Mutual Daily Mutterings
Quote of the day…
“Failure is simply the opportunity to begin again, this time more intelligently.” – Henry Ford
Rolling weekly spread change…
Source: Bloomberg, Mutual Limited
“Bonds and stocks correlated…next dogs and cats will be playing nicely together”
- Overview – bond markets hit pause on the recent reflation trade with yields dropping for a second day in a row, while stocks were mixed, but with a slight bearish tone. The catalyst for the pause seemingly the return of pandemic concern, with parts of Europe facing or amidst a third wave and forced to endure further lockdowns, while vaccine efficacy data is suggesting its not the great panacea that we all hoped it would be. From NAB this morning…”even though countries are pressing ahead with vaccine role outs, the speed of recovery might be slower than envisaged. The political wrangles over vaccines supplies from the EU have added to this feeling, with a risk-off mood returning slowly to markets”…and this from RBC … “the medical evidence regarding the efficacy of various vaccines vis-a-vis the new strains, and the spread of the new variants, is likely to have a significant bearing on the direction of markets going forward.” On the data front, some modest beats in European PMI’s, while US PMI’s recorded a modest miss. Oil popped on the situation in the Suez Canal, where a container ship has jack-knifed and run aground, blocking the crucial trade rout. The nearly 200km route handles about 12% of global trade, 8% of LNG and around 1 million barrels a day of oil. The ship that caused the stir, the ‘Ever Given’, ran aground last night as a dust storm and wind speed resulted in a loss of steering. Stronger gas demand in the US also contributed to the pop.
- Offshore Stocks – growth underperformed old school value with the DOW at the head of the pack (flat), while the increasing tech heavy S&P 500 (-0.5%) and the very tech heavy NASDAQ (-1.7%) underperformed. The trading day started optimistically enough, but as the session rolled on sentiment waned and then in the last 30 minutes the S&P 500 fell out of bed, into the red (hey, I rhymed again). European markets were broadly mixed, but a few more gains than losses, but modest moves in general. Within the S&P 500, Energy (+2.5%), Industrials (+0.7%), Materials (+0.7%) and Financials (+0.4%) were the best performers, but they weren’t good enough to offset falls across Telcos (-1.7%), Discretionary (-1.5%) and Tech (-1.2%), with the latter the most significant contributor to the index’s underperformance. The up vs down mixed was reasonably even, 51% vs 48% (balance unchanged).
- Local stocks – a modest rally in the main local index, with all bar three sectors flashing a moderately optimistic green, although suspect it might sour today. Energy (-0.9%), Industrials (-0.2%) and Telcos (-0.2%) were the losers on the day, while in the winner’s circle, Healthcare (+1.9%), Staples (+1.1%), Discretionary (+1.1%) and REITS (+0.8%) were walking tall. The ASX 200 is now bumping along its 50D average, which it has been doing for much of March and it’s really hard to see the index breaking free, meaningfully, from these reasonably tight, 6700 – 6800 ranges.
- Offshore Credit – demand from both overseas and domestic investors for longer-term US corporate bonds was met by the most borrowers issuing debt in over two weeks as nine borrowers priced a touch under US$10bn. Deal metrics looked reasonably constructive. Secondary spread moves were modest, but again US outperformed EU, which was also mirrored in CDS, but again…modest moves.
- Local Credit – secondary trading was relegated to the back seat as primary again dominated local action. Lend Lease (Baa3/Stable) put the feelers out for a 10-year green bond (fixed) with initial guidance set at +220 – 225 bps. I haven’t looked at Lend Lease for a while, but do know it can be a challenging and polarising credit / company. Nissan Finance (BBB-) are also out and about presenting their wares, with a 3 or 5-year fixed deal to possibly follow. In the major bank senior space, spreads unchanged with the Jan-25’s at +32.5 bps and 3-year at +24.5 bps. As things stand, a new major bank senior primary deal would be fair value around +39 – 42 bps, although likely start marketing around +45 bps. With quarter end fast approaching, no sell-side appetite for tier 2 is keeping things quiet, with spreads also unchanged. The NAB Nov-26 calls are at +131 bps, as are the shorter dated WBC Jan-26 calls.
- Bonds & Rates – the popular narrative suggests the recent pause in rising yields “likely to have legs,” supported by growing vaccine and pandemic concerns. On the technicals, the US 5-year note auction saw better demand than previous with the bid-to-cover ratio lifting off recent lows and indirect bidding increasing. Yields also benefited from a combination of “suspected buying from Asia (Japan), short covering and fresh option bets on calmer times ahead.” While it was a firm day in the end, intra-day moves were meaningful, with the 10’s (yields) trading in a 5 bps range after an early dip to 1.59% before rebounding to 1.65% and then settling at 1.61% post comments from the Fed’s Williams. The firmer tone in treasuries reverberated through the ACGB market with a solid rally recorded yesterday. The 10’s closed at 1.66%, down -8 bps on the day, with the 10’s now -26 bps off their recent 12-month highs, 1.92% on the last trading day of February. If the drop in yields has legs, we see the mid-1.40% level as a key technical support levels, which is around the 50D moving average.
- Macro – nothing local of note, but a bit happening offshore. US durable goods orders for February fell -1.1% MoM, vs consensus of +0.5% MoM, but again February’s polar vortex (i.e. chilly weather) was to blame and the impact on markets was limited. US Flash PMI’s for March were solid. Manufacturing edged up to 59.0 (vs prior 58.6 and cons. 59.5) and services to 60.0 (vs prior 59.8 and cons. 60.1) the highest level since July 2014. The overall strength was accompanied by higher prices, a common theme across all PMI’s as supply constraints were felt. Across the pond, Eurozone Flash PMI’s for March beat expectations. Manufacturing was strong, rising to its highest level on record at 62.4 (vs cons. 57.6 and prior 57.9), while services rose to 48.8 (vs cons. 46.0 and prior 45.7). New manufacturing orders (also at a record high) drove the gains. Markit noted supply chain issues pushing up price as well in the notable 2-speed economy (with services struggling). The extending of lockdowns was also cited as a risk to current high expectation levels. Commentary paraphrased from WBC’s ‘Around the Grounds’.
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Scott Rundell, Chief Investment Officer
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