Mutual Daily Mutterings
Quote of the day…
“I don’t like country music, but I don’t mean to denigrate those who do. And for the people who like country music, denigrate means ‘put down’. …” – Bob Newhart
S&P 500 – quarterly reporting (17% reported)…
Source: Bloomberg, Mutual Limited
“Buy the dip, or catching falling knives…”
- Overview – a risk on session with a broad-based rally across major offshore indices with the narrative swinging to the theme that the rally was underpinned by ‘dip-buyer’s’ stepping in. Maybe, or its just back-filling innocuous market moves again, on what was a relatively quiet news day. Bonds were unmoved. Interestingly the narrative is pointing to “a rally in companies that stand to benefit the most from an economic revival.” At the same time the WHO reported that COVID is spreading at the fastest rate – over a given seven-day period – since the pandemic first kicked off. That is 5.2 million cases. The number of cases has been rising for eight weeks now, and the number of deaths rising for five weeks. Risk markets nonetheless remain buoyant, with stocks up +6% – 8% while infection rates climb. Talking heads…”investors are trying to figure out what’s going to accelerate through the reopening based on earnings and guidance, while simultaneously keeping an eye on any reports of a coronavirus resurgence globally….it’ll be a tug-of-war for direction on certain days.” For the ‘coiners out there, this from some guy who apparently knows some things (kind of like me), Bitcoin is very frothy, and “it may pull back to $20,000 – $30,000. It’s trading at $55,500 right now. Still, he remains bullish over the long run, predicting an eventual rise to $600,000.” Riddle me this Batman, how the hell do you value something like Bitcoin given the lack of tangible fundamentals (correct me if I’m wrong) and how do you come up with a number like $600,000? Why not go all in and say $1,000,000? Does it depend on how much saliva is on your finger and which way the wind is blowing from?
- Offshore Stocks – solid and broad-based gains recorded across most Northern Hemisphere stock indices overnight – just one red-headed step-child didn’t get the memo, the Brazilian IBOV Index, which fell -0.72%. These gains come despite weak Asian leads, with the NIKKEI down -2.03% and the HANG SENG down -1.76%. Most major groups within the S&P 500 rose, with Materials (+1.87%), Energy (+1.48%) and Financials (+1.39%) strutting around, lording it over all the other lesser performing sectors. Having said that, only Telcos (-0.28%) and Utilities (-0.90%) were relegated to the naughty corner. Evidencing the broad-based improvement in risk appetite, 83% of the S&P 500 stocks rose, and a gauge of small caps (the Russell 2000) climbed more than +2.00%, outperforming major benchmarks.
- Local stocks – could have been worse. Taking the lead from softer sentiment in Northern Hemisphere markets on Tuesday night, the ASX 200 opened yesterday in the red and headed south at a reasonably persistent and aggressive pace, down -1.30% intra-day. However, as the day wore on, possibly buoyed by stronger than expected Retail Sales data (see below), the index clawed back most of its losses to close down just -0.29%, and back below 7,000. It was a relatively broad sell-off with 63% of stocks down, and only four sectors were able to lift themselves up off the canvas. Healthcare (+1.06%) shone bright on an otherwise dull day, followed by Industrials (+0.52%), Utilities (+0.35%) and Discretionary (+0.34%). Tech (-1.93%), Energy (-1.51%), and REITS (-1.34%) all followed the dark side of the force on the day. Futures are in the green, the index should poke its nose back above 7,000 before the day is done.
- Offshore Credit – reasonable primary market activity, but the thing worth focusing on here is the change in default outlooks over recent weeks. At the height of the COVID pandemic, most of the respected, and even less respected, rating agencies were calling for double-digit default rates this this cycle. These forecasts have been torn asunder and relegated to use as toilet paper. Fitch cut its forecast for 2021 default rates (for speculative or junk grade) to just 2.0%, mainly on the back of “amble liquidity amid government stimulus, as well as rising oil prices and a lack of big debt payments coming due.” Why does stronger oil prices help reduce default rates? Because a large portion of the junk bond sector is represented by oil and gas producers, many of whom are sporting some hefty leverage numbers. S&P is less optimistic, but has nonetheless also dropped its forecasts to 5.5% vs original forecasts last year of 12.5%. Moody’s are forecasting 4.7%, down from 7.5%. For some context, using S&P data (because that’s what I know best), default rates peaked during the GFC around 11% – 12% vs the long run average of around 4.4% – 4.5% (give or take a few basis points), based on data back to 1987. Markets are certainly priced to reflect lower default rates – it’s never been cheaper, and possibly easier, for ‘junk’ bond companies to raise debt. However, not everyone is a fan…talking heads…“I do not agree with the rating agencies’ view that all is well, what the rating agencies are missing is zombies – companies that appear to be alive but are really walking dead.” Realistically, it comes down to your investment time horizon. If it’s to the end of 2021, then all is well. Short of armed conflict between China and [insert opponent of choice here], which is not a zero % probability, there is enough liquidity and fiscal stimulus in the system (and to come) to keep all boats afloat for the remainder of 2021, and a fair way into 2022. If your horizon is beyond, well then there are some hairs on the outlook as the sugar rush fades and reality creeps back in.
- Local Credit – the main focus yesterday was the Bank of Queensland tier 2 deal, a 10.25-NC-5.25 line that launched with guidance of +175 bps, around +5 bps to the curve. Given the technical backdrop, there wasn’t a snowflake’s chance in hell of the deal pricing there. As expected, a strong book ensured, peaking at a smidge under $1.1bn and final printed volume of $250m. Consequently, final pricing tightened into +160 bps, around 7 – 8 bps inside the BEN and BOQ tier 2 curve. In secondary we saw the new deal tighten into +154 bps (-6 bps), a meaningful move despite some real money selling on the break – frustrating, as these ‘flippers’ have taken stock away from longer term holders, making a mockery of the book build process…boom, said it, drop the mike! Expect the secondary curve for BEN to tighten on the back of this, and I wouldn’t be surprised to see major bank tier 2 tighten into mid +120 bps around for the 2026 calls (were +130 – 133 bps prior to the BOQ deal). Spreads elsewhere were unchanged.
- Bonds & Rates – the first central bank to blink in the face of rising growth expectations, and dare I say it, a rising inflation impulse …from Bloomberg “a surprisingly hawkish BOC goosed the loonie. Tiff Macklem’s policy board not only pared back asset purchases to C$3bn (US$2.4bn) from C$4bn as expected, it signalled earlier rate hikes, citing a stronger-than-expected rebound. Tightening could now come as early as next year, compared with earlier guidance pointing to no action before 2023. Canada’s currency reversed course and jumped almost 1%”. Like Australia, Canada is a big resource player….so, some might expect similar moves from the RBA. Not me, at least not yet, but there are some similarities.
- Macro – yesterday’s Australian Retail Sales figure came out stronger than expected, +1.4% MoM vs +1.0% MoM consensus, and rebounding strongly from February’s -0.8% MoM decline. Victoria (+4.4% MoM) and Western Australia (+5.5% MoM) underpinned growth. Implications…borrowing form NAB’s commentary…”by industry, the only detail available ahead of the final release on 10 May was for ‘cafes, restaurants and takeaway food services’ where sales leapt +6.0% MoM, taking the level of spending in cafes and restaurants to above pre-pandemic levels for the first time – now sitting +4.0% above February 2020 levels. The return of spending on cafes and restaurants to pre-pandemic levels may be reflective of a wider trend of consumers pivoting back towards services, which may see retail sales growth slow or even fall given the retail trade survey is heavily weighted towards goods consumption. Note retail sales compromise around one-third of total consumption.
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