Mutual Daily Mutterings
Quote of the day…
“I like real music. You know, the kind of music that actually takes talent..” – Eddie Van Halen
- Moves: risk on … stocks ↓, bond yields ↓, curve ↑, credit spreads ↑, volatility ↑ and oil ↑….
- Stocks took it in the neck with a rusty fish-fork overnight as earnings season guidance underwhelms – specifically concerns firms being able to maintain profitability in the face of a tightening Fed. Tech particularly came under selling pressure with key underperformers including Alphabet (aka Google), Microsoft and Texas Instruments. Amidst the risk off back drop, bonds rallied (yields lower), which has been on the cards for a week or so now given building risks to the growth outlook.
- “The prospect of slower economic expansion alongside persistent inflation is leading to a febrile mood in markets. The panoply of risks spans the pandemic, supply-chain disruptions, Fed tightening and Russia’s grinding war in Ukraine. The search for portfolio buffers in the US is evident in the highest relative cost of loss-protecting put contracts in two years.” (Bloomberg).
- You could add China’s zero-COVID approach to the array of risks noted above, although markets seemed to take some solace from the fact China has pledged to support its economy through COVID. When in doubt, build more infrastructure, specifically transport facilities, and greater expenditure on energy and water conservation projects. Depending on scale, this will be a boon for commodity prices – all other things being equal.
- Talking heads…”there’s no question that economic growth is in trouble, and that the runway for central banks to manage a soft landing is getting smaller as wages and inflation move higher. The big question for asset allocation is not whether inflation will be high. That’s a given. Instead, it’s whether growth can keep up.”
- The energy situation in Europe worsened with Russia cutting Poland and Bulgaria off from its gas supplies. Russia is still demanding payment in roubles, with neither country inclined to acquiesce to their request (demand). No major development reported in the Russia vs Ukraine conflict other than more countries pledging aid (military hardware) to the latter.
The Long Story….
- Offshore Stocks – warning, graphic content. Yesterday’s dip-buyers will be shaking their heads while spewing forth expletive laden rants at market cruelty, or their own stupidity. The DOW puked -2.4%, while the S&P 500 gave up -2.8%, and the NASDAQ was down almost -4.0%. It was widespread blood, gore and mayhem with 94% of the S&P 500 in full retreat, running with their arms flailing in the air. Discretionary (-5.0%) was punished most, followed by Tech (-3.7%) and then Telcos (-3.2%). Only Energy (+0.04%) was able to keep its head above water. Elsewhere, the next best performer was Utilities (-1.0%). Relative Strength Indicators are on the cusp of flashing ‘oversold’, so keep an eye out for more stupidity dip-buying. At 4175 the S&P 500 is within spitting distance of its 12-month lows, 4169 (March 2022).
- Despite the recent carnage, US reporting season (Q1) actually hasn’t been too bad – keeping in mind it’s looking to the past, rather than the future. Nevertheless, aggregate sales are up 10.5% on the pcp and are +2.0% vs consensus estimates, while aggregate earnings are up +1.7% on the pcp and are +7.2% vs consensus estimates. Around 76% of S&P 500 firms have reported top line growth, while only 61% have reported earnings growth – but 81% of firms have surprised on the upside relative to consensus estimates. Just under a third of the index has reported.
- S&P 500 Relative Strength Indicators…
- Local Stocks – a tough day on the tools for equity investors with markets puking -2.1% as growth concerns mount. Only 14% of the ASX 200 was able to make any gains, and no sector was spared the rod. Materials (-5.1%), Energy (-4.0%) and Tech (-1.8%) were the worst of the worst, although the former was the true driver of misery, accounting for two-thirds of the broader index’s malaise. Industrials (-0.7%), REITS (-0.7%) and Discretionary (-0.7%) did their best, but it wasn’t good enough. Yesterday’s fall saw the index drop through its 200D moving average, and given offshore leads, we’ll likely see the index cross the 50D and 100D moving averages today as well. Relative Strength Indicators (chart below) will likely be signalling ‘oversold’ by day’s end. Futures are down -1.5% as I type.
