Mutual Daily Mutterings
Quote of the day…
“There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest of them have to pee on the electric fence for themselves…” – Will Rogers
S&P 500 – quarterly reporting (24% reported)…
Source: Bloomberg, Mutual Limited
“A heavy week of data ahead…”
- Overview – a slow news week with no meaningful data of note, just a handful of second tier metrics. Within this back drop, it was a positive and reasonably constructive end to the trading week with stocks booking solid gains on Friday, recouping all but a fraction of weekly losses. Bond yields did little on Friday, and lower on the week. Broader themes of vaccine programs amidst the still lingering pandemic, balanced against continued stimulatory measures and resulting recovery trajectory persist. The latter seemingly robust and assured, but in being so bringing with it inflation fears – and potential for monetary policy tightening. Although, much of the imminent inflationary risk appears largely priced in with bond yields range bound over the past 4 – 6 weeks after an initial 80 – 90 bps spike higher, or near doubling. Whether inflation risk extends into higher outright yields and steeper curves really depends on one’s investment horizon. If it’s anything like society’s rapidly declining attention span, the time horizon is getting shorter and shorter by the minute. Gradual steepening can be absorbed, aggressive steepening, like that seen through January and February can materially weaken risk sentiment. Moving on…US reporting season has reached the half way mark (almost, 24% of the S&P 500 reported), with strong signs the US economy is on the rebound. Aggregate quarterly sales grew +5.6% QoQ and aggregate earnings grew +45.3% QoQ. Only two sectors really struggling, Energy and Utilities, both recording falls in sales and earnings, but still early days in the season.
- Offshore Stocks – a broad rally on Friday with four-in-five stocks gaining and all sectors bar Staples (-0.16%) and Utilities (-0.17%) closing higher on the day. Financials (+1.85%), Materials (+1.68%) and Tech (+1.44%) led Friday’s charge. Over the week, however, gains were less assertive, in fact only four sectors closed higher, REITS (+2.04%), Health (+1.77%), Industrials (+0.43%), and Materials (+0.37%). Dragging aggregate markets down were Energy (-1.77%), Discretionary (-1.23%) and Utilities (-0.95%). European markets were down a smidge on Friday, despite stronger PMI data, adding to the broader losses on the week of around 0.5% – 1.5% across the various indices.
- I’ve often mentioned charting tools in my commentary, but I’m not what I’d call a ‘chartest’…I only mention them because it is a field of study / trading technique and therefore potentially of interest. Charting tools, such as RSI, MACD, and Bollinger Bands are looked at within Mutual, but do not carry a meaningful weight in our decision making process. And thankfully so. Some interesting commentary / analysis from Bloomberg on charting and how useless it has been over the past year. “It’s testament to the straight-up trajectory of stocks that virtually all signals that told investors to do anything but buy have done them a disservice this year. In fact, when applied to the S&P 500, 15 of 22 chart-based indicators tracked by Bloomberg have actually lost money, back-testing data show. And all are doing worse than a simple buy-and-hold strategy, which is up 11%.” And this leads us to an oldy, but a goody, when it comes to stocks – never fight the Fed! Talking head…”to try to guess that this is the right time to be out of the market, you may as well go to Las Vegas…there’s just as much risk doing that”. Put it all on black I say!
- Local stocks – meh, the ASX 200 did very little on the day, very modest moves in either direction intra-day, although spent most of the trading session underwater before a late bout of optimism hit the market and the index closed with its nose just dry. Uppers vs downers (stocks, not pills) were relatively even, 47% vs 45% (rest unchanged), and more sectors up (6) than down (5), must. Importantly for the broader index, Financials (+0.40%) and Materials (+0.26%) gained on the day, representing a smidge over 50% of the index. Party-poopers on the day were Discretionary (-0.99%), Utilities (-0.71%) and Staples (-0.57%). Not as positive on the week though, but also not grim either. Again, Materials (+0.95%) and Financials (+0.95%) offset all but a fraction of losses elsewhere, dominated by Energy (-4.33%), Tech (-2.63%) and REITS (-1.54%). Futures are pointing to a modestly positive open.
