Mutual Daily Mutterings
Quote of the day…
“I’m afraid of a world run by adults who were never spanked as kids…and got trophies for participating…” – Anonymous
The satirical world…
Overview – “moderately constructive ahead of tonight’s FOMC…”
- Sentiment across risk assets overnight was on the buoyant side, albeit gains were muted. What seemed to garner some traction on the sentiment front was Chinese activity data, which indicated that momentum had picked up amongst Chinese consumers. Even more inspiring for the bulls, the industrial sector has moved beyond ‘recovery’ mode and into ‘capitalism works’ mode with YTD growth now up +0.4%.
- Again, no progress on the next round of US fiscal support packages – is it too presumptive to assume one will actually arrive? Either way, the lack of progress has hardly moved the dial, i.e. its sooo last month darling! Markets also didn’t really give a care for any other news flow or data, probably because they have their loved-up goo-goo eyes locked firmly on tonight’s FOMC meeting. Slightly weaker than expected US industrial production was also largely ignored and the World Trade Organisation (‘WTO’) ruling that put the US in the naughty corner for violating trade rules was shrugged off.
- Bonds were mixed, US Treasuries were largely unchanged, which is generally normal ahead of an FOMC meeting. A dovish stance is expected from J Powell and the accommodative bunch after saying earlier in August that it will shift to a more relaxed approach on inflation. Central bank largesse is buttressing sentiment in the face of risks from the lingering pandemic, the US presidential election…and to some extent the possibility of a no-deal Brexit. Credit firm again, just doing its thing.
- Trade specifics… the World Trade Organisation pulled the chair out from under Trump’s main justification for his trade war against China, saying his 2018 tariffs violated international rules. Trumpites need not fear, the belligerent one can effectively veto the decision by lodging an appeal — and the US has frozen the WTO’s appellate system. No impact on the phase one trade deal with China apparently, but rest assured the Chinese Ministry of Commerce was upright with the golf-clap, applauded the ruling.
- US Presidential Election update…it’s less than fiddy days away now, scheduled for November 3 (yes, that’s Melbourne Cup Day). According to polls quoted by Bloomberg Biden is in the lead with 50.0%, while Trumps is lagging on 42.9%. SportsBet odds reflect a similar scenario with Biden at $1.80 to win the new shiny office, while Trump is at $2.00. Odds for the ‘popular’ vote are more skewed, $1.20 for Biden and $4.00 for Trump. In his 2016 election victory Trump actually lost the popular vote (46%), but claimed the electoral vote (56%).
Credit – “limited scope for meaningful gains, but carry the main drawcard…”
- The relatively aggressive run of primary issuance continues. US IG saw another $9.2bn priced across eight borrowers. New issue conceptions were a faction negative (which is reflective of strong conditions), while books were 3.5x covered. Spreads compressed ↓29 bps from launch to final pricing. Secondary spreads were firm in the IG space, some very modest widening in HY. In EU IG markets, MTD issuance surpassed €100bn with another €9.5bn added overnight (five borrowers). Again, average deal metrics were strong with books 3.5x covered and spread compression of ↓19 bps.
- Local markets remain constructive, albeit on subdued volumes – everyone is hording what they have. The scope for capital gains (via spread compression) has shrunk, especially in the FRN space. Also considering likely asymmetric outlook for bond yields. Carry will be the main value add over the near term. Some of the more aggressive alpha-types in the market would scoff at carry dominating their attribution stats, but in a low-yield, tight (ish) spread world, it’s the main game in town. There are some pockets offering greater scope for tightening, i.e. the hitherto leper sectors, such as REITS, airports etc, but a lot needs to go right. FRN’s are our preferred sandbox for now. No change to major bank senior or tier 2 spreads of note.
- Prevailing theme: while volatility has stepped up a notch ahead of the next potential systemic pot-hole, the US election, spreads have held fast. 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 – “crowded trades…”
- Nothing really insightful to add here, just one of those days where the words don’t come. So, a snippet from Bloomberg instead…”tech stocks are the world’s most crowded trade, say fund managers overseeing $601bn, fuelling fears of a bubble. Investors surveyed by BofA have never been so unanimous, with 80% of participants citing long US tech, up from 59% in August. Among the biggest tail risks, concerns about a tech bubble ranked behind only a resurgence in COVID. The survey was conducted in the week through Sept. 10.”
- The ASX 200 shrugged off the firm leads from offshore yesterday to bumble along the bottom, occasionally poking its nose above water to test the smell, before closing a smidge in the red. Sector wise, it was almost an equal number of winners (5) vs losers (sorry, participants who didn’t win, 6). Leading in the winner’s circle were REITS (↑6%), IT (↑1.2%) and Health (↑1.2%), while leading the ineffectual participants was Energy (↓1.7%), Financials (↓1.4%) and Telcos (↓1.4%). Futures are pointing to a solid open, ↑0.8%, reflecting a bit of catch up.
- 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.
Bonds & Data – “tight tactical ranges ahead of the FOMC…”
- FOMC tonight… with some risk the market is left underwhelmed by the guidance provided. From NAB…”there is some expectation that with the US Congress unwilling/unable to agree to a new fiscal package, monetary policy may need to step in to fill the void. Accordingly, markets will be focused on any changes to forward guidance and to any balance sheet adjustments.” There are meaningful doubts that the Fed would signal a near-term increase in it’s QE program and instead focus on communicating the adoption of its “average” inflation targeting regime – historically, the Fed’s communication skills have been left wanting, so let’s see how that goes.
- S&P hosted a webinar yesterday on the outlook for Semi-government ratings and the sovereign rating in light of the COVID-19 pandemic. Of the states, Victoria is not surprisingly the one most at risk of some rating action, currently AAA/Credit Watch Negative, which was assigned early August, shortly after our cell-block doors were slammed shut. Will a downgrade eventuate, in S&P’s words, there is a one-in-two chance. For those not familiar with S&P’s rating methodology, when assigning a rating they look at a five-year rolling average period. So the event itself wont necessary drive the downgrade, rather, how will the state look through the ‘cycle’. More specifically, and this relates to other states / territories with negative outlooks (NSW & ACT), how long each state will take to get their fiscal affairs back on order. Their base case is an economic recovery kicking off from 2021, with fiscal positions to improve from 2022. Obvious concerns are loss of government revenues from reduced activity, i.e. housing – less concerned about prices, more about transactions. And the balance sheet also has a lot more-red on it from increased borrowing programs to fund fiscal support programs and infrastructure spend.
- RBA minutes out yesterday, which didn’t really do much to move the dial. No further easing to monetary policy appears imminent – even to 0.10% (from 0.25%), which has attracted a fan base in recent weeks. The buying of bonds in secondary was confirmed, but again no expansive detail on when, or exact volumes etc. Once again, the bank reaffirmed their willingness to step in and purchase ACGB’s and Semis in the event of market dysfunction. But we’re not there at the moment, with markets running like a reasonably lubed up machine.
- 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 0.875% this morning).
Click here to find the full PDF from our Chief Investment Officer’s daily market update.
Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907
Mutual Limited Daily Update