Mutual Daily Mutterings
Quote of the day…
“People will be vaccinated, cured or dead by winter.” – German Health Minister, Jens Spahn…harsh, but then, we all know that German operas go for three days and they have no word for fluffy!
Chart du jour…oil vs CPI
Overview: ”Side Ways…”
- Rising yields sucked some of the life out of the stock market overnight with tech stocks particularly under pressure, while banks and energy stocks did their best to keep the party going. A third day of declines threatened most Northern Hemisphere markets, but in the end, the S&P 500 clawed its way into positive territory in the last half hour of trading, while the DOW was up for most of the day, and the NASDAQ down for much of the day.
- Fed speak… Atlanta President Raphael Bostic said overnight that the Fed bank may need to speed up the removal of monetary stimulus and allow for an earlier-than-planned increase in interest rates. This is an oft repeated line by voting members over recent months…the boy who cried wolf. Having said that, traders pared back bets on a dovish-for-longer Fed after Powell was selected for a second term as high-priest and grand poo-bah of the central bank. Powell himself “sought to strike a balance in his policy approach, saying the central bank would use tools at its disposal to support the economy as well as to prevent inflation from becoming entrenched.”
- Talking heads…”looking at the market today, obviously things that are sensitive to rates…tech is showing a little bit of weakness, financials are showing strength. That’s reflective of that move in the yield curve.” And, “the market is still overbought and needs to digest some of the recent gains.” No argument on the latter from this little black duck!
- Oil futures rebounded following an announced release of 50 million barrels of Texas Tea from US strategic reserves, a move replicated by China, Japan, India and South Korea and the UK – “an unprecedented, coordinated attempt by the world’s largest oil consumers to tame prices that could prompt a backlash by OPEC+. While the headline size is big, a chunk will be borrowed and returned, leaving traders anticipating tighter balances. Many also said the long-talked-about plan was already baked into crude prices” (Bloomberg). OPEC may not take this well and cancel existing plans to boost production….an expensive game of chicken potentially ensues. Problem is, strategic reserves are finite, OPEC+ don’t have that problem.
- Offshore Stocks – hard to write commentary on US stocks during our summer when you’re trying to publish by 8:30am (markets don’t close until 8:00am our time). In the last half an hour the S&P 500 has oscillated between very modest losses and very modest gains. So, I’ll draw a line in the sand and say it did do much on the day, while the old school DOW continued to perform, while the index for millennials, the NASDAQ fell as yields rose. Energy (+2.8%) was the bright spark on the day, followed by Financials (+1.4%), one aided by rising oil prices, the other by rising yields, you can figure out which is which. REITS (+1.2%) also had a decent day. Meanwhile at the kiddie-table, we had Discretionary -0.6%, Telcos (-0.4%) and Tech (-0.3%). Note, final actual changes on the day may vary a smidge given last minute movements, but you get the gist of it.
- A snippet from Bloomberg on potential sector performance, and general lack of breadth of performance in the market…”consumer discretionary is vying with materials and tech to be the best-performing S&P 500 sector this month. But almost 60% of those gains in terms of index points are Amazon.com (over 40%) and Home Depot. The equal-weight consumer discretionary gauge (S25) has risen about +3.7% so far this month, compared to the cap-weighted gauge (S5COND) up almost +4.0%. The cap-weighted outperformed even more significantly in October. The equal- to cap-weighted discretionary ratio has fallen to the lowest since February as investors have focused on these big stocks”. And this, “But bigger isn’t always better, as this week’s tech-led declines have shown. The equal-weighted gauge has only declined about half as much as the cap-weighted S5COND this week. And the cap-weighted can thank Amazon for two-thirds of those declines and Tesla another ~18%. These stocks are more prone to profit-taking investors wary of rising bond yields. Consumer discretionary isn’t as expensive as earlier in 2021 but it’s still historically pricey among rising inflation and supply chain concerns. That puts its outperformance in question heading into year-end.”
