Mutual Daily Mutterings
Quote of the day…
“Just cause you got the monkey off your back doesn’t mean the circus has left town.” – George Carlin
“Bonds drifting higher, stocks drifting lower…”
- Overview – a relatively quiet news day, at least nothing really market moving. Stocks were mixed, some indices up on the day – just, but majority were moderately in the red. Treasuries again higher, but pared back some of the intra-day moves higher. Some commentary overnight from US Treasury Secretary, and former Fed Chair, Janet Yellen overnight provided some insight into the Biden Administrations tax strategy. Yellen is pushing for higher taxes on corporations but not on the wealthy. She said “a wealth tax has been discussed but is not something President Biden” favours. The administration is looking to boost the top corporate rate to 28% and a capital-gains tax hike might be something “worth considering.” The next fiscal stimulus package, the $1.9 trn bazooka will be voted on Friday. Market reaction was muted, much of this is not entirely new, so likely baked in. Brent oil climbed above $64/bbl as some street estimates are predicting prices could advance into the $70s in coming months. On the pandemic front, a grim day in the US as the death-toll surpassed 500,000, which is more than the number of lives lost in WWI, WWII and Vietnam combined. Meanwhile Australia has kicked off its vaccination program. For us mere mortals not in ten trenches on the frontline, i.e. doctors and nurses, we’ll have to wait a while before we get our jabs.
- Offshore Stocks – Tech stocks led markets lower in the US with NASDAQ and S&P 500 both sporting bloodied noses, actually NASDAQ sporting some moderately severe head-trauma, while gains in Energy and Financials saw DOW walking tall, at least with its head above water…walking…water? You know what I mean. European markets were universally in the red, although moves were modest. Talking heads… “long-duration assets are the ones that are most vulnerable in a rising interest rate environment…the exact same stocks that led the market higher when interest rates were plummeting are the ones most vulnerable when interest rates rise”. Moves have been gradual from here, with confidence slowly evaporating. Perhaps formal approval of the US fiscal stimulus package will provide a pep-up for confidence, but it’s been a given for months, so should already be baked in. Tread warily.
- Local Stocks – the local market moved sideways yesterday on the day with stocks down marginally shading stocks up, 53% vs 43%. Aggressive moves higher in bond yields were largely ignored (more on this below) with the ASX 200 closing largely unchanged. If not for Materials (+2.7%), the only sector to really put up a fight, and close in the green, offsetting most of the losses. Healthcare (-1.7%), Discretionary (-1.0%) and Tech (-1.3%) did most damage to the broader index. In the finance space, Bank of Queensland announced it had agreed to acquire ME Bank from the local superannuation funds for $1.325bn, to be fully funded by an equity raising.
- Offshore Credit – modestly busy start to the week in US IG with seven deals for $6.1bn priced. Expectations are for a $30bn – $40bn week to close out the month (MTD issuance at $83bn). Secondary spreads are stable for now, largely shrugging off the rising yield / steepening curve theme. It is worth noting that offshore spreads are now comfortable back below pre-pandemic lows. US IG Financials index was averaging around +77 bps through January 2020, peaked at +340 bps and is now back at +64 bps. Similar thematics across US IG Corporates, averaging +105 bps in January 2020, peaked at +380 bps, now at +96 bps.
- Local Credit (Primary) – some primary action yesterday with Charter Hall (‘CHW’) (Baa1) launching a 7Y (60%) and 10Y (40%) at +95 bps and +120 bps respectively, in from launch levels of +120 – 125 bps and +140 – 145 bps respectively. Any sign that perhaps the steepening yield curve might dampen risk appetite was well and truly quashed with the book at almost $1.8bn, with the deal capped at $500m, which was reflected in the 25 – 30 bps of compression post launch. Local technicals are very robust at the moment, which is reflected in the performance of this deal through book build. Too tight for mine. Bank of Queensland tier 2 debt, which is rated one notch lower than CHW at Baa2, has a 2024 callable bond, which is available in secondary at +126 bps, so some 30 bps wider, yet four years shorter and just one notch lower. I know what I’d prefer. Still in primary, UBS’ Sydney branch (A+/Aa3) launched a 5-year line with guidance of +55 bps (‘area’). The deal is expected to price later today, and with a book just shy of $1bn from local bids, I suspect it will price around or inside the +50 bps area. Keeping in mind Suncorp-Metway (A+/A1) priced their 5-year last week at +45 bps, and is now at +42 bps, so UBS inside +50 bps is likely.
- Local Credit (Secondary) – straight from the horse traders mouths…”secondary flows largely dominated by offshore accounts with domestic accounts largely sidelined by the rate sell-off or focussing on the primary trades. We did see a continuation of profit taking in T2 that was still very competitively bid by market makers. Risk markets for now holding in with still better buying of longer end fixed paper on the rates sell-off”. Nothing done in major bank senior, while in tier 2 quite an active day with good two-way flows. Traders again “skewed to slightly better buying in BQDAU/Insurer T2 and net selling in major banks”. No noticeable change in spreads, but given the recent run, not surprising. Profit taking being supported for now, but if it continues and spreads, we could see some sogginess.
- Bonds & Rates – again the reflation trade narrative dominated yesterday with a big move higher in ACGB yields, with the local bonds underperforming treasuries. The 10’s ripped higher, +16 bps to 1.59%. Statistically, moves of this magnitude a very rare. Since 2016 there has only been 8 trading days where 10-year bond yields have risen by +15 bps or more. Interestingly also the 3’s are hovering almost +4 bps north of the RBA’s 0.10% target despite the central bank active in secondary, buying $1bn of the Apr-24’s. Interestingly again, the Nov-24’s, just 7 months longer, are +16 bps steeper. As Homer would say, “that’s crazy-talk Marge!”. The 10’s are now over +60 bps higher YTD, or double what that were around October lows (0.72%). They’re also back at pre-pandemic levels. Markets have smashed through consensus estimates, with a median Q1’21 expectation of 1.03% and a range of 0.90% – 1.35%. The range for Q2’21 is 0.50% – 1.55% with a median of 1.13%, still well shy of prevailing levels. Consensus estimates were last updated (Bloomberg) at the end of January, with a +10 bps change top medians from December to January for Q1 and +17 bps for Q2. Given where markets are now, I’d be expecting a sizeable adjustment at the end of February. Whether the tone continues today is open to debate. If historical correlations hold fast with US treasuries, then we’re going higher. While, ten-year treasury yields pared gains from intra-day highs (1.3925%), they still edged +3 bps higher on the day. Although, the 5- to 30-year yield curve flattened after steepening to the widest in five years.
- Macro – so, are we going to get inflation? Markets certainly seem to think so, just a matter of when…and how much? To better explain some of the machinations here, I’m going to borrow (ok, steal) some commentary from my former alma mater, CBA…”the irrational OIS markets are pricing cash rate hikes from the RBA for mid-2022 in Australia. While there can be conjecture around the February 2024 date for the RBA’s current commitment, there is a lot of wood to chop before the RBA hikes interest rates in just over a year. This particularly stands out against the RBA shifting in 2020 to saying they would only hike when actual (not forecast) inflation was sustainable inside their 2% – 3% target range. But, if the economy continues to improve, 2024 is too late”. My emphasis at the end there, once the inflation genie is out of the bottle, it can be very hard to contain, especially when your ability to tighten monetary policy is constrained by the vast sums of debt outstanding.
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Scott Rundell, Chief Investment Officer
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