Mutual Daily Mutterings
Quote of the day…
Lyndon Johnson on the media – “If one morning I walked on top of the water across the Potomac River, the headline that afternoon would read: ‘President Can’t Swim.’…”
The satirical world…
Overview – “Cautious…”
- Offshore markets closed the week out with a whimper. Equity markets closed marginally changed on the day, in either direction. Over the week however, stocks were down globally, with US markets leading the charge. Stocks that hitherto had been market darlings, i.e. tech, have started to lose their lustre as investors being to question valuations that are stretched on any measure. It was the worst week since March for US markets. Regional index futures are pointing to a cautious open this morning.
- Elsewhere, treasuries were a touch firmer at week’s end with yields down a basis point. On the week, treasuries were better bid, reflecting the broader risk off tone, curves bull flattened. Closer to home and we had a modest bear steepener. Offshore credit held firm relative to the weakness observed across equities with spreads marginally wider and primary markets very active. A touch quieter in primary in A$ markets, while spreads sported a similar tone, very-marginally wider. Synthetics (CDS) closed the week a touch wider also.
- Vaccine update – after pausing their vaccine trials on account of a trial participant being hospitalised, AstraZeneca and Oxford have kicked their UK trials off again. The UK health regulator recommended that the trials resume after an independent review of the safety data triggered a pause on Sept. 6 with no details about the participant’s sickness disclosed.
- US election update – polls still have Biden ahead, with 50.5, leading Trump on 43.0…for what it’s worth. The 2016 election polling showed Trump trailing Clinton, yet we all know how that turned out. On a side note, which I found amusing…Trump arrived at a rally in Michigan late last week to the Creedence Clearwater Revival song “Fortunate Son”. Obviously who ever chose the song hadn’t listened to the lyrics, because it’s a very curious choice for a wealthy heir who avoided the Vietnam draft by receiving five medical deferrals. “Some folks are born, silver spoon in hand. Lord, don’t they help themselves, y’all,” the song goes, later adding in the chorus: “I ain’t no millionaire’s son, no, no.”…see here for the song, a favourite of mine to be honest.
- Elsewhere in global politics, on Friday there were a raft of Brexit headlines, although little market moving (for those that we’re interested in). These included the press citing officials on both sides of the pond digging in their heels and Reuters reporting the EU will not approve any EU-UK trade deal without full implementation of the Withdrawal Agreement.
Credit – “holding fast despite stocks pulling back…”
- A modest end to the week in offshore primary markets with $2.9bn across two issuers in the US, which took issuance on the week to $68bn vs predictions of $40bn – $50bn. Deal metrics remain robust. Across in Europe €2.5bn priced, also sporting robust deal metrics with books 5.0x over-subscribed and spreads compressed ↓37 bps from launch to final price.
- While stocks have pulled back in the past week, credit spreads have held fast, maybe a basis point or so wider, but generally ignoring the moves in their flashier cousins. Makes sense, while credit spreads have benefited from the Fed’s largesse, and other central bank’s, and fiscal stimulus, credit does not attract as much retail-FOMO attention as stocks. As such, they have not rallied as aggressively.
- Locally, I’ll go straight to the horse’s mouth, from ANZ traders on domestic financials “failed to trouble the scorer today in domestic fins. Pretty dire state really for this sector as flow ever dwindles. We saw some short-dated selling away with sub 1yr well bid. If the demand was there we suspect, we could unearth some decent selling interest in 3-4yr bonds” Major bank senior paper was unchanged on the day, and did very little on the week. In tier 2 space “the excess inventory that has weighed on spreads for the last two weeks has clearly been absorbed and price tension is returning with a number of domestic accounts looking for T2 across both FRN and fixed. No change in spreads today”…also from ANZ traders.
- CBA’s recent 30-25 tier 2 deal is pricing around +179 bps (mid) vs +180 bps at pricing. ANZ’s 31-26, the other recent tier 2 issue, is at +185 bps, also around primary pricing level. NAB’s 31-26 line is pricing around +195 bps, while the MQG 30-25 is at +215 bps. Looking at some older paper, the 29-24 complex (ANZ, WBC, NAB) are pricing at +174 bps.
- Prevailing theme: if the pull-back in stocks remains narrow and measured, then spreads should hold fast. If, however, the weaker tone in stocks expands and runs, then credit spreads will likely come under some widening pressure. Given the continued accommodative policy backdrop, and supportive technicals, any pull back (widening) in spreads should be modest. Narrowing the focus, the key source of fundamental risks for us is mortgage deferrals and the tapering of the JobKeeper program…still a very murky outlook on bank asset quality.
