Mutual Morning Mutterings

The things kids (mine) say…

My middle son, Lachlan (11): “so daddy, who’s your favourite oldest band?”  I said Led Zeppelin, to which he asked “so, what band was he in?”

Themes … ”I’m getting a little dizzy…”

Overview – just pick a song already!  Markets are worried about the macro consequences of the virus outbreak again.  A complete reversal of yesterday’s apparent comfort.   Accordingly, this morning I’m channelling ‘Vic Reeves & The Wonder Stuff’ and their cover of ‘Tommy Roe’s’ 1969 hit, “Dizzy” (original / cover).  A comment from a former US client of mine quoted on Bloomberg sums it up, “you have this push and pull between good US economic data and virus fears”…”you’re playing that back and forth, almost as you were during the trade war, where people were reacting to changes minute by minute”.  As for the virus, the growth rate of deaths does seem to be abating with a total of 2,129.  Despite the deceleration, Hubei province, ground-zero for the virus, has ‘asked’ firms not to resume work before March 11.  Hubei has a population of 58.5 million, so that has to have a sizeable economic impact….

Stocks – US markets started the day innocently enough, blithely stumbling along minding its own complacent business before it took a header off the table.  The S&P 500 was down -1.3% at one point, but has since staged somewhat of a comeback to be down -0.40% on the day.  Tech stocks were the main culprits contributing to the sell-off.  European stocks were also taken to the cleaners.  Despite the sell-off and virus-related market fears, most stock indices around the world are in positive territory YTD. Only the FTSE (UK), Nikkei (Japan), IBOVESPA (Brazil) and Hang Seng (HK) are down YTD.  That’s only 25% of the largest 20 stocks indices in the world.  Even China’s stock index, the CSI 300 is up YTD (+1.2%). For the record, on a local currency basis the ASX 200 is coming in 3^rd place with +7.2% YTD (NASDAQ no. 1 with +8.6% YTD).  As for the road ahead, Goldman Sachs put out a piece recently warning of a likely sell-off given investors have been underestimating the epidemic’s impact.  I’ve had that song on repeat for a few weeks now.  No surprise, but Asian equity futures are in the toilet.

Bonds – yields fell overnight on virus fears, with US 10Y yields down 4 – 5 bps and just 1 bps off the ‘virus-era’ lows (1.5068%).  Across European sovereigns, yields are down 2 – 5 bps with France, Germany, Sweden, Netherlands and Switzerland all having negative yields.  Same tune as in previous updates, bonds will remain well bid while doubts around the virus macro impact remain.  Locally, mixed labour data out yesterday saw ACGB yields drop 4.0 – 4.5 bps across the curve, while bills were 1 – 2 bps lower.  The AUD threw its toys out of the cot, falling 0.8% to 0.6640 against the USD (now 0.6618).  Market pricing suggests March is a dead rubber for a rate cut from the RBA, just 7.8% probability.  April is at 31% probability of a rate cut, which is a popular call for the major bank chief economic boffins.  Either way, the labour data is consistent with more monetary policy easing.

Credit – some modest activity in offshore markets with a handful of USD deals priced, each still coming with good cover (3.4x vs 3.5x YTD average).  Compression in spreads from guidance to launch has also been constructive, -21 bps, in line with YTD averages and ahead of 2019 averages (18.7 bps).  Issuance in AUD has been active and there appears to be no indigestion from buyers, most if not all recent deals have tightened in secondary.  Synthetics edged wider in sympathy with stocks, although moves were relative muted with CDX +0.9 bps and MAIN +0.7 bps.  Banks were a little more vigorous, Snr Fins +1.2 bps and Sub Fins +2.8 bps.

Data & Events – Australian labour data came out yesterday with jobs growth slowing, up 13.5K (vs +10K consensus) for January, compared to + 29K in December.  The unemployment rate increased to 5.3% from 5.1% last month and consensus of 5.2%.  The participation rate increased to 66.1% from 66.0% (consensus also 66.0%), a gnat’s hind leg away from all-time highs of 66.2% (August 2019).  Overnight we saw US Philly Fed manufacturing index put in a solid showing, +19.7 points to 36.7 points (vs consensus of +11 points) however markets weren’t interested.  Initial jobless claims came in on expectations, +4,000 to 210,000 (neutral market impact).

So, what’s it all mean Basil? – re-iterating our cautious stance on risk.  If macro data or earnings data comes to light that confirms prevailing fears, then we’ll likely see yields fall further, albeit modestly as the downside is largely priced in. Stocks have the greatest to lose if worst fears come to light as little of the risks seem to be priced in.  Credit remains resilient so far with synthetics still knocking around post GFC tights, while the hunt for yield is keeping cash bonds well bid. AUD credit remains relatively resilient to what volatility there is in spreads globally (Charts 1& 2 on attached) – some modest relative under performance in AUD Financials, mainly selling of offshore bank AUD paper.  Strong technicals have seen Major bank spreads grind tighter.

This day in history – Friday 21 February 1657: – Prince Willem III appointed viceroy of Gelderland.  Scholars still debate the merits of Willem’s claim with Ulrich von Leichtenstein a clear crowd favourite after his performance in the mounted joust at the London World Championships.….

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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 0.90%
• 3yr Govt Bond down 4pts– implied yield 0.68%
• 10yr Govt Bond down 4pts– implied yield 1.00%
• 20yr Govt Bond down 4pts– implied yield 1.29%

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