Mutual Daily Mutterings
Quote of the day…
“I could tell my parents hated me. My bath toys were a toaster and a radio” – Rodney Dangerfield
- Overview – a bit of a meh session, stocks did very little as investors weigh up whether continued commitments by the Fed and Biden’s willingness to let the economy run hot will spark destabilizing inflation. Probably yes, at some point would be my call. Inflation expectations are near the highest since 2013, and questions are being asked about when the reflation trade in bonds could start to threaten equities. Either way, in the microcosm of a day, stocks fluffed around and did very little, while bonds displayed an aged sloth like lethargy…yields drifting lower. In other news, the second impeachment trial of Trump kicks off in the US Senate. Basic scenario is this, 100 senators will act as jurors, minimum of 67 required for a conviction, the current split across Democrats and Republicans is 50:50. For those that struggle with the maths, that’s 17 Republicans needed to cross the floor…dubious, no conviction likely.
- Offshore Stocks – the recent run of positive momentum seems to have faded overnight with US indices oscillating around the ‘unchanged’ levels, give or take a few basis points…directionally into the close however was positive with the S&P500 closing marginally ahead and off its intra-day lows (↓3%). Had to happen at some stage, a stall in momentum that is. The question is, are we approaching an inflection point, on the eve of a pull-back, or was it just a slow day with the retail FOMO’s just catching their breath, re-grouping before another assault on the castle of irrational exuberance. To this end, I note a comment from David Rosenberg “what is generally referred to as “liquidity” is really more about “momentum” and “speculation.” This is not about earnings: this past quarter’s EPS will end up being nearly 20 per cent below where the consensus estimate was exactly a year ago in level terms. But the market is up, not just 70 per cent from the lows, but 15 per cent from a year ago, when the market believed profits would be almost 20 per cent higher than is actually the case”. Rosenberg argues that in the long run, fundamentals always matter…a view I have a soft spot for. Split between the losers (stocks without medals) and winners was roughly equal and only one sector was more than 1.0% down on the day, Energy (↓1.0%).
- Local Stocks – a moderately tough day on the tools in the ASX 200 with 70% of stocks closing down on the day. REITS (↓1%), Utilities (↓1.4%) and Health (↓1.3%) falling most, but Financials (↓0.7%) did the most damage to the broader index, driving a quarter of the fall. No sector was spared the rod, all sporting shades of red. Reporting season brought a mix of results. Dexus reported a ↓6% drop in FFO and ↓55% fall NPAT, which wouldn’t have surprised many directionally. Shopping Centres Australasia provided some upbeat numbers, with regional and suburban shopping centres faring well through the pandemic. Suncorp reported solid numbers, aided by no repeat performance on the provisioning front, large last period, absent this half. Margin growth, aided by the RBA’s TFF, sufficiently offset weak asset growth. Today we have IAG and CBA as the two I’ll watching most closely, especially the latter. Almost a quarter of the ASX 200 has reported their interim results now, with aggregate sales down ↓2.2% HoH and aggregate earnings falling ↓34.2% HoH. Futures are pointing to modest gains, ↑0.2%.
- Offshore Credit – reasonably active across both US and EU IG primary markets with deal metrics constructive on average and secondary spreads continue to grind in. Of interest, over the past week we’ve seen US HY yields fall below 4.0% for the first time since Adam was a boy. The iShare IBOXX HY ETF yield has fallen to 3.85%, a new historical low and the first time HY yields have been below 4.0%. This compares to 5.5% a year ago and a 12 month average of 5.9%. Oh the exuberance, I’m sure it’ll all end well.
- Local Credit – the only part of the local credit market showing any life is in major bank tier 2 paper, which legged it tighter yesterday across the curve. The word on the street is “the market had felt like it was on the precipice of this move for the last week and yesterday spreads gapped ↓4-5 bps tighter as buyers aggressively looked to add risk. Buyers concentrating on 2029-24s to 2031-26s maturities”. The technical backdrop has been tight for a while now, i.e. lack of supply, a theme that will likely persist, at least in the short term. Strong buy side demand will very likely continue to drive spreads tighter. Fingers crossed issuers on the sidelines have had their interest’s tweaked by recent spread action and are about to kick their DCM teams out of their issuance funk to give the market what it craves, more paper. Across the 2026 callable paper, spreads are ↓4 bps to +143 – 145 bps, while the 2025 calls are ↓3 – 4 bps to +139 – 142 bps. MQG’s 2025 call is ↓5 bps tighter at +164 bps. This line priced in May last year at +290 bps.
- Bonds – local bonds pulled back a bit yesterday, in a yield sense, down 2 – 4 bps across the curve, with a modest bull-flattening. The 10’s are still very much elevated relative to street expectations, 1.23% at the close yesterday vs 1.07% by the end of Q1’21 per the street. If current levels hold, or if we range trade plus or minus 5 bps through to the end of the quarter, here and now, only a couple of street strategists will have bragging rights, most will be off the market by 15 – 20 bps. Overnight, US treasuries rallied a basis point or so around the 10-year mark. Over the past 30-odd days the US 3s10s curve has steepened around 10 bps on the reflation trade, while the 5s30s are around 8 bps steeper.
- Macro – on the inflation front, in the US, Fed officials were on the wires overnight, sounding confident in their view that price spikes will be at worst a transitory problem as the economy recovers. “The temporary jump in inflation or rise won’t surprise me — the question for me will be how persistent is it….the jury is out on that right now.” From the Dallas Fed Chief, Kaplan, with similar comments from colleagues. US inflation data is due out later tonight our time, with consensus for January at +0.3% MoM vs +0.4% in December, and +1.5% YoY vs +1.4% YoY for the year to December. Locally consumer confidence data comes out, which should show signs of improvement.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907