Mutual Daily Mutterings
Quote of the day…
“Both optimists and pessimists contribute to society. The optimist invents the aeroplane, the pessimist the parachute” – George Bernard Shaw
“Thous shall not fight the Fed…”
- Overview – Sir Jerome to the rescue, again, bounding into the fray on his trusty steed, Dr Feelgood. The noble and gallant Fed Chairman once again assured markets that all is good, but the economy needs support and he, with all his chivalrous might, will be there to provide it. Powell, testified before the US Senate committee on something or other, that the US economy still had a long way to go to reach maximum employment and the Fed’s inflation target, signalling that he wants to remain accommodative. Nothing new here to be honest, he’s preaching from the same hymn book as last year, just sometimes the congregation needs to be reminded of the teachings of the good book, and in the case of the markets, the eleventh commandment, “thou shall not fight the Fed”. The faithful, reminded of these teachings, piled back into stocks, with a solid risk on session across US markets. Of course, this did little for the long-suffering bond holders (yes that’s a joke) who saw yields punted higher again as the reflation trade gathers support. Talking heads…“there’s definitely a debate going on within the market both in terms of interest rates and inflation, but also in terms of economic growth…it’s this whole growth-versus-value investing style discussion that happened last year, and now in 2021 I would say it’s been more mixed”
- Offshore Stocks – bond yields be buggered, stocks were on the good foot overnight, shrugging off any concerns rising yields might have on the recovery (for now). Talking head…”while it’s certainly true that the rise reflects an optimism about an ongoing bounce in nominal economic growth, by the same token it’s important not to choke off a recovery by strangling the provision of credit”. Modest gains across European markets, not much north of +1.0% on the day, but welcome from a bull’s perspective given recent sogginess. US stocks opened briefly in the red, but then Sir Jerome began talking and equity investors seem to hang on every word, unleashing their inner animalistic instincts with 77% of stocks (S&P 500) up on the day, and again Tech (+1.1%) was a dominant player in the broader index’s gains, accounting for a quarter of the day’s growth. Energy surged (+3.6%) as oil jumped +2.0%, and Industrials (+1.9%) and Financials (+1.9%) also had strong sessions. Half of the sectors were up by over +1.0%, and only two sectors, the low-beta wall flowers, Staples (flat) and Utilities (-1.0%), failed to get out the gates.
- Local Stocks – under pressure again yesterday. Almost two thirds of stocks closed in the red with Tech (+2.7%), Telcos (-2.5%) and Materials (-1.9%) dragging the market into the gutter, especially Materials, accounting for around a half of the broader index’s losses. Only a couple of low-beta sectors in Staples (+1.0%) and Utilities (+0.7%) could hold their chins up on the day. The ASX 200 is now down -2.0% over the past week, and it’s probably too early to say whether we’re in a sustained downward trend, although we’re within spitting distance of some key technical support levels – 6777 close yesterday vs 6740 50D moving average. If you’re into the Fibonacci’s (not an Italian pasta dish), the next major support level is a way’s off, 6251 (-23.6%). Futures are pointing to a solid rebound today, with strong offshore leads.
- Offshore Credit – active in EUR markets, dominated by SSA’s, with €12bn printed. Average deal metrics remain constructive, with books covered 3.0x and spread compression of 22 bps. YTD issuance is just under -5% down on the 2020 run rate, with corporate issuance down -19%, financials are down -28%, while SSA issuance is up +18%. Secondary spreads are a touch wider over the past 30 odd days EU Fins, +4 bps, yet it’s the opposite in the corporate space. Across the pond in US markets, a handful of deals (6), with US$12.2bn priced on the day. No specifics on coverages yet, but spread compression was constructive. Unlike their EU brethren, secondary spreads across financials and corporates are tighter YTD, -6 bps and -21 bps respectively.