- ASX 200 Relative Strength Indicators…
- Offshore credit – wider in general across cash, but most action was in the synthetic space with CDX (US) +5 bps wider to 83 bps, while MAIN (EU) was +3 bps wider to 88 bps. Senior Financial were +4 bps wider, and Subordinated Financials +7 bps wider. Cost of credit protection is at almost two-year highs. In primary, equity market volatility saw several deals shelved, while three push ahead for US$3.3bn priced. Pricing outcomes were mixed, underscored by a clear delineation between results for non-financial issuers and their FIG counterparts, with the former securing more attractive funding levels on a relative basis. Issuers paid 10bps in concessions on average on order books that were 3.5 times covered
- Local Credit – traders…”flow was extremely light to kick off week, little surprise as many returned from extended holidays and the market awaits a seminal CPI print today. Broadly speaking, secondary credit remains better offered by the domestic account base though nascent buy cares have emerged from the offshore community.” In the financials space…”a week of very light turnover sees no material change to recent themes. Indigestion problems persist in the front end and the inventory overhang is continuing to pressure spreads. The long end remains relatively flat, though we are now beginning to see signs of a re-steepening. No flow of note to report.”
- Major bank senior 5-year paper is being marked around +87 bps, a couple of basis-points wider on the week, while 3-year spreads are unchanged at +67 bps. The curve from 1-year to 2-year and 2-year to 3-year is +15 bps, while from 3-year to 4-year and 4-year to 5-year it is only +10 bps. The nearing prospect of supply in the tier 2 space (within weeks likely) has spreads drifting wider. The most recent tier 2 deal, CBA’s Apr-27 call is quoted at +195 bps (+5 bps on the week) – it issued earlier in the month at +190 bps. The 2026 calls are around +184 – 188 bps (+6 bps on the week), while the 2025 calls are at +172 – 173 bps (+7 bps on the week).
- If the scuttlebutt is true and a tier 2 deal is in the pipeline – and I’m hearing it’s ANZ – the likely starting point for price talk will be well north of +200 bps, which is where the curve is for 5-year calls. But, this doesn’t include any new issue premium, which I’m sorry to say for bank treasurers is probably +20 bps (give or take) at the moment. Of the outstanding major bank tier 2 paper, the highest issue market is +215 bps (NAB’s May-24 call). Average issue margin of outstanding lines is +180 bps. Tier 2 will likely continue drifting wider, particularly given the broader risk off sentiment, but mainly on expected supply.
- Major Bank Tier 2 Spread Waterfall…
Source: Bloomberg, Mutual Limited
- Bonds & Rates – some modest respite yesterday for fixed rate investors with ACGB yields dropping 2 – 3 bps across the curve following similar leads from offshore. Again, today we should see yields drop further as offshore markets have come to the realisation that perhaps yields have overshot the mark. US 10-year treasuries rallied overnight with yields -9 bps, while at the front of the curve, more aggressive moves: US 2-year yields fell -15 bps. Consequently, the curve bull-steepened. Offshore moves will have some influence on local markets, but markets will likely reserve judgement until they’ve had an opportunity to digest AU CPI data, which is scheduled for release at 11:30am (more below under ‘Macro’).
- ACGB 10-Year yield vs AU CPI YoY…
- Macro – offshore data…”releases overnight were focused on the US with the Conference Board consumer confidence report disappointing while the Richmond Fed index surprised to the upside. Overall, news flow has been limited but concerns around the global growth outlook as central banks take an aggressive stance towards normalising monetary policy while there are growing fears that Beijing could go into lockdown continue to dampen market sentiment. While the US corporate earning season has, to-date, been positive with 80% of firms beating market profit expectations, company forecast projections have been disappointing, fuelling investor’s concerns over the economic outlook.” (NAB)
- Main event today for local markets is the CPI data and its consequences for monetary policy setting…“RBA cash rate pricing suggestive that the market is looking for upside surprise to today’s CPI print. Market pricing for the RBA has changed significantly over the past six months – see chart below. While the macro-economic backdrop supports this re-pricing, it is NAB’s view that the market is now too aggressive in terms of the magnitude of rate hikes being priced for this year with the overnight cash rate priced at 2.35% by year end. Today’s CPI print will clearly have an influence on near-term rate hike expectations where the market currently prices 11bps of hikes by the May RBA Board meeting and 44bps by the June meeting.” (NAB)
- Market Implied Cash Rate…
Source: Bloomberg, Mutual Limited
Source: Bloomberg, Mutual Limited
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