Mutual Daily Mutterings
Quote of the day…
“Some people’s idea of free speech is that they are free to say what they like. But, if anyone says anything back, that is an outrage…” – Winston Churchill
“Haven’t a clue…”
The satirical world…
Overview – “all about the Fed in the end…”
- Mixed across risk assets overnight with tech stocks again under the pump. A choppy day across European stocks ranging between unchanged to up ↑6% and that’s where it ended (STOXX). Across the ditch, the S&P 500 opened in positive territory before producing some intra-day chop, but with some positive momentum heading to the FOMC meeting, driven by energy stocks (oil up strongly). The market obviously was expecting more from the Fed as it all went to custard in the final hour of trading, plunging ↓1.3% to close down half a percent on the day. Tech stocks were under pressure from the get-go, with the NASDAQ closing down ↓1.7%. The ASX 200 is looking like a modestly soft open, futures down 0.2%.
- Bonds weakened (yield up) a touch, while credit maintained the range, good primary volumes with secondary spreads range bound across US. Synthetics did little on the session. VIX was up a touch, around 26%, double pre-pandemic ranges. Oil jumped the most in two months on shrinking US inventories and a pickup in US refining helping mitigate concerns about oversupply.
- A common chant during election times for supporters of the incumbent is “four more years, four more years”, and so on. Last night, members of the FOMC were chanting “three more years, three more years” (of rates near zero). The FOMC stated it “expects to maintain an accommodative stance of monetary policy” until it achieves inflation averaging 2% over time and longer-term inflation expectations remain well anchored at 2%. Pause here for a moments silence, RIP higher interest rates.
- In his post meeting speech, Chairman Jerome Powell said that while the recovery has been faster than expected, activity remains well below pre-pandemic levels. This didn’t prevent the Fed from raising its 2020 GDP forecast to a contraction of ↓3.7%, an improvement from previous forecasts of ↓6.5%. The outlook for Q4 unemployment was also trimmed from 9.3% to 7.6%. Despite the improved macro forecasts, Powell reiterated the need for fiscal stimulus to shoulder some of the recovery burden. And there is some hope here, the White House has given a strong indication it is willing to increase its pandemic-relief offer in talks with Democrats and that Senate Republicans should go along in order to seal a stimulus deal in the next 7 – 10 days.
- US Presidential Election update…47 days to go now. Nothing really from either campaign to move the risk dial overnight. Biden’s lead dipped overnight, dropping from 50.0% to 49.0%, while Trump gained from 42.9% to 43.1%. No change to SportsBet odds with Biden at $1.80 to win the big boy’s chair, while Trump is at $2.00. For those who like to back the roughies, Kanye West is quoted at $501.00 to win the main job.
Credit – “limited scope for meaningful gains, but carry the main drawcard…”
- The Fed’s meeting and subsequent announcement did little to halt supply of credit. US IG saw nine borrowers hit the scene, pricing $13.8bn with very modest (+2.2 bps) new issue concessions, while books were cover 3.0x, a touch lower than recent averages. Spread compression also a touch softer than recent averages, ↓25 bps. Good volumes also in EU IG, with ten borrowers printing €10.7bn. Books were 3.8x covered with spread compression from launch to final pricing of ↓18 bps. Secondary spreads across both markets saw modest moves, at the index level.
- Locally, no real change from prior sessions – focus on primary activity, which has been concentrated in the corporate space. With two weeks left in the financial year for three of the four majors, it seems traders have put the cue back in the rack. Accordingly, no meaningful flows in bank paper being reported, and what flow there has been has been weighted modestly to selling. But no spread impact of note. Major bank senior paper unchanged, and the same with tier 2. On the bank supply front, best we can hope for is a possible regional bank five-year deal.
- 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 – “FOMC does nothing for FOMO’s…”
- Nothing to add here, unless you want me to make stuff 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 – “no surprises from the FOMC, with no meaningful change to prevailing bond themes…”
- Today, we have Australian labour force data (for August), which will include the impact of the Victoria lock-down. Consensus is forecasting a fall of ↓35K, although the range across contributors is very wide, ↑100K to ↓125K. Unemployment is forecast to come in at 7.7%, an uptick from 7.5% last month. Consensus range here is 7.4% to 8.0%. Given the @#$% show we have in Victoria, I’m thinking a drop of just 35K is a little optimistic and could be a lot higher. Either way, doubt the data print will have a meaningful impact on bonds. ACGB 10 year bonds have traded in a 0.815% – 0.975% range over the past two months (excluding a very brief flirt above 1.0%) with current levels in the middle at 0.873%
- 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).
This day in history…
- Thurs Sept 17: 1584 – Ghent surrenders to the Duke of Parma after a siege lasting almost a year. The success of the siege was never in doubt if truth be told, for the Duke of Parma was a not an official title, but one bestowed upon the Spanish General, Farnese, for his legendary version of the chicken parma. Once the General started his work on the skillet and the aroma floated over Ghent, the siege was all but over.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907
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