Mutual Daily Mutterings
Quote of the day…
Bubble-like conditions make it possible to achieve incredible success if you’re simply prepared to drink deeply of the narrative and dispense with risk management” – Cameron Crise (Bloomberg)
“Looking for some sustainable direction…”
- Overview – it started out as a modest risk-on session overnight (European stocks up), but the bulls ran out of puff heading into the close, especially with tech stocks on the nose as investors cycle out of growth stocks into value stocks. Ten-year Treasury yields jump toward 1.6%, 12-month highs, while the USD strengthened. Brent crude briefly traded near US$70/bbl before pulling back (WTI -1.7%). Gold slumped (-1.1%) and Bitcoin traded above US$51,000 (+3.6%). Broadly speaking investors continue to embrace the prospect for a surge in global economic growth as vaccine distribution improves and the US is on the cusp of passing a $1.9 trillion spending bill. However, the risks associated with rising Treasury yields remain an overhang amid fears that government (US) aid programs could overheat economic growth and therefore push inflation into uncomfortable territory, ie. requiring – in theory – tightening of monetary policies. Talking heads (PIMCO)… “you will see a lot of volatility in markets…we believe that confidence is improving, especially with vaccines coming online, so we will see an uptick in growth globally. There are a lot of reasons to be confident in the market, but a lot of this is also priced in.”
- Offshore Stocks – a solid session in European markets with DAX up +3.3%, STOXX up +2.6%, and FTSE up +1.3%. The US market picked up the baton on the open with markets quickly out of the gates. However, toward the end of the trading day, the S&P 500 gave up its early advances, which topped +1.0% as tech shares dropped -1.5%, down -1.9% heading into the close. The power of tech stocks on display, only two sectors within the S&P 500 were in the red, Telcos (-1.1%) and Tech stocks (26% weight). Approximately 72% of stocks in the index closed in the green, yet the broader index struggled to keep its nose above water. The NASDAQ tumbled almost -2.0% with Tesla Inc. pushing its five-day rout past -20.0%. Closer to our own time-zone, yesterday we saw China’s main stock index enter a correction on concerns around liquidity conditions and valuations in some of the recently favoured stocks build. The CSI 300 Index dropped -3.5%, breaking through its 100-day moving average and putting losses from its recent February 10 peak to -13.0%.
- Local Stocks – modest gains in local stocks yesterday, reasonably broad-based with seven sectors up, four down. Just under 60% of stocks sporting a light shade of green, dominated by Materials (+1.7%), Staples (+0.7%), Energy (+0.7%) and Financials (+0.5%). At the other end of the championship tables, vying for the daily wooden spoon were Tech (-1.1%), Healthcare (-0.8%), Industrials (-0.7%) and REITS (-0.2%). Over the past week stocks are largely unchanged, although volatility has ticked up a notch, from 16.0% to 18.2%, primarily, I suspect, as markets continue to digest inflationary pressures and what rising bond yields mean for the sustainability of the post pandemic recovery. Tech stocks hit hardest in rising yield environments as valuations look less attractive – value coming to the fore, but it is honestly a day-to-day proposition. While optically US stocks were running out of steam, it was limited to tech stocks – not a big component of the local market (<4.0%), accordingly, futures are indicating a reasonably buoyant open, +0.7%. Chinese futures in the toilet again, down -3.6%, while NIKKEI (+0.5%) and Hang Seng (+0.7%) are looking okay.
- Offshore Credit – a heavy session of US IG issuance, no aggregate deal metrics yet available, but optically the market remains constructive with books over-subscribed and decent spread compression from launch to final pricing. Despite the relative buoyancy of primary, secondary spreads continue to drift wider. In EU markets, a modest session of issuance, or deal announcements, five issuers for €4.1bn priced. Secondary spreads are a smidge wider. CDS moves mirrored equities, with CDX +2.5 bps wider, while MAIN was half a basis-point tighter.
- Local Credit – a broadly constructive day across Aussie credit yesterday. Traders are reporting “good participation from a range of domestic and offshore buy side accounts with SSA’s proving to be the sector of choice”. Nevertheless, flows were on the lighter side. The focus however remains on the front end of the curve with short dated paper remaining well bid. The net result for major bank senior was unchanged, with the Jan-25’s at +34 bps (+10 bps to recent lows), while the 3-years are at +25 bps (+7 bps to recent lows). In the tier 2 space, not a lot of flow, however traders are indicating the street remains better bid across the board. The $700m WBC Mar-26’s are due to be called on Wednesday and it is highly likely this cash will be redeployed back into the tier 2 space in secondary. The curve closed a basis point tighter, with more grinding tighter likely.
- Bonds & Rates – US treasuries have stabilised somewhat, but they are almost +20 bps higher (10-Year) over the first week of March, now sitting at year highs. Potential catalysts for another leg higher include inflation data, particularly February consumer prices, which are released Wednesday evening our time. A series of Treasury auctions beginning tonight could also be a catalyst for movement after a poorly bid auction of seven-year notes a couple of weeks ago (Feb. 25) unleashed a flurry of selling (and yield increases). From Bloomberg “with market-based inflation expectations, derived from yields on inflation-protected Treasuries, near levels last seen in 2014, an upside surprise by February consumer prices could bolster the view that higher nominal yields are required. Weak demand for the 10-year note auction later the same day or for the 30-year bond sale the next day would suggest that Treasury supply remains a problem even though auction sizes increases have paused.” On the $1.9 trillion fiscal shot in the arm, which is seen as a major contributor to inflationary fears, Former Fed Head and current Treasury Secretary, Janet Yellen, dismissed inflationary fears, stating “I really don’t think that’s going to happen,” noting that inflation before the pandemic “was too low rather than too high“. Full employment is the target, inflation be damned…for now. The fiscal package will be voted on tonight in the Senate. Local bonds yesterday dropped -6 bps to 1.77%, but remain +10 bps higher on the week.
- Macro – no meaningful data of note overnight, and locally today we have NAB Business Conditions…and that’s about it.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907