Mutual Daily Mutterings
Quote of the day…
“If aliens are watching us through telescopes, they’re going to think the dogs are the leaders of the planet. If you see two life forms, one of them’s making a poop, the other one’s carrying it for him, who would you assume is in charge?” – Jerry Seinfeld
Rolling weekly spread change…
Source: Bloomberg, Mutual Limited
“Oh, right…that pandemic”
- Overview – risk assets fell out of bed last night, but it was the bottom bunk, not the top bunk, that would have obviously hurt more. After a month or two of COVID risk being in the backseat, sedated by vaccine deployment, it jumped back into the front seat, at least for last night. Stocks choked, with companies set to benefit from an end to lockdowns taking a worst beating than most as the narrative swings back to rising virus cases, the “third wave” and new lockdown restrictions in Germany signal the global reopening will be delayed. Point of order your honour, the lockdowns in Germany (Italy, etc) have been in place for over a week now, why all of a sudden are markets concerned now, why not back then? I’d suggest a news vacuum elsewhere has the keyboard jockey’s looking for alternative narratives. Or, markets were still a little tippsy on all the US fiscal stimulus, which blurred out all other risks. Again, choose your own adventure. So, stocks down, the USD strengthened, and bond yields slid for a second day following Fed Chair Powell playing down the risk that economic growth would spur unwanted inflation. Oil took it in the neck as renewed lockdown measures in Europe and rising virus cases in India sparked concerns about the demand outlook.
- Offshore Stocks – the S&P 500 spent much of the trading session oscillating around the ‘unchanged’ mark before slumping about -1.0% in the last hour or so. The small-cap Russell 2000 gave up the ghost, falling -4.0% with companies set to benefit from the economic reopening trade taking a swift and brutal kick to their soft and delicate area! Last night was also the 1-year anniversary of the bear market bottom (ha ha, he said bottom!), which was proceeded by a very aggressive, stimulus fuelled, +75% rally (S&P 500). Fiscal and monetary policy stimulus notwithstanding, that is a remarkable rally, and let’s be honest, concerns around over inflated valuations aren’t new or unjustified.
- Local stocks – a very modest sell-off yesterday, optically at least. More stocks (59%) were down than up, but across the ASX 200’s sub-sectors, gainers vs participants who didn’t gain (aka lowers) were more balance, six down, five up. Fighting the good fight were Telcos (+1.0%), Utilities (+0.8%), Healthcare (+0.7%), REITS (+0.6%) and Materials (+0.2%). Taking the fight straight to the gutter were Energy (-1.0%), which will take it in the neck more today given offshore moves. Tech (-0.9%), Discretionary (-0.7%), and Financials (-0.5%) also got down and dirty. Futures are pointing to a very, very modestly soft open, -0.03%. Our Asian neighbours a looking a touch less resilient with futures down -0.2% – 0.8%.
- Offshore Credit – a modest day with US$6.7bn across four borrowers hitting the US IG market, taking week to date issuance to US$23bn. Secondary spreads remain supported, outperforming their European brethren, who have been drifting wider for a month or so now, particularly in the corporate and high yield space. Post index roll, CDS moves remain modest, less than a basis point in either direction.
- Local Credit – primary still dominating the local credit market’s attention, although still an absence of local ADI issuance, be it senior or sub. New deals announced yesterday included Toyota Finance Australia (A+/A1) and toll-road owner and operator WESTCONNEX (BBB+/-). From hereafter, drawing on trader’s EOD commentary…”further corporate mandates are now live and the reception that these deals receive in what could be a volatile week for rates will set near term risk appetite.” On the major bank senior curve, we saw some very modest widening, “though not in response to any sell flows. The curve retains a strong bid in the front end with only sporadic two-way cares in the longer dates”. Good two-way flow in regionals also observed on the day. “We think that regionals offer some appeal here with most (perhaps all) having secured funding via debt markets or the TFF. In short, we would not anticipate much in the way of near-term issuance and consider the pick versus majors as attractive”….yep, concur. Tier 2 paper moves a touch tighter across select lines, -1 – 2 bps, noting traders are “in that awkward period pre quarter end whereby our capacity to provide liquidity is constrained by pending capital charges.”
- Bonds & Rates – US treasuries rallied as this week’s debt auctions kicked off, with a softer risk tone overshadowing immediate inflation concerns, US$60bn of two-year notes received solid demand. A decent rally in the UST 10’s, -7 bps to 1.624%, which will exert some downward pressure on local bonds. Yesterday, the ACGB 10’s closed at 1.741%, -3 bps on the day, possibly back into the 1.65% – 1.70% range today.
- Macro –Fed Chair Powell and Treasury Secretary Yellen appeared before the House Financial Services Committee overnight. Again, the dynamic duo continued to downplay the risk of inflation, but recognised that pent-up demand, supply-chain bottlenecks and the comparison with very weak price pressures last year will drive prices higher. However, while “we do expect that inflation will move up over the course of this year…our best view is that the effect on inflation will be neither particularly large nor persistent.” As calculated by the personal consumption expenditures price index, inflation per the Fed’s median forecast is expected to end 2021 at +2.4% vs +1.5% in January. In their growth forecasts released last week, the Fed projected the US economy will grow +6.5% over 2021, which would be the fastest annual pace since 1983 and would follow a -2.4% contraction in 2020 as a result of the COVID pandemic. Consensus (per Bloomberg) has GDP growing +5.7% over 2021 with inflation per the Fed ‘s preferred measure ending the year at +2.1%….so consensus is lower than the Fed, yet markets still pricing in an aggressive inflationary outlook….he said, she said…
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907