Mutual Daily Mutterings
Quote of the day…
“An alcoholic is someone you don’t like who drinks as much as you do.” – Dylan Thomas
Rolling weekly spread changes…
Source: Bloomberg, Mutual Limited
- Overview – I must admit, I expected a pretty crappy night in markets on contagion concerns – on the back of the Archegos block trade shenanigans – but alas no, markets were pretty measured, content – for now – that any blow back will be limited to a handful of banks. Talking heads… “investors are whistling in the dark as they try to determine how wide the Archegos-related pain will spread…you’re seeing a tug-of-war play out between those who believe the situation is benign and those who worry about a systemic risk.” Expecting some follow-on selling is not unreasonable, and I still wouldn’t completely discount it, especially when markets are running as hot as they are. A ratio of the S&P 500 market cap relative to US GDP is at 30-year highs and close to 2x average. PE’s are also at 30-year highs…potentially justifiable given >6% growth expectations, fuelled by extraordinarily monetary and fiscal stimulus, but the inflationary pressures and future interest bill is the big elephant in the room. Add to this the prospect of tax hikes in the US, and, well there are some things that go bump in the night and could really spoil the party. Bond yields rose across the board. Talking heads…” “now, as we talk about additional stimulus — there will still be some of that — but you are going to have to start to balance it with the proposed tax increases,…because as we talk about more and more spending, it becomes very clear that taxes are going to increase, it’s just a matter of by how much.” Having said all that, near term, systemic risks to the broader financial sector will likely be contained because global liquidity is so abundant. Lastly, the Suez Canal is back in business with the ‘Ever Given’ freed – a modest positive for risk, or one less thing to worry about. The Suez Canal Authority estimates could take a week to clear the queue of ships waiting to make the crossing.
- Offshore Stocks – Financials (-0.9%) and Energy (-1.3%) stocks pushed the S&P 500 down from record highs following revelations that banks including Goldman Sachs and Morgan Stanley liquidated holdings in Bill Hwang’s family office Archegos Capital Management late last week after he failed to meet margin calls. Across the S&P 500 some 59% of stocks closed down, although the balance of sectors in the red vs green was reasonably balanced. Utilities (+1.1%), Staples (+1.0%) and Telcos (+1.0%) fought a solid rear-guard action to keep the broader index only modestly lower on the day. Both Nomura and Credit Suisse were caught up in the Archegos fun and frolic, each smacked around the head by a particularly large and rancid fish, dropping -15.0% as lenders continue to process exiting positions. Other banks to feel the wraith of market selling include DB (-2.5%), Citi (-2.0%), and MS (-2.6%), although both – and other banks – closed well off their intra-day lows, GS was down -3.0% at one stage, but is closing down -0.5%.
- Local stocks – modest risk off day with sentiment likely weighed down by block trade uncertainties. Across the ASX 200 74% of stocks closed in the red, while Materials (+1.3%) and Industrials (+0.3%) were the only two sectors to advance. If not for Materials, the losses would have been much more meaningful. Tech (-2.8%), Discretionary (-1.4%) and Telcos (-1.2%) were the worst performers on the day. At 6799 the ASX 200 is around the mid-point of its 90D trading range 6600 – 6920. Futures are pointing to a firmer opening.
- Offshore Credit – small ripples of the forced Archegos unwind were felt in global credit markets. Nomura had to take the rare step of cancelling a US$2.4bn bond deal that had already priced after its loss warning. The Japanese bank warned yesterday of a ‘significant’ potential loss from an unnamed US client…market sleuths have surmised that its Archegos and the figure is believed to be around US$2bn. For completeness, Credit Suisse flagged their exposure as “highly significant and material to our first quarter results”. Elsewhere, a ‘measured’ response to the situation with no meaningful impact on primary activity – five deals totalling US$6bn priced. Similar in EUR markets, €6bn priced, with books 2.2x covered and spread compression of 28 bps. Minimal movement in CDS markets observed.
- Local Credit – heading into month and quarter end, most investors and traders alike have put the cue back in the rack. A very much uneventful day in local credit yesterday, which will likely remain the theme for the next couple of days. Major bank senior paper saw some two-way flow, but volumes were modest and spreads closed unchanged. Flow largely absent tier 2 paper with spreads closing unchanged.
- Bonds & Rates – in a piece yesterday WBC pondered “has the first phase of the bond re-pricing run its course?”…followed with their answer “recent price action suggests inflation expectations are largely re-calibrated”. I tend to agree, the recent Jan-Feb sell-off has abated and bonds seem to have found a new trading range, albeit a reasonably wide one of 1.65% – 1.80% in the ACGB 10’s, or 1.50% – 1.70% in US treasuries (10Y), with ACGB’s outperforming over the past week. Treasuries drifted higher (yields) overnight, which should bleed into local markets also this morning.
- Macro – from ANZ on overnight US data….”the March Dallas Fed index rose to 28.9 vs 17.2. That was the highest reading since August 2018 and compares well with a dreadful -69.3 in March last year. The sub-components were very strong. The production index surged to 48 vs 19.9, capacity utilisation rose to 46.1 vs 16.5 and new orders rose to 30.5 vs 13.0. Inflation indicators also firmed. Prices paid were 66 vs 57.4, prices received were 32.2 vs 23.0 and delivery times jumped to 31.2 vs 9.5. Along with the other regional Fed data, it indicated a sharp acceleration in growth at the end of Q1 and highlighted the challenging environment that lies ahead for fixed income markets.” Locally today we have weekly payrolls and then tomorrow private sector credit growth.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907