Mutual Daily Mutterings
Quote of the day…
“Nothing spoils a good story like the arrival of an eyewitness” – Mark Twain
“Full speed ahead…”
- Overview – risk off from start to finish, but the negativity abated once Fed Chair Powell came out (before the Senate) and reinforced the Fed’s “accommodative-for-longer” stance, indicating the central bank was nowhere close to pulling back on its support for the economy. Not only did Powell promise to keep the pumps primed, but he also boldly predicted GDP growth of as much as 6% this year…that has to be inflationary, no? Apparently not. Powell stated “the economy is a long way from our employment and inflation goals”. I agree on the employment front, there is excess capacity, but on the inflation front, I’m less convinced markets will accept such a benign view as being reflective of likely reality, at least timing wise. Thus the aggressive curve steepening over the past two months. I found this comment slightly amusing, he promised to give “advance warning” to any change in course. Ah, he is just such a joker. By the time central banks formally revise course on policy, especially in a post GFC world, the market is six months ahead of the move, and that’s the timing issue I touched on. Investors, the collective of which represents the market, is always trying to get ahead of itself. Despite the easing on the day of recent moves, the weight of the collective is still calling hogwash* on Powell’s policy assertions (I would normally use a different word, but profanity filters might explode).
- Offshore Stocks – a volatile session to say the least. Tech stocks took it in the neck initially, with the NASDAQ down ↓2% at one stage while the S&P 500 was down over ↓1.1%. But then Dr Feelgood, Jerome to his friends, Mr Powell to his subordinates, uttered some soothing words. We’re in the final hour of the US trading session as I write this and the market has clawed its way back into positive territory. Gainers outweighed the losers (sorry, participating stocks that didn’t advance on the day) by 57% to 43%, with all sectors bar Discretionary (↓0.4%) ahead. Energy (+1.6%) and Telcos (+1.3%) the two heavy weights driving the recovery on the day. European stocks were mixed, some gained, some came to play, but failed to make a difference. Moves were modest.
- Local Stocks – a solid day in the end with 60% of stocks walking tall, although at the sector level the tone was more mixed, five gained, six didn’t. For absolute price change, Energy (↑9%) and REITS (↑2.9%) took the chocolates, but for bang for buck (most influence on the index), Financials (↑1.5%) and Materials (↑2.0%) were the co-apex predators on the day. Tech dragged the chain, down ↓4.1%, with Afterpay taken behind the woodshed for an old-fashioned belting, down ↓7.2%. Consumer Discretionary (↓2.0%) and Telcos (↓1.9%) also spending some time in the naughty corner. Despite the late bullish flourish into the offshore close, local and regional futures are in the red, moderately.
- Offshore Credit – reasonably busy optically, a lot of deals across the screens with $10bn priced, but no aggregate details yet on book cover etc. Macquarie Bank launched a US$1bn 15-NC-10 tier 2 deal at T+170 bps, which was well inside initial guidance of T+200 bps area. Rough and dirty, this swaps back at around BBSW+185 – 190 bps (priced to call), give or take (still yet to price). This compares to MQG’s A$ May-30 call deal, which is pricing +148 bps….that’s still quite a difference after adjusting for tenor. US market looking expensive for MQG relative to A$.
- Local Credit (Primary) – UBS AG, Sydney Branch priced a ‘yard’ of 5-year paper, consisting of $700m in floaters and $300m in fixed. The deal priced at +50 bps, -5 bps inside initial guidance. The deal was well supported, with an original book of around $1.5bn before dropping to $1.3bn at final re-pricing. UBS is rated A+ with S&P, just a notch below the major banks, but equally rated at Moody’s (Aa3) and better rated at the red-headed step-child of rating agencies, Fitch (AA-…albeit with a negative outlook). At +50 bps for 5-years, the deal offered good value over the major bank senior curve, which would likely price around +30 bps for a 5-year deal at the moment (extrapolated from the existing curve).
- Local Credit (Secondary) – words of market wisdom and wonder from the markets leading sell-side credit traders, slightly edited to protect the innocent and grammatically impaired…”a more subdued day in rates after Monday’s carnage, but with the relative rate stability, selling emerged across all sectors as investors looked to reduce risk. Compounded by a distinct pick up in selling to either fund the new UBS 5yr or preparing for a growing primary pipeline in corps. Whilst the volumes that we saw were not particularly large, they were enough to weigh on spreads with a generic 1-2 bps of widening. Dealer bid side liquidity also pulling back from the recent aggressive bid levels being show”. In the tier 2 space, we woke up yesterday with a funny feeling in our tum-tums, and thought today’s a good day to take some risk off the table, and so we did…it would seem we’ve picked the bottom…for now. Across the major bank tier 2 space, spreads drifted +1 – 2 bps wider. Traders again…and this is a risk for the long side if the profit taking morphs into a bit more of a wider theme…”further selling is going to challenge dealer’s ability to warehouse risk given the generally smaller T2 limits constraints of most banks”. I recall at CBA our traders lamenting the puny size of their tier 2 limits ahead of a sizeable issuance need as a result of APRA’s TLAC requirements. Seems credit teams have kept the reigns tight on tier 2 limits.
- Bonds & Rates – treasuries were volatile again, with 10-year yields initially rising before fading to around 1.36% (largely unchanged), while bets on faster growth pushed the gap between 5-year and 30-year yields to the highest level in more than six years, +161 bps (vs a 5-year average of +85 bps). Locally, the recent curve steepening remains the topic du jour. On the day the curves eased back from the precipice, with 10’s -3.5 bps lower (yield) at 1.57% despite further steepening in the US the night prior, about +3 bps. Where to from here? Do you have a dart board I could borrow? Gut feel, the steepening will abate for now, bets are placed and it’d a braver man, women or child to short the market here…last nights Fed commentary and market moves thankfully, purely for ego purposes, and at least for the moment, supports my view. Further, the talk amongst journo’s reportedly with an ear into Martin Place is that the RBA will step into the market today (semi’s) and tomorrow (ACGB’s) with the one-wood in a bid to assert their “authorita” as Cartman would say. Either way, the debate in the market is whether the RBA will live by its initial assertion that rates won’t move higher until 2024. Markets here and now are saying, nup! Inflation has to be on the horizon given surging commodity prices, massive amounts of fiscal stimulus in the US (equal to 15% of GDP) and the success of the COVID vaccine roll out. It’s just a matter of when – closer than it has been for a while I would think, and how long will central banks let inflation run hot. The risk is it gets away from them and they’re unable to pull it back…which it has a history of doing. It’s a tough one. Markets are now pricing cash rates around 0.6% by 2024, so +50 bps above current rates.
- Macro – running out of time to put something pithy and inciteful together, so will plagiarise borrow from others (NAB in this instance)…”in Australia today we have Q4 Construction work done and the Q4 Wage Price index. In offshore markets there is the final reading on German Q4 GDP and we get US home sales data. On the central bank front the RBNZ meets today while Fed Powell testifies before the House Financial Services Panel for a second day. On supply the US treasury will auction $61bn of 5-year notes”
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907