Mutual Daily Mutterings
Quote of the day…
Joe Biden to Wheelchair-bound Man – “Stand up, Chuck, let ’em see ya.’…”
The satirical world…
Overview – “wheeling & dealing + vaccine optimism…”
- A return to the winner’s circle for US stocks overnight, while European stocks scrabbled around the table for scraps – very modest moves, both up and down. In the US markets digested the weekend’s vaccine headlines, which looked to give the bulls and dip-buyers alike a nice warm and fuzzy feeling in their already portly tum-tums. Also adding to the buoyant mood was a slew of M&A announcements.
- Despite the stock rally overnight, traders likely remain on edge given the recent reassessment of valuations and volatility in options markets. Nevertheless, street strategists (GS and DB) have published commentary suggesting the recent pullback in the US is nearing an end…I’d add by adding, “for now”.
- Elsewhere, treasuries did little on the day, and the same in bonds globally. Primary issuance in global credit markets remained active, while secondary absorbed it with aplomb. Synthetics danced to the beat of equity’s drum, tighter by a basis point or two.
- Oil continued to soften overnight as OPEC joined the growing chorus of pundits warning about a deteriorating outlook. The cartel cut global oil demand forecasts for each quarter to the end of 2021 by an average of 768K barrels a day. Consequently, consumption is forecast to collapse by an unprecedented 9.5 million barrels a day this year. MTD Brent crude has fallen ↓13%, while YTD the Texas-Tea is down ↓42%.
- On the vaccine front, a valid comment from a former colleague, ‘Smokin Joe’ this morning, “given the huge contraction in economic activity caused by lockdowns, a vaccine could be the metaphorical shot in the arm for the world economy. However, effectiveness, production and distribution of a vaccine are significant hurdles for the world economy to return to ‘normal.” Be that as it may, markets will likely get all hot and bothered over any meaningful advancements in vaccine-land.
- M&A is bursting back into the narrative with wheelers and dealers starting the offshore week with a bang, announcing $69bn of M&A. The latest flurry of activity brings September’s tally up to $146bn, which represents a ↑51% jump from the same period a year ago.
- Talking heads…“the path of least resistance is up”…“we still have a lot of monetary stimulus in the pipeline, there’s still a decent amount of momentum in the market, the underlying data in earnings seem to be reasonably positive.”
Credit – “primary continues, secondary holding firm…”
- Another active day with US IG printing $12.3bn across twelve borrowers. Deal metrics were again constructive with only marginal new issue concessions, +1.5 bps, while books were 3.8x over-subscribed and spread compression from launch to final pricing at ↓30 bps. Across the pond, EU IG issuance totalled €8.7bn across ten issuers. Included within the EUR issuance was a Coca-Cola deal, who were also active in US IG. In the US IG, both Coca-Cola and JPMorgan were buying bonds as they refinanced older, and more expensive borrowers. This type of liability management activity is likely to increase into year-end given the “attractive funding landscape and the surplus of cash issuers have amassed on their balance sheets from the historic corporate borrowing binge this year”.
- Nothing material to add on local markets, at least no change to prevailing themes. Focus this week will be more on primary with new deals announced, including a new NSW Transgrid (Baa2) deal. The NSW transmission company (electricity) has launched a 10-year fixed with guidance at ASW+190 bps (a fixed deal). A no brainer deal, essential economic assets, with extraordinarily high barriers to entry. Elsewhere in local markets, the major bank curve has steepened a touch, with 3Y unchanged at +33 bps, while the 5Y (Jan-25) inched a touch wider at +47 bps (↑1 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 – “vaccine optimism back on the table…”
- All sectors across US markets in the green overnight, buoyed by vaccine optimism. As for the catalyst for this optimism, Pfizer’s CEO in the US was quoted over the weekend that they ‘could’ have their vaccine candidate in production and out to the masses by year end. To my knowledge, and I may have missed this, but no suggestion yet on whether said vaccine candidate was effective. In their regard, their candidate is in phase 3 trials with results due by the end of October…I guess you don’t move to phase 3 trials unless you’re confident the thing will work (to some degree). A vaccine will be crucial, from a market’s perspective, as it would mean we could effectively live with the virus and the global economy can begin moving back to some semblance of normality. Then the issue becomes policy error, i.e. extracting all that stimulus at the right time without jeopardising the recovery and at the same time minimises inflationary risks.
- I read a Citigroup US equity market outlook piece yesterday, which far to say was on the bearish side. Of the twenty ‘warning’ measures cited in their model, 45% were flashing amber (‘Caution’) or red (‘Danger’). Historically, Citi claim when more than 50% are in the red or amber zone, a correction has followed. Another interesting snippet of data in the piece, since 1940, when PE ratios have exceeded 20x the average total return of the S&P 500 over the subsequent 12-month period has been -0.4% (median of +3.4%). History suggests a lean year ahead for stocks…having said that, since 1940 there has been no period where monetary and / or fiscal stimulus has been as accommodative as that laid on the table over the past six-months.
- Prevailing theme: elevated tactical volatility has become a key theme, although on any given day can be trumped by vaccine optimism and hopes of the next round of fiscal stimulus becoming closer to reality. It’s still 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, with subsequent dip-buying likely over the next couple of months, which will keep markets range bound. Delays in US fiscal stimulus and the upcoming US election represent key headwinds.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907
Mutual Limited Daily Update