Stocks – “still some hot air to let out…”
- US tech stocks under the pump recently…why? Well, they were and still are over-valued, but what triggered the pull back last week? Borrowing from NAB’s market daily note this morning (slightly redacted)…”trading strategies within the tech sector are under scrutiny with the FT and WSJ running articles on record call options trading and momentum strategies. Potential indicators of frothiness cited in these articles are that single stock and ETF option volumes are up 92% YoY, while small investors are reported to have bought call options with roughly a $500bn notional value in August, five times the previous monthly high for small investors reached back in early 2018”
- On September 2, less than two weeks ago, the S&P 500 reached its all-time high of 3580, some ↑60% off its pandemic lows in March. On Friday it didn’t do much at all, closing just ↑05% firmer on the day. Since its aforementioned peak the index has fallen ↓6.7%. At its peak, the index was sporting a PE (LTM) of more than 27.0x, well above the two-year average of 20.1x, 3 standard deviations above to be exact (ball park!). Even with some of the froth blown off it’s still bloated at 26.0x – relative to the macro outlook.
- Let’s assume for a moment that we’re in a parallel universe, a fantasy land if you will. In this land of rainbows, lollipops and unicorns, let’s assume the Fed hadn’t expanded its balance sheet by over $3 trillion in under six-months, and the US government hadn’t handed out in excess of another $3 trillion (or around 11% of annual GDP) in household income support payments over the same time frame. In said figment of our imagination land, where could we expect the S&P 500 to be pricing? Well, if we were to go back to recent averages, based on forward earnings we could expect the S&P 500 to be at 2609, or down ↓22% from current levels, which would take us back to levels last seen in mid-April. Will this eventuality eventuate? Hard to say, I’d suggest not…at last not while the Fed is all in. We’ll have pull backs and bouts of volatility, especially ahead of the US election, but a greater than 20% drop from here is a challenging scenario to justify all things considered. A lot depends on the election outcome.
- Doing a similar exercise with the ASX 200 and we could expect a correction of ‘just’ 8% – 10%, so pretty modest in the context of recent trading ranges. Why so modest vs the S&P 500? I’d suggest it’s because the rapid ascension in the S&P 500 has been totally cray-cray, fuelled by Jay “Dr Feelgood” Powell’s extraordinary monetary policies and a rather blasé and willy-nilly spraying of cash into household’s wallets. This has seen the S&P 500 at ↑60% since March, materially outpacing the bank and mining heavy ASX 200, up ‘only’ ↑29% over the same time frame.
- Prevailing theme: elevated tactical volatility has become a key theme. Dip-buyers likely burnt their fingers last week, which will make them think again about jumping back in. It’s a trader’s environment given volatility, while for strategic investing markets are populated with potential landmines. By most traditional measures stocks are still expensive compared to fundamentals. Further mini-corrections likely over the next couple of months. Delays in US fiscal stimulus and the upcoming US election represent key headwinds.
Bonds & Data – “range bound for now, mild risk biased to rising yields…”
- Offshore data to end the week, US August CPI inflation was firmer than expected, at +0.4% MoM and +1.3% YoY (vs consensus +0.2% MoM and +1.2% YoY), with the ex-food and energy measure rising +0.4% MoM and +1.7% YoY (vs consensus. +0.2% MoM and +1.6% YoY). For the week ahead, the FOMC meeting on Wednesday is the key focus for offshore markets. Markets will be looking for the FOMC to elaborate on its recently announced average inflation targeting framework, which suggests the FOMC will seek above 2% inflation for a period of time to offset recent undershoots. US August retail sales is also out this week, with consensus expected a +1.0% MoM increase (vs +1.2% MoM in July).
- Locally, we have the RBA September meeting minutes out tomorrow. In last week’s post meeting statement the bank inserted the line that it “continues to consider how further monetary measures could support the recovery”, a line that it has not used before. So, any details on what shape further easing policies could take will be closely dissected by markets. Having said that, negative rates remains a likely no-go zone.
- Prevailing theme: no change…with rates (yields) at or near historical lows, and negative rates off the table, rates are generally “asymmetrically skewed higher” over the year ahead. While global monetary policy will remain accommodative, and extraordinarily so, supply and expectations of macro improvement (admittedly off lows) suggest rising rates. How far? The front of the curve will remain anchored around 0.25%, while the ten-year part of the curve is forecast to push toward 1.0% near term (opened at 0.89% this morning).
International Day of…
- Mon September 14: September 14 is apparently Cream Filled Donut Day (#CreamFilledDoughnutDay). I have clearly been reading the calendar incorrectly since restrictions were put in place, assuming every Monday, and indeed most other days were Cream Filled Donut Day. Even a cursory glance will confirm this
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Scott Rundell, Chief Investment Officer
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