Mutual Daily Mutterings
Quote of the day…
“People who read the tabloids deserve to be lied to.” – Jerry Seinfeld
Rolling weekly spread change…
Source: Bloomberg, Mutual Limited
“To the core…”
“In tech we trust…for now perhaps”
- Overview – yields eased off the gas overnight, providing a tail wind for tech stocks – old school stocks also gained, but less so. And, why the pull back in yields? Nothing meaningful that I can nail down. So, lifting the eyes beyond the present and it’s a big week for US bond markets with a slate of auctions, and moves by the Fed to let a key bank capital exemption lapse (covered earlier in the week). Talking heads… “the rise in long-term yields has kind of affected every move we’ve seen in equity markets, from the big selloff in the higher growth stuff to the rotation into the more economically sensitive sectors…any time there is some rate stabilization, it’s kind of the spark for tech to capture a little bit of gains.” True, but the trend cycle is very narrow, yields and therefore tech stocks could easily reverse last night’s moves tomorrow. Despite markets assertions that inflation is a growing problem that will need to be dealt with, Fed officials claim there’s “no sign yet that faster economic growth will deliver unwanted inflation or a need to adjust monetary policy” (Fed President, Richmond)…he further added that for “unwanted inflation to take hold expectations for prices increases would have to really move and begin to get factored into business decisions and wage bargaining.”
- Offshore Stocks – a temporary pause on the value for growth reflation trade rotation with bond yields easing back from 12- month highs, giving investors a brief catalyst to rotate back into Tech stocks. Within the S&P 500, Tech (+1.9%) led the gains, ably assisted by Staples (+1.2%), and REITS (1.2%). All up somewhat narrow rally across US markets with just 56% of stocks in the S&P 500 closing higher, although at the sector level only four closed in the red. Financials (-1.3%) fell on lower bond yields, while Energy (-1.0%) was also softer. Industrials (-0.1% and Utilities (-0.1%) were down, but only marginally so. European markets were mixed, with little direction or momentum on the day. The Asian lead was also mixed, with the NIKKEI (-2.1%) and Hang Seng (-0.4%) flashing some red, while the CSI 300 (Shanghai) rose a neat +1.0%. Where to from here…from UBS “stock sectors have fluctuated in the past month by more than what is implied by their historical relationship with rates, suggesting the market is pricing in another 15 to 25 basis point gain in 10-year yields”…if so, then Tech / growth should underperform value, i.e. DOW > NASDAQ, but less so S&P 500 > NASDAQ as the former has almost 27% of tech stocks these days, the largest sector in the index by a factor 2x.
- Local stocks – the ASX 200 started very briefly in the red yesterday, with weak leads, but then quickly gained a bit of a spring in the step, closing firmer on the day. It was a broad- based rally with just under two-thirds of stocks gaining, led by Energy (+2.8%), Utilities (+2.2%), Healthcare (+2.1%), Staples (+14.6%) and Discretionary (+1.5%). Only Materials failed to get a shot off, an insipid -0.5% fall on the day. Despite the firmer leads this morning, futures are suggesting a moderately softer open this morning (-0.3%).
- Offshore Credit – a chunky start to the primary week with US$16.8bn priced in US IG markets, dominated by a UE$15bn deal by Oracle. There were about ten companies waiting in the wings to hit the market, but only two garnered up enough courage to step on the dance floor overnight. Interestingly on the Oracle deal, it shows the companies lack of respect for their rating and bond holders. The deal led Moody’s and Fitch to lower their ratings on the issue as the proceeds are earmarked to refinance debt and pay shareholders. Busy in EU primary also, or at least a handful of potential issuers are hovering with intent, actual deals done were modest.
- Local Credit – not a lot in secondary going on with primary taking centre stage, particularly in the corporate and SSA space. For the uninitiated, SSA’s are also known as ‘supranationals’ and include the likes of the World Bank, Asian Development Bank, European Investment Bank etc. Basically, banks that are back in some form or another by one or more sovereigns. As such they’re typically AAA or AA rated, but generally trade at a premium to the underlying sovereigns. In the major bank senior and tier 2 space, spreads were unchanged on the day.
- Bonds & Rates – US treasuries pulled back a few basis points, although the broader trend remains for yields to push higher – as touched on yesterday, bond short positions have grown and this week there are a couple of treasury auctions. Across the pond, the ECB upped its bond buying last week in a bid to combat higher yields, settling net purchases of €21.1bn under its pandemic program vs €14bn the previous period. Whether this new pace is enough to prevent bond yields from rising further remains to be seen, but it’s unlikely to materially reverse recent increases.
Macro – as touched on yesterday, a big week for US macro data. Also, Fed Chair Powell and Treasury Secretary (and former Fed Chair), Janet Yellen are expected to make their first joint appearance before the US House Financial Services committee to testify on Fed and Treasury pandemic policies (tonight our time). On the matter of inflation, I put some grey matter to work on the matter this morning. My take, for now, is inflation is not yet evident in the official data – plenty of anecdotal evidence though – because there is excess capacity in the ‘system’. Large swathes of the US (and EU) economies are still battling the pandemic, with some still in lockdown, accordingly spending patterns remain constrained. In turn means competitive pressures are placing limitations on pricing power, i.e. businesses are absorbing initial inflationary pressures – this is intuitive, I haven’t yet dug up any data to support the hypothesis. As vaccine programs expand and economies open up, households will (should) begin to spend again. As competitive pressures reassert themselves, then, perhaps we’ll see inflationary forces back in play. So, for now, I can understand the Fed’s reticence to call inflation a concern. BUT, yes another but, markets always lead central banks…it’s just a question of timing.
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