At the index level, it appears the ASX 200 is comfortable trading around the 8800 level, but the volatility under the hood has been high. It’s just that funds have been rotating in an out of stocks/sectors rather that in and out of the market. At this stage it appears the bulls require a “believable” resolution to the US-Iran conflict, &/or a cracking reporting season next month – at least expectations feel muted/cautious. However, when we look at the broad markets valuation its ok except on one front:
The Equity Risk Premium (ERP): is the excess return investors demand for owning equities over government bonds. At just 0.79%, the ERP is near its lowest level in a decade, down from a peak of 6.20% in March 2020 and well below the 10-year average of 3.31%. The compression has been driven almost entirely by the sharp rise in bond yields, with the Australian 10-year yield climbing from 0.62% in March 2020 to above 5.0% today.
- On Saturday morning the futures market were calling the local market to open up +48pts/0.6%, this morning, though first up this morning we’ve seen oil prices drop 5% and US Futures rally a further ~0.6% on news of a pause in Middle East fighting.
MM remains bullish towards the ASX200 around 8800
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