Mutual Morning Mutterings

Themes … ”recession risk back on market’s agenda…”

Overview – a risk off session overnight as the first evidence of the coronavirus’ macro impact came to light.  Apple advised markets it would miss formally guided revenue targets on account of the virus and disruptions to both its supply chains, but also the fact many of its Chinese stores have remained closed for almost a month.  Having said that, Apple’s stock is back to levels last seen, well just last week, so hardly a massive hit to valuation.  I suspect the Apple headline could be one of many headlines to come through in coming weeks hinting at the broader macro impact of the virus.   The rate of growth on the death toll from the virus has decelerated for a third day with total deaths (official) now 1,873 (+93 on the day).

Stocks – a sea of red across stocks on the session, although over a longer-term horizon, say 5 days, stocks are still largely ahead…and much of the daily losses overnight were halved by the end of the day.  In the context of the macro risks stemming from the virus outbreak, which has been topical for over a month now, the impact on stocks has been…well, not a lot!  Over the past 30 days the S&P 500 is still up +1.2% (or +4.3% YTD), while the ASX 200 is up +0.7% (or +6.4% YTD).  As has been stated infinitum (that’s fancy talk for a long time), extraordinary accommodative monetary policy is plastering over any real cracks in the macro story.  Markets and investors seem convinced central banks will come bounding over the hill of economic shocks on a glistening steed to sweep them up into their muscular and accommodative arms.  This may well be the case, but risk of policy error cannot be ignored.

Bonds – everything I said on stocks, well just reverse it.  Bonds are pricing nothing but a zombie hoard clambering over the hill of economic shocks to devour our greedy blackened souls.  While stocks are still ahead over the period that the coronavirus has dominated the market narrative, bonds yields are still down well over 30 bps (UST 10’s).  As a consequence of the Apple headline, potentially a macro canary, recession risk is once again being priced in with treasury (US) curves flattening to 15 bps (2s10s), the flattest since November last year and down 20 bps since the virus outbreak was first publicised.  The RBA Feb meeting minutes highlighted that financial stability was back on the central banks radar.  The virus outbreak and potential macro consequences will keep rate cuts on the agenda and therefore curves compressed relative to recent trading ranges.

Credit – it was a deal-a-thon in AUD credit yesterday as every man and / or woman and their dog decided it was time to hit the market for some flash money.  Liberty Finance priced a $250m 4-year floater at +235 bps, the bottom end of guidance.  Demand was strong with a book north of $750m, clear evidence that technicals remain robust (Liberty is borderline investment grade).  ICBC Sydney branch also hit markets, pricing a $500m 3-year at +77 bps, also at the tight end of guidance.  Other deals were also announced, including a couple of infrastructure deals (QPH Finance and Aurizon).  Emirates NBD Bank also launched a deal, a 10 year at +200 bps area.  As of yesterday the book was north of $800m.

Data & Events – not a lot of data out of note overnight and yesterday locally we had the RBA minutes, which formalised RBA themes largely priced into markets already.  Today we have wage data with QoQ consensus at +0.5% (4Q’19) or 2.2% YoY, both flat on the prior reporting period.  Tomorrow is the biggy, labour data, but we’ll touch on that tomorrow morning.

So what’s it all mean Basil? – last night was the kind of session that supported our cautious and wary position on risk.  Nothing has changed.

This day in history – 19 February 1878: Thomas Edison is granted a patent for his gramophone, the ultimately precursor to the iPod / iPhone.

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Contact:

Scott Rundell, Chief Investment Officer

T: +61 3 8681 1907

E: Scott.Rundell@mutualltd.com.au

W: www.mutualltd.com.au

Interest Rate Futures

• 3m Bank Bills – implied yield 0.91%
• 3yr Govt Bond down 2pts– implied yield 0.72%
• 10yr Govt Bond down 4pts– implied yield 1.03%
• 20yr Govt Bond down 4pts– implied yield 1.33%

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