- Local stocks – a reasonably buoyant day in local markets yesterday after mixed leads, which were probably leaning to the weaker side of the ledger. More stocks gained ground than not. It was the old-guard driving gains with Materials (+2.3%) and Financials (+0.9%) having the most significant impact on the broader index. Growth in Materials came off the back of iron ore prices rebounding on bets stronger-than-expected steel output cuts so far this year mean China’s steel mills are primed to lift volumes next month. Other sectors firing were also, including Energy (+2.5%), Utilities (+1.8%) and REITS (+1.4%), although they have a lesser weight within the index. Tech (-3.5%) dragged the chain, as did Telcos (-0.8%), the only sectors unable to get a shot off. Futures are flat.
- Local Credit – lighter in volumes yesterday, by all accounts, with cash spreads drifting marginally wider in general. More primary action in the corporate and offshore bank space. Computershare (BBB) priced $300m 6-year coin at ASW+123 bps, while Agricultural Bank of China printed $500m 3-year at +53 bps. Neither deal peaked our interests. Despite the general drift in spreads, I’m seeing major bank senior unchanged with the NAB Aug-26 (longest dated and last major bank senior deal) at +57 bps and the Jan-25’s at +42 – 44 bps. Major bank senior spreads are off their tights which came just prior to APRA changing its tune on CLF usage for bank liquidity calculations and will likely range trade for the remainder of the year – carry is your friend. Through 2022 I expect major bank 5-year spreads in primary to drift into a wider trading range, say +60 – 80 bps (shaded zone in the below chart), but could spike wider, say up to +110 bps if we have a global or systemic shock of some kind where wholesale funding markets are disrupted.
- Bonds & Rates – bonds behaved according to expectations yesterday, given leads from US and EU markets, a reasonably significant sell-off across the curve. We’ll likely see a further sell-off today – some macro data due out, but shouldn’t be market moving in its own right. Across the ditch, or ‘dutch’ as my former kiwi colleagues would say, the RBNZ is expected to raise interest rates for a second straight month — probably by at least 25 bps to 0.75% — and signal a more aggressive tightening cycle. New Zealand’s inflation is above the central bank’s target range and is accelerating amid a labour shortage.
- Offshore Macro – pilfering some commentary from NAB’s morning note…”in contrast to the US where incoming November Markit PMIs were either unchanged (Manufacturing) or fell (Services) Eurozone PMIs were stronger than expected across the board, and in all case bar German manufacturing, up on October…. the bottom line is that Eurozone economies are for the most part dealing with ongoing supply chain disruptions and rising covid infection rates much better than earlier in late 2020 and earlier this year, though it has to be said that these surveys will have been taken prior to the announcement of Austria’s full lockdown and what lies ahead for other Eurozone economies, including Germany (and where, for example, most Christmas market have now been closed).”
- Bloomberg…looking ahead ”a wealth of U.S. data will provide a snapshot of the pre-Thanksgiving economy Wednesday (tonight), with inflation concerns front and centre. The second print of third quarter GDP should show a slight uptick to an annualized +2.2% from the initial +2.0% reading, consensus shows. October personal income is seen rising +0.2% and personal spending may climb +1.0%, both improving on September’s numbers, and weekly jobless claims should extend the downward trend. The Fed’s preferred price gauge, the PCE deflator, may accelerate to +5.1% from +4.4%.”
- Local Macro – Q3 construction work done due out today (-2.9% consensus vs +0.8% in Q2), and Q3 private capex (-2.0% consensus vs +4.4% in Q2. Weekly payrolls also due out (no consensus available). Neither should be market moving.
- Side Note – my German comment about their operas and them having no word for fluffy is a line from Blackadder Goes Forth, and by no means a reflection of reality. By all accounts there is a word for fluffy, but it is usually connected to another word…my oldest son has taken it upon himself to learn German off the internet. He started with Russian, but decided to switch to German. He found that there are many German words for fluffy, depending on the sort of fluffiness involved. For example, flaumweich (fluffy fur); schaumig (fluffy cake or egg); locker (fluffy hair); and kuscheltier (fluffy toy) among others.
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Scott Rundell, Chief Investment Officer
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