- Offshore Credit – no primary deals done on Friday in US IG markets, leaving weekly volumes unchanged at US$27.6bn, falling short of initial estimates (US$30bn). Issuance over the past two weeks has been anchored by the big banks (top six), although corporate issuance may pick up as companies come out of reporting season black out. Preliminary forecasts for this week is for another US$25bn – US$30bn of primary flow. In secondary, spreads continue to grind tighter, with similar themes across Europe.
- Local Credit – a quiet end to the week with no meaningful flows from domestic or offshore accounts per trader’s commentaries. Major bank senior spreads were unchanged on the day and week, with the Jan-25’s stuck around +33 bps, and three-years at +25 bps. In the tier 2 space, we had the well supported BOQ 10.25-NC-5.25 deal, with $250m priced at +160 bps (around 8 – 9 bps inside the BBB- tier 2 curve). The deal tightened straight away, down to +154 bps before the ink had dried on the deal, and closed the week at +153 bps. Elsewhere, major bank tier 2 closed unchanged on the day, while on the week the ANZ Feb-26 call was +2 bps wider, and the MQG May-25 call tightened a basis point. Elsewhere all lines were unchanged on the week.
- Bonds & Rates – US treasuries punched higher, meaningfully, since the beginning of the year. Although yields have been on a rising trend since August last year (10-year bottoming at 0.501%), it wasn’t until the calendar tripped over into a new year that the trend accelerated, rising from 0.909% to 1.740% by the end of March. This move higher largely reflecting expectations of the economy reaching escape velocity from the recession and then accelerating strongly on the back of further stimulus measures. With aggressive growth typically comes inflation. Be that as it may, since the end of March bond yields (US treasuries) have fallen -18 bps, back down to 1.558%. Profit taking perhaps, or reflective of broader macro (lingering pandemic, inflation risk vs growth) or geo-political concerns (China)? Take your pick, I think a mixture of both. Local bonds have generally followed a similar path, although timing of moves has been a little different. The rise in yields didn’t really kick off until November or December (a couple of months after US treasuries), but when it came, it came with speed and then abated quicker – yields trending sideways from the beginning of March (a month sooner than US treasuries). Macro prints this week will be important for the finishing the current page of the bond market’s colouring-in book.
- Macro – after a slow week of macro data releases, the week ahead is more meaningful. Offshore first, in the US we have Q1 GDP (Thursday) with consensus forecasting +6.9% annualised QoQ, up from +4.3% QoQ over the prior period. Q1 Personal Consumption, also out on Thursday, is forecast (consensus) to top +10.3% QoQ vs +2.3% last quarter. On Friday we have the March PCE Deflator, which is the Fed’s preferred measure of inflation. MoM consensus is forecasting +0.5% and +2.3% YoY, up from+1.6% YoY in February. There is also a raft of other data prints out next week in the US, including jobless claims, employment cost index, personal income and personal spending, and pending home sales. Locally, we have Q1 CPI data out on Wednesday, with consensus at +0.9% QoQ and +1.4% YoY (vs 0.9% at the end of December). Still well below the RBA’s 2.0% – 3.0% target range, but trending higher. Consensus expectations are for CPI to peak in Q2’21 at +3.2% YoY before settling around +1.6% – 1.8% over the following 12 – 18 months. For mine, a surprise to the upside is a good bet. Also, out this week we have March private sector credit growth (Friday) with consensus at +0.30%, up from +0.20% a month earlier.
- Currency – some comments from CBA’s FX guys on the reflation trade and impact on currency (and other markets)…“the global reflation trend that has undermined the USD may be interrupted by President Biden’s reported plan to increase capital gains tax for high earners. A significant increase in capital gains tax may prompt high earners to sell US equities and other assets to crystallise capital gains to avoid the higher rate of tax. USD and JPY may benefit from safe haven demand if US equity prices decrease materially. However, over the medium term, higher capital gains taxes may make US assets relatively less attractive and undermine the USD. Keep in mind at this stage we do not know when, or even if, the plan will become law. The US equity market will provide guidance”
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907