- Local Credit – with so much action in the street, and volumes heavy, I’ll again latch on to trader’s words, they’re in the trenches…”selling across all sectors and tenors from both domestic and offshore investors…it’s worth noting also that only a handful of trades were $40-50m type volumes, so a lot of smaller trades. AUDJPY related selling really picking up steam as the cross rocketed up to 83.70. Domestic real money accounts also noticeably increasing their selling, although I think that is more in preparation for upcoming primary issuance. Broader AUD fixed income markets clearly still rattled after the savage rates sell-off and liquidity is significantly worse across the board and that includes AU credit markets. Spreads continue to move wider and bid side liquidity for now is patchy at best”. For mine this is profit taking rather than a rout or panic, although undoubtedly sentiment has softened. I think the pull back is healthy, spreads were really just getting a little silly. Major bank senior paper edged wider, I know cray-cray, with the Jan-25’s +2 bps out to +26 bps, true nose bleed levels! Across the tier 2 space also, some trader sheets saying +2 bps on average across most lines, we’d suggest +5 bps is more likely with the bid drying up. Let’s put these moves into perspective, i.e. against the backdrop of the COVID pandemic and the macro poo-storm that it has brought us. Aggregate credit spreads are -12 – 15 bps tighter YTD in fixed, less so in FRN’s (-4 bps). Financial YTD, we’re looking at -56 – 76 bps tighter across fixed and -29 bps in FRN’s. Lastly, against pre-COVID levels, spreads are -9 – 23 bps tighter in fixed, and -24 bps tighter in FRNs. It’s been a good run, a little pull back is warranted, and healthy, and there is a good chance we could see more.
- Bonds & Rates – well, the RBA really showed the market who was in charge didn’t they? After speculation amongst the media fraternity that the RBA would come in and assert their “authorita” with some heavy buying yesterday, only a “modest” $1bn of semi paper was snapped up across the 28’s to 32’s…today the RBA is expected to be active in ACGB buying, likely the Apr-24’s which they already own a lot of, around 47%. Per some NAB’s commentary, “if we assume the RBA purchases at least $5bn of this bond (over the coming days/weeks) to get the yield closer to 0.10% then ownership will rise to 63%”…that’s approaching Bank of Japan levels. It’s a well-known fact the BoJ owns around 40% of outstanding JGB’s, compared to the RBA’s 15% holdings of ACGB’s (excluding semi’s). Despite some soothing words Tuesday night from Fed Chair Powell, which saw treasuries stabilise, local bonds again steepened with the 10’s +4 bps to 1.61%, while the 30’s are +6 bps to 2.61%. And, the lead from last night is unlikely to ease the pain, “treasuries tumbled anew (yields up), lifting 30-year yields the most in almost two months, as corporate hedging and trend-following quant funds added fuel to the selloff that’s driven global debt to its worst annual start in years” (Bloomberg). Overnight US treasuries (10’s) were up as much as +9 bps at one stage, to 1.43%, but then pulled back to be around 1.38% (+4 bps).
- Macro – first up, construction work done, borrowing some words from NAB here…”Construction Work Done came in below expectations, down 0.9% QoQ in Q4 against +1.0% expected (NAB -1.1%). The decline was driven by weakness in non-residential (-2.4% QoQ) and engineering construction (-2.8% QoQ), only partially offset by strength in residential construction (+2.7% QoQ). The private sector parts of construction work done feed directly into next week’s Q4 GDP figures and suggests a slight 0.1 percentage point contribution to Q4 GDP. Work done stabilised in Victoria, after a sharp fall in the September quarter.” Probably more of interest given rising inflation risk within the narrative, the Wages Price Index came out ahead of expectations +0.6% QoQ vs +0.3% QoQ consensus and +1.4% YoY vs +1.1% YoY consensus. Talking heads who promote a benign inflation outlook point to low wages growth and excess capacity in the labour market as a reason for not being too alarmed on inflation. Accordingly, the pro-inflation risk camp would be crowing with that number, at least at face value. Arguably, however, the increase reflects normalisation of wages, or reversal of private-sector pay cuts during the broader lockdown period.
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Scott Rundell, Chief Investment Officer
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