Mutual Daily Mutterings
Quote of the day…
“It is even harder for the average ape to believe that he has descended from man” – H.L.Mencken
Rolling weekly spread change…
Source: Bloomberg, Mutual Limited
“Quiet end to the week”
- Overview – a mixed end to the week across risk assets, although the ‘reds’ outweighed the ‘greens’ on the day and probably the week. The overall themes remain unchanged. The focus remains on inflation and how meaningful it may be, and how rapidly it might become a problem. News flow wise, the main item out of the second day of the Fed’s monthly love-in was the decision not to extend capital breaks for big banks, despite “frenzied requests” for such from the Wall Street big boys and girls. The initial reprieve was granted last April, which allowed lenders to load up on Treasuries and deposits without setting aside capital to protect against losses. They can’t do that anymore. A potential mitigating factor is the Fed said it will seek comment on possible SLR adjustments – the SLR or ‘Supplementary Leverage Ratio, was an unpopular bank capital component introduced in 2010 by the Basel Committee in response to the GFC. I won’t go into the details, it’s complicated, suffice it to say, it’s unpopular amongst the bank.
- Offshore Stocks – a very narrow sell off on Friday, with 54% of stocks within the S&P 500 down, but only five sectors down vs six sectors up. Telco (+0.8%), Discretionary (+0.8%) and Healthcare (+0.4%) all holding their heads high, while staring at their shoe laces with shame were Financials (-1.1%) and Energy (-1.3%). On the week, just three sectors up, and only marginally so. At the other end, Energy (-7.7%) was belted every which way from Sunday, while Financials (-1.7%) and Tech (-1.4%) were also on the receiving end of a roughing up. Despite the softer week, BofA funds flow strategy indicates strong flows top stocks, suggesting such funds may add US$1.6 trillion to stocks this year. The flow data indicates equities remain a popular instrument for investors. And despite the rise in yields, bonds have seen inflows of US$110bn this year, only a third of the US$347bn into stock funds. YTD the DOW and S&P 500 are up +6.6% and +4.2% respectively, outperforming Tech stocks, with the NASDAQ up +2.5%. European markets are up +6.0% – 8.0%, similarly Asian stocks are up also.
- Local stocks – weaker end to the week, hey that rhymes. Value stocks gained most, with Utilities (+1.2%), REITS (+0.8%) and Telcos (+0.3%) the only sectors holding their heads high. At the other end, Energy (-2.0%), Industrials (-1.7%) and Materials (-1.5%) where all taken to the cleaners. It was a little more even on the week, but again Utilities (+2.2%), Telcos (+1.8%) and REITS (+1.3%) performed best on the week, while Materials (-4.0%), Energy (-2.6%) and Industrials (-2.4%) all dragged the chain. The value vs growth rotation continues.
- Offshore Credit – still constructive in primary with US$31bn priced in US IG markets over the week, although strength of deal metrics has eased a touch. Books were 2.9x overs-subscribed, down a touch on the YTD average (3.1x) and 2020 (4.0x). Spread compression, from launch to final pricing was -23 bps vs YTD average of -24 bps and 2020 average of -30 bps. In secondary, markets clawed back some recent widening, with US IG outperforming all comers.
- Local Credit – not a lot of movement on the week in spreads – a bees bum hair of movement, wider. Stealing some trader’s commentary…hey, I’m writing this on Sunday afternoon, don’t judge…”reasonably busy end to week. Another volatile overnight session, combined with a well received 3.5yr deal from MUFG Sydney Branch and a closely watched BOJ policy decision. Plenty of watch in rates space yet global credit seems to be treading water, US OAS spreads having remained in a tight range so far this week, despite healthy volumes of primary issuance. Domestic credit markets displaying similar resilience though secondary volumes remain worryingly light”. Senior major bank paper unchanged, while tier 2 continues its daily grind tighter, another basis point.
- Bonds & Rates – ACGB’s closed the week a higher (yields) as the inflationary hype continues to exert its pressure. In the US, a “big short position in Treasuries futures may have sparked Thursday’s bruising sell-off”. According to Bloomberg, “open interest in 10-year notes surged by almost 150,000 contracts, the equivalent of US$14bn in the cash bonds. Coupled with the price move, that suggests new short positions were added with overall open interest climbing to the highest in over a year”. It’s going to be a tough week for treasuries also as the market will have to will “absorb a massive slate of auctions focused in maturities that have gotten pummelled amid a brightening outlook for growth and inflation….the government will be selling into a market that’s endured a painful stretch, driving an index of longer maturities into a bear market. A key part of the yield curve just hit its steepest in over five years after the Federal Reserve reaffirmed plans to keep rates near zero through 2023” (Bloomberg). Amidst this back drop, local bonds will likely face rising pressure (yields) also. Despite the ACGB 10-year yield ending the week at 1.80%, and averaging 1.72% over the past month, consensus forecasts – per Bloomberg – still have yields between 1.38% – 1.53% for the coming 12 months.
Macro – a busy week of data for offshore markets, but a quiet one locally – nothing of real significance due out. Keep an eye out for quarterly US GDP (cons. +4.1%) and Core PCE (cons. +1.4%), both expected to be ‘unchanged’ on the pcp.
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