Mutual Daily Mutterings
Quote of the day…
“When you are dead, you do not know you are dead.. It’s only painful and difficult for others. The same applies when you are stupid” – Ricky Gervais
Chart du jour …two cartoon Tuesday
Overview…”duelling forces of monetary policy and geopolitical risk…”
- European markets had a bad day in the office with stocks down -2.0% give or take, and yields higher, which set the tone for US markets. While US markets opened in the red, they did claw their way back to positive territory, just, and only temporarily. US markets were little changed when I bounded out of bed at 4:30am this morning. And, in the time it took to do my morning ablutions and haul my earthly vessel into the office, markets were down -1.0%. Into the close and the tone firmed up a touch. Bond yields were somewhat weaker also.
- The broad narrative remains focused on two broad themes – concerns around Fed policy error and ongoing geopolitical developments. As things stand here and now, it’s likely the balance of influences is tilted more toward Fed policy error, and less toward rising geopolitical risk (Russia). If anything, the latter eased somewhat overnight. But, things can change rapidly.
- Not much in the way of data overnight, but there were plenty of Fed officials spruiking their personal views…officials affirmed support for policy tightening, although differences remain on scope and speed. Some, such as James Bullard, want to “front-load” rate hikes, calling for +100 bps of hikes by July 1, and also warning the Fed’s “credibility is on the line.” Thomas Barkin on the other hand favours a “steady move back” toward normalizing monetary policy. Others advocated a systematic approach that’s careful to not “oversteer,” with a preferences for gradual change.
- Talking heads…it’s “hard to see a happy ending” for bonds in a scenario of rising interest rates (JP Morgan)…“we are in somewhat of a hot mess. We’re in the middle of the Fed’s last policy mistake and concerned about their next policy mistake. Right now, caution is the name of the game.”
- In geopolitics, some rational intent emerged with headlines doing the rounds that Russia’s Foreign Minister was proposing talks with the west continue. Putin by all accounts agreed. Talking heads…“if an armed conflict between Russia and Ukraine is somehow avoided, a short-lived relief rally is likely, but there are still too many worries on the horizon for any type of longer lasting upward move higher in stocks…it is time for investors to raise cash. Cash is the ultimate king when markets are volatile.”
The Long Story….
- Offshore Stocks – European markets closed on the backfoot, comfortably in the red across the board. This set the early tone for US markets, and a choppy day ensued. After briefly popping up for some clean air, key US indices closed moderately weaker. More stocks retreated than advanced, 79% to 21%, and only two sectors were able to advance on the day, Discretionary (+0.6%) and Telcos (+0.3%). Elsewhere it was a sea of crimson, led by Energy (-2.2%) at the top of the rubbish heap, followed by Financials (-1.1%) and Healthcare (-1.1%). Market trend from here, tactically at least, will depend on Fed policy decisions (next meeting 15-16 March) and geopolitical developments, which could be a day-by-day proposition. Caveat emptor, buying only for the brave…or stupid.
- Local Stocks – a modest ‘up’ day for local stocks, although it was a reasonably shallow rally. Around 55% of stocks retreated. Financials (+1.5%) did all the heavy lifting, with Energy (+3.4%) providing support (smaller proportion of the index). Healthcare (-1.4%) was the biggest headwind, with two-thirds of the sector in the red. Materials (-0.4%) was another headwind, reversing some of the prior session’s gains. We’re in the midst of interim reporting season for local markets with just under a third of the ASX 200 reported. Aggregate sales have risen +10.3% on the pcp, while aggregate earnings are up 4x (397%) on the pcp (Discretionary & Utilities the main drivers). Around 77% of those that have reported so far have posted revenue growth, but only 63% have reported earnings growth. Unlike US reporting season, which has been largely one way traffic, the local season is very much mixed, particularly on the earnings side. Nonetheless, the ASX 200 has outperformed global peers on the week, up +1.87% vs losses of around -2.0%%. Although, with weak leads and futures in the red early (-0.9%), the performance gap will narrow somewhat.
- Offshore credit – A Bank of America investor survey in the US is indicating credit investors are in a “sell what you can” mood. Goldman Sachs also is telling clients to switch to cash. In Europe, according to another Bank of America survey, the net overweight position in IG debt dropped to 16%, the lowest since February 2019. That also gels with Goldman’s call to move to underweight on corporate bonds and lift cash to overweight. Bank of America opined that “investors are still terrified over central bank policy errors after a decade of financial repression.” Spreads in general continue to drift and likely catalysts to turn this story around are difficult to identify at this stage.
|EU Cash vs CDS…Source: Bloomberg, Mutual Limited||US Cash vs CDS…Source: Bloomberg, Mutual Limited|
- Local Credit – local spreads remaining resilient still to offshore spread volatility. Traders…”an uneasy calm to the local market yesterday – very little risk changed hands as investors were left weighing a potential Russia/Ukraine conflict with looming inflationary pressures. We closed spreads modestly wider across all asset classes though do note a lack of heavy sell flow behind the moves. Street liquidity was patchy with bid/offer spreads wider and whilst this geopolitical risk persists, we would expect spreads widen should the streets capacity to add be tested in size.” Major bank senior 5-year paper drifted +1 bps to +67 bps, while the rest of the curve was unchanged. In tier 2…traders ”closing spreads wider, though more as a reflection of the heightened event risk rather than any material selling. In fact, very little client interest seen at all. We do note weakness in the interbank market however. No trades of note on the day.” The 2026 cohort are trading +140 – 146 bps, while the 2025’s are around +131 – 133 bps and 2024’s at +98 bps.
AU Cash vs CDS…
Source: Bloomberg, Mutual Limited
- Bonds & Rates – volatility abounds in bond markets given duelling forces of monetary policy expectations (uncertainties) and geopolitical risks. Overnight were saw a sell-off in US treasuries and a modest flattening of the curve. Two-year yields rose +8 bps (up +11 bps at one stage intra-day), undoing the prior sessions gains (spiking geopolitical risk), while ten-year yields rose +6 bps, stopping just shy of the 2.00% mark as I type, although was through 2.00% intra-day. Despite the recent volatility, the cyclical trend is undoubtedly higher in yields. Having said that, last Friday’s actions gave us a preview of what to expect in bonds if Russia does pull the trigger and send the troops into Ukraine. With word or warning that Russian invasion was imminent (within days), treasuries attracted a strong safe haven bid and rallied 8 – 10 bps across the curve. As the risk dissipates, and focus swings back to the Fed, we saw a 5 – 8 bps sell-off. Locally, we’re largely following offshore moves – ACGB’s rallied 6 – 7 bps across the curve, mirroring moves in treasures on Friday night. Today, we’ll likely give much of yesterday’s gains back.
- Macro – the key prevailing economic questions…“there’s a tremendous amount of debate and disagreement regarding the state of the US economy right now. Fortunately, in the coming months we’re going to get some clarity about who was right. If inflation continues to accelerate from here, it will show that the Fed was, in fact, right to start pivoting so hard to inflation-fighting mode. Or it will show that rate hikes ultimately are a poor tool for fighting inflation. Or it will show that the Fed ought to have moved sooner, and made a fateful mistake by letting things get as hot as they’ve gotten. Or it will demonstrate that the inflation we’re seeing is simply a function of the pandemic, and the price we’re paying for a rapid return to normal. It’s also possible that the people who warned that Fed hikes were inflationary, will be the ones to be proven correct.” (Bloomberg).
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Scott Rundell, Chief Investment Officer
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