Mutual Daily Mutterings
Quote of the day…
“If you think everything you’ve done is great, you’re probably dumb” – Lewis C.K..…
Chart du jour: S&P 500 vs Bitcoin …
Source: Bloomberg, Mutual Limited
“HODL My Drink…”
Overview…”May 2013 flashbacks…”.
- An interesting session in markets overnight with stocks under the pump from the get-go, although US markets closed off their lows. Volumes traded were on or about YTD averages. Bond yields sold off as the ‘T’ word, ‘tapering’ was mentioned in the latest FOMC minutes. Bitcoin, and other crypto currencies, were belted from pillar to post, down 33% at one stage to $30K, before rebounding to $38K. It was as high as $63K just a month ago. Most commodity prices tumbled on inflation fears, with oil down
- US Treasuries ended the session lower (yields higher), extending their losses after the April FOMC meeting minutes indicated said some officials would be open to discussing scaling back the central bank’s massive bond purchases “in upcoming meetings” if warranted by economic performance. Note here, the mere mention that tapering will be discussed, not necessarily implemented, but discussed, was enough to send markets into a bit of a tizz. The last time ‘tapering’ was discussed in this context was back in May 2013, and markets really threw their collective toys out of the cot. US 10-year yields almost doubled…not saying that’ll happen here, but I’m just saying…
- Talking heads…“we saw 10-year yields rise pretty sharply, clearly an upward move after the minutes were released — it looks like it all comes down to minor changes in wording on tapering. There might be a few participants who are getting a little eager to start the discussion, which might be more than the markets were expecting. For anyone waiting for the taper, this could be a hint it’s coming sooner rather than later.” And…”everything that was being ignored as benign or transitory last week has suddenly re-emerged this week as more risky…it is a very fickle and fragile market. It doesn’t take much to reverse direction”.
- Outside of taper talk, wordage within the FOMC minutes, on the recovery in the US economy, the broad consensus amongst the board was one of cautious optimism, “though participants noted it would likely be some time until substantial further progress is made toward the central bank’s dual employment and price stability goals”…still, a big focus on need for jobs growth before tapering will be considered.
- Offshore Stocks – the SPX was down -1.6% at one stage early in the trading day before closing off its lows, -0.3%, the DOW was a little more-worse-for-wear, -0.5%, while the NSX only just slipped into the red. Across the SPX, some 71% of stocks closed lower on the day, and only two sectors were able to keep their noses clean, Tech (+0.3%) and Telcos (+0.1%). All other sectors were wallowing in the mud to varying degrees, led by Energy (-2.5%), Materials (-1.5%), and Discretionary (-0.8%). The SPX has broken through some key support levels in recent days (intra-day), but has just been able to keep above its 50-day moving average of 4081. The index closed at 4115. Stocks will remain choppy for the next couple of months as markets digest every skerrick of data that might provide a signal on whether inflation is transitory (Fed view) or here to stay. Problem is, how long is transitory in a data sense – it could take 3 – 6 months, if not longer for the pandemic induced base effects to work through. Strap in, it could be a bumpy ride.
- Local stocks – ouch, a tough day in the trenches for local equity markets. The ASX 200 was dumped on, down -2.0% on the day, although it did ease back a touch from its intra-day lows (-2.1%). Around 87% of stocks fell and no sector was spared. Materials (-3.2%) shed the most blood, followed by Energy (-2.7%), Industrial (-2.4%), and Financials (-2.0%). The relative outperformers were Staples (-0.7%), Healthcare (-1.1%) and Tech (-1.2%).
- Offshore Credit – quiet in offshore primary markets as market volatility spooked issuers. Despite the spike in volatility (VIX up 84 bps to 22.2%), CDS markets remained relatively unchanged – at worst half a basis point wider. Cash indices are also largely unchanged.
- Local Credit – not a lot to say, traders referencing it as a productive day with healthy flows. Major bank senior paper was unchanged (again), while in tier 2 a little bit of a follow through on recent tightening, with the ANZ and WBC 2026 calls a basis point tighter at +131 bps and +132 bps respectively. The slightly longer dated NAB 2026 call (Nov) is unchanged at +135 bps.
- Bonds & Rates – obviously some more comments on the FOMC…the tapering comment triggered a repricing in short-term interest rate markets of the outlook for Fed rate increases, which dealers on average expect to begin six quarters after tapering starts. A quick history lesson for you youngsters, post the GFC in 2008 the US Fed unleashed several rounds of QE, which saw the Fed balance sheet grow from just under US$1 trillion to a post GFC peak of US$4.5 trillion by the end of 2014. In May of 2013, then Fed Chair Ben Bernanke uttered the term ‘tapering’ in a speech to Congress. As it was last night, it was the mention of the possibility of discussing tapering, rather than, yep, we’re doing it. Mentioning it was enough. US 10-year yields surged from around 1.62% to 3.00% by September of the same year, that’s a +138 bps rout, in just four months. Over the same period, ACGB’s rose from 3.03% to 4.17%, or +114 bps. In July of 2013 Bernanke stated that any tapering decision was subject to incoming data, which calmed markets and there was a brief -30 bps rally, before yields re-engaged with their upward trajectory. Tapering actually didn’t commence until December 2013. Ironically, yields started a three-year rally from then, falling from 3.03% to pre-pandemic lows of 1.37% in the middle of 2016. Back to ACGB’s, now let’s assume we have a repeat of 2013 (much different economic circumstances, but humour me), if one was to hold ACGB 10’s today, at $98.05, a 114 bps rise in yields would see price drop to $88.33, or a 10% capital loss. Ouch!
- Macro – some economists commenting on yesterday’s data…from NAB “consumer sentiment fell -4.8% to 113.1 in the W-MI survey. Even with the fall in the month, consumers remain very optimistic with the level of sentiment still around the highest since 2010. Importantly for the outlook, unemployment expectations fell a sharp -15.4% in the month to its lowest level since February 2011, a time when the unemployment rate was hovering around 4.9% – 5.0%”. Also, wages growth came in a little stronger than expected, +0.6% QoQ vs +0.4% QoQ consensus. Annual data shows a +1.5% YoY lift vs +1.4% YoY consensus. From CBA…“the lift in wages growth is consistent with the tightening labour market. The international border closure and the inability to source labour from overseas means that skill shortages and stronger wages pressures are likely to become a trend sooner than the RBA is expecting”.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907