Mutual Daily Mutterings
Quote of the day…
“It takes only one drink to get me drunk. The trouble is, I can’t remember if it’s the thirteenth or the fourteenth.…” – George Burns
Chart du jour: US GDP at 17 year highs…
Source: Bloomberg, Mutual Limited
“The only way is up, right…yes, no?…”
- Overview – markets oscillated between gains and losses as investors continue to digest corporate earnings results (generally solid) and US GDP data, which showed the American economic recovery gained some positive momentum through the first quarter of the year, and is running at its hottest since 2003. Talking heads…”it looks like it’s a tug-of-war between those that think the good earnings results we’ve seen are just the beginning of a longer economic and corporate earnings boom and those that believe we are at peak growth and markets are unlikely to go higher from here.” The near-term outlook for US stocks (and credit) remains constructive, despite some underlying valuation concerns. With the Fed content to let the party run into the wee hours of the morning, i.e. they continue to spike the punchbowl, combined with another shot of fiscal Red Bull from the Biden administration, investors have reason to be moderately enthused about taking additional risk. Talking heads…. “all evidence still points to continued support from both fiscal and monetary policy against a backdrop of accelerating corporate earnings…this reinforces our view that markets can advance further, with cyclical parts of the market — such as financials, energy, and value stocks — likely to benefit most from the global upswing.” However, short of WWIII breaking out (not a zero % probability), meaningful downside risk is arguably capped for now (for risk assets). Having said that, it is getting harder to be comfortable ‘adding risk’ at these lofty valuations, perhaps there’s something I’ve missed, or something his hiding under the bed, poised to jump out and scare the @#$% out of me…talking heads “ultimately, it’s a sucker’s game to try to call the top in the stock market. It’s entirely possible that stuff keeps motoring on. But I get worried when I hear smart investors say that they cannot imagine a reason for the market to go down. It might just be time to dial down enthusiasm over the fundamentals and focus on investor psychology”
- Offshore Stocks – European markets were slightly weaker overnight, led lower by ‘das auto’ sector, with forecast production delays the culprit, in turn being impacted by chip shortages. Another record high for the S&P 500, although there was a modest stumble over the day, with intra-day moves turning slightly negative, briefly. It was generally all one-way traffic, with three-stocks up for everyone down, while only two sectors were roughed up, Healthcare (-0.39%) and Tech (0.03%). Elsewhere, it was a reasonably vibrant shade of green, with Telcos (+2.75%), Financials (+1.82%), Energy (+1.11%) and Staples (+1.06%) all outperforming on the day. Stocks (S&P 500) are now +11.76% up from their minor inflation driven glitch in mid-Feb, where the S&P 500 dropped -4.17%, cray-cray I know, the market actually dropped, sheesh! Since then, a modest pull-back in bond yields (despite still persistent inflation fears) and a buoyant reporting season has refuelled the risk furnace. Valuations are frothy nonethneless. Backward looking PE’s are rumbling around 31.3x vs a five-year average of 21.6x, while forward PE’s are at 23.5x vs a five-year average of 19.3x (Bloomberg). Relative strength indicators are pushing toward ‘overbought’ again, in stark contrast to around the same time last year when they were ‘oversold’. Despite all the tail winds, I also see headwinds and feel upside from here will be constrained, with valuations drum-tight, it wouldn’t take much to spook investors. Having said that, being early (or late) is the same thing as being wrong.
- Local stocks – a modest ‘up’ day yesterday with 57% of stocks closing higher and six out of eleven sectors also closing higher. The dullards first, at the bottom of the pile was Staples (-1.27%), reflecting an underwhelming Q3 market update from Woolworths. Discretionary (-0.55%), Telcos (-0.31%) also had moderately challenging days in the trenches. Away from the frontline, enjoying champagne and caviar back in Paris, Tech (+2.24%), Healthcare (+0.85%) and Materials (+0.80%) all enjoyed some rest and relaxation. Despite the positive offshore leads, futures are in the red, pointing to a moderately softer opening.
