Mutual Daily Mutterings
Quote of the day…
“I know a man who gave up smoking, drinking, sex, and rich food. He was healthy right up to the day he killed himself”– Johnny Carson
Chart du jour…AU Unemployment…
Source: Bloomberg, Mutual Limited
“Misery Loves Company…”
Overview…”recognising you have a problem is half the battle…”
- The winners overnight were ‘cash-spewing’ technology companies and longer-dated bonds, while old school cyclicals were licking their paper cuts…hardly ‘wounds’, daily moves were very modest. All up, stocks were mixed across Europe, while in the US an obvious growth bent was observed, where the NASDAQ rose, the DOW retreated and the S&P 500 did very little in the end.
- At T+2 days from the FOMC meeting, a meeting at which Fed officials swivelled from the mother of all dovish stances to the start of a marginally hawkish stance, the last thing I would have expected to see in markets is a rally in bonds. But that’s what I woke up to this morning. Long end bond yields dropped -7 bps amid speculation investors were unwinding curve steeping trades. So, that’s a net +1 bps rise in 10-year yields post the FOMC meeting. Interesting.
- Talking heads…“money is just rotating from cyclicals and other reopening plays, it’s all about growth now…we’re seeing money being put back into growth-at-a-reasonable-price related names”. And, in the context of the Fed’s slight tilt to thinking about taking a more hawkish stance, “2023 is a long way off and I think we’ve already started to see markets stabilize…this economic environment is still an excellent environment for companies.”
- The aforementioned ‘dot shock’ probably isn’t the last surprise we’ll see from the Fed – over the coming months. Markets are sniffing around the prospect of a faster taper as the next shock to contend with, i.e. given the red-hot recovery pace and extremely easy financial conditions. Short-term indigestion aside, a focus on normalization ‘should’ be healthy, with the longer-term bull market in stocks intact as long as real growth exceeds inflation, and that’s the $64 trillion dollar question.
- In other markets, gold, oil and other raw materials were taken behind the woodshed for a roughing up, with the Bloomberg Commodities Index tumbling -3.5%. Oil (WTI) fell to around US$71/bbl and Brent to US$73/bbl as the USD strengthened and as officials in Iran signalled that a nuclear deal is close. The country holds elections tonight, with the frontrunner supporting the nuclear talks. Gold dropped below $1,800, down -2.1%.
- Offshore Stocks – two stocks down for every-one up in the S&P 500, while six-sectors gained, and five sectors fell. The combined might of the old school guard of Materials (-2.2%), Financials (-2.9%) and Energy (-3.5%) were too much for Tech (+1.2%), which tried valiantly to drag the broader S&P 500 into positive territory. In after market trading, e-mini’s are reflecting similar themes – DOW down (-0.6%), S&P 500 largely unchanged, and NASDAQ up (+1.3%). Tonight’s trading action could be interesting, we have the quarterly event known as “triple witching,” when options and futures on indexes and equities expire.
- Local stocks – the ASX 200 spent pretty much all day in the red yesterday, albeit to varying shades of redness. In the end, it was a modest hue of crimson, down just -0.4%. Not bad given Fed policy implications. Two stocks fell for everyone that gained, while six of the core index groups fell, and five gained. Sectors wallowing in the mud were Telcos (-1.9%), Energy (-1.9%) and Materials (-1.8%), with the latter driving the bulk of losses on the day given its the representation within the index at just under 31%. Fighting the good fit were Tech (+1.3%), Financials (-0.8%), and Discretionary (-0.2%), but in the end they were out-gunned by the crimson-raiders…all very poetic. Despite the mixed messages from offshore markets overnight, which favoured high-growth tech stocks over old-school cyclicals, a mix that does not favour Australia’s markets, local futures are sporting an optimistic shade of green, +0.5%.
- Offshore Credit – a modest rebound in issuance post the Fed meeting, with just three deals done for US$2.2bn. Books were 3.7x oversubscribed (strong) with spread compression of -26 bps observed. From Bloomberg “The market’s faith in high-grade credit remains unwavering in both the primary space as well as secondary trading. The Bloomberg Barclays IG OAS index stands at +81 bps, the tightest level since March 2005”. Flow data indicates another week of strong inflows into investment grade funds. Despite lagging 2020’s historic pandemic fuelled issuance pace by -33%, gross new issue supply is running +32% ahead of 2019’s more normalized pace and could challenge the previous record of $1.33 trillion set in 2017 as tight spreads, low Treasury yields and the spectre of inflation encourage companies to tap the debt capital markets sooner than later.
- Local Credit – trader talk…”an active day for financial markets following a range of data releases and the rates sell of post the previous night’s FOMC meeting. Secondary credit was reasonably constructive with both corporates and financials trading decent volumes”. Major bank spreads, across senior and tier 2, were unchanged despite the continued buying of major bank fixed and sub-3-year FRN’s. At our investment committee meeting yesterday we left our portfolio settings unchanged on the belief the Fed’s modest change in policy stance would have a neutral impact on local spreads over the near term. So far, so good.
- Bonds & Rates – local bonds were smacked over the nose with a rolled-up newspaper yesterday, with a meaningful sell-off on the back of the Fed’s nascent tilt from a dovish stance to an ever so slightly hawkish stance, or more accurately thinking about thinking about tightening policy. After another day of digesting the impending change to policy tone, markets deemed that yesterday’s moves were an overreaction, with more respect being paid to the growth outlook, and perhaps some comfort the Fed has things under control. In a world of reverse signals, the Fed signalling that while they still think inflation is transitory, the recognition that the actual period of transition may be longer than expected, and they may have to tighten, has given markets some comfort that they know what they’re doing. Local bonds will likely rally this morning given these leads.
- Still with bonds and rates, RBA Guvna Lowe gave a speech yesterday that provided some nuggets of interest on the RBA’s monetary policy settings, some hints of things to come. The speech, titled “From Recovery to Expansion” can be found here, or if this doesn’t work, just go to rba.gov,au. With regard to future monetary policy settings, the speech contained three broad messages that most strategists seem to have picked up on. First, there is quite an explicit hint that the 3yr Yield Curve Control Target will not be rolled from the April 2024 bond, quite a common view already. Secondly, a decision on QE has yet to be made, and when the matter is on the table (likely at the July meeting), the discussion will be around “how the RBA can best support the ongoing recovery.” And lastly, there were no hints that the RBA is set to follow the Fed, and other major central banks in flagging rate hikes earlier than prior guidance. Having said that, it is noted there was no mention of “no rate hikes until 2024 at the earliest”, or words to that effect.
- Macro – local labour data out yesterday, I’ve pilfered, with some slight editing, some commentary from NAB…”an unequivocally strong print with employment surging 115K, almost four times the market consensus call (consensus 30K). The unemployment rate also fell -40 bps to 5.1% (consensus 5.5%) and is now back to pre-pandemic February 2020 levels. Importantly for the outlook, the unemployment rate at 5.1% is running 3-6 million ahead of the RBA’s recently upgraded May SoMP forecasts which may have implications ahead of the RBA’s 6 July Board Meeting. Within the report, broader indicators also showed strength, with hours worked rebounding +1.4% in the month to record highs, and underemployment declined -30 bps to 7.4%, its lowest level since 2014.”
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