payrolls. Yesterday saw a bit of market commentary around whether the RBA would extend its YCC bond buying from the Apr-24 bond to the Nov-24. There is a growing consensus that the RBA won’t extend from the April to November bond, which has seen the spread between the two widen to new highs, +20 bps. There’s not a lot of market moving data out over the coming week, so local markets will likely remain beholden to offshore influences.
- As noted earlier, S&P affirmed Australia’s sovereign rating, and somewhat surprisingly amended the outlook to Stable (from ‘Negative’)…I’ve cherry picked some comments from CBA given they were almost thumping the table on a downgrade recently….“the shock news of the day was that S&P affirmed Australia’s AAA rating, without having waited to see all the state budgets. S&P have shown a lot of faith in the medium-term forecasts and have returned Australia to AAA (Stable). In particular, S&P are confident that the iron ore price will be much higher than the Government estimates (which is fair, the Government forecast is conservative on that point) but also that the next three years will play out largely as forecast overall, or better. We are surprised that S&P are that confident about any forecast for 2024, but it is true that the economy is generally recovering faster than anticipated. The timing of the announcement is unusual, because the state budgets actually feed into large portions of the Sovereign rating and are mostly not yet released”
- Macro – nothing of significance out overnight in offshore markets and today locally we have business confidence data (11:30am). The next offshore data of market significance is US CPI data, out tomorrow night.
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Scott Rundell, Chief Investment Officer
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