- Offshore Credit – a modest day in US primary, a token couple of deals for just over US$500m priced, with week to date issuance at US$13bn, well behind initial expectations (US$25bn – US$30bn). Spreads in secondary held steady. European primary action was a little frisky, but generally pretty subdued on the day.
- Local Credit – Bank of Queensland (BBB+/A3) finalised their 5-year A$ senior deal yesterday, pricing both a fixed and floating tranche, with $225m and $425m priced respectively. Initial price guidance was at +68 bps, which tightened into a WPIR guide of +63 – 65 bps, before finally printing at +63 bps, the top end of our expected range (+60 – 63 bps). Books were in excess of $635m for the FRN at WPIR guidance and $245m for the fixed, for total of $880m, but dropped to total of $765m on final pricing. The paper performed well on the break, quoted on Bloomberg at +60 bps (-3 bps), which is actually where I thought it might price. Unless BOQ has an explosion of lending growth, I doubt we’ll see much of them in primary for the remainder of the year. Elsewhere, some trader comments on this deal, and what it implies for major bank senior paper, when it comes….”decent representation from domestic real money accounts here, with a number of others observing from the sidelines. Doubtless, the relatively small size of this deal helped justify the pricing and investors now have another clue as to where a 5yr major bank may land. We would suggest that this print now points to the high 40’s? To this point, we move the long end of the indicative curve +1 bp wider and foresee that it can and most likely will steepen another 2-3 bps vs the 3yr point as we head towards the end of June”. Tier 2…some sogginess evident, which will likely keep issuance at bay for the time being… ”ongoing selling from a tandem of domestic real money accounts continues to weigh on secondary spreads. Closing the complex 1-2bps wider, in truth it could be more as the street is starting to feel pretty well stocked”.
- Bonds & Rates – bonds sold off (yields higher) across the board overnight on the slightly stronger risk tone. US treasury yields rose +2.5 bps to 1.634%, while across Europe yields were +3.5 – 4.5 bps higher. Ten-year treasuries are again on the march, up almost +10 bps over the past week. US 10-year break evens are running hot again at 2.43%, approaching all time wide spreads to the underlying 10-year yields. I wrote a piece on inflation yesterday, published to our website (link), more just some thinking aloud rather than any solutions to the world’s problems. Feedback welcome. Little movement in ACGB’s yesterday, closing a touch lower (yields).
- Local Macro – some commentary from CBA on Federal Treasurer Frydenberg’s pre-Budget speech yesterday, which “…suggests a shift in the Federal government’s budget repair strategy. Back in October 2020 the Federal Government was planning on undertaking budget repair when the unemployment rate was sustainably below 6%. The Treasurers speech yesterday points to a change in strategy, with budget repair not on the agenda despite the fall in the unemployment. Clearly the labour market and the economy has recovered faster than the Government (and most forecasters) had expected. The Federal government is now aiming for an unemployment rate below 5.0% and expect the NAIRU to be between 4.5% and 5.0%. As a result, the government will not undertake the second stage of budget repair until they are confident in the economic recovery and the labour market has improved further. This improvement will also help the budget bottom line and suggests further expenditure in the upcoming Budget, due 11th May, to support the economy”. Consensus expectations are for unemployment to drop to 5.1% by Q3’22, with some forecasters as low as 4.4% (vs some at 5.7%). Today, March Private Sector Credit Growth is out (11:30am), with consensus expecting +0.3% MoM, up from +0.2% MoM in February.
- Offshore Macro – US GDP out last night, and I’ve borrowed CBA’s assessment….”US Q1 2021 GDP highlighted the US economy is gaining momentum. However, the +6.4% saar fell slightly short of the +6.7% saar consensus estimate. Unsurprisingly, consumption surged. Strong US economic momentum has positive implications for the global economy. In our view, the global economy will benefit from spill overs via higher US imports. The combination of low interest rates, an improving US economy and an improving global economy is a recipe for the USD to continue on its downward trend”….and therefore strength in the AUD.
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Scott Rundell, Chief Investment Officer
T: +61 3 8681 1907