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The ASX200 edged higher on Thursday as the broad market managed to successfully offset pockets of aggressive selling in the Resources Sector courtesy of some very tough commentary from Fed Chair Powell around the potential for a recession in the year ahead. The commodities markets have certainly been paying attention with both crude oil and copper plumbing multi-week lows over recent days:

  • Fed Chair Jerome Powell acknowledged the Fed is strongly committed to fighting inflation and that a soft landing was very challenging while a recession is now a “possibility”.
  • Financial markets are generally a far better barometer than central banks when it comes to looking forward and they’re telling us it’s more likely to be a probable than possible outcome.

Ironically as fears of an economic slowdown have started to weigh on bond yields the last 24-hours has seen mortgage rates rise yet again for a number of major lenders which by definition will make a local economic slowdown even more likely:

  • Bonds have moved from pricing in a certain 0.5% hike next month, with some looking for 0.75%, to now only attributing an 80% possibility of a rise to match last month’s 0.5%.
  • However Westpac and St George have just passed on the full 0.5% RBA hike in May to fixed mortgage rates e.g. 4-years fixed are now at 5.29% compared to being under 2% less than a year ago.

NB The banks announced these hikes earlier in June but they became reality in the last few days.

We can see the local market bouncing over the coming weeks helped by some traditional EOFY window dressing and fresh allocation for the new month and quarter in July but on a pure index level, we believe the 6750 area will prove tough resistance short-term, especially if recession concerns continue to pressure the Resources Sector.

US stocks rallied overnight with the S&P500 closing up +0.95% as the broad market managed to outweigh further weakness in the Energy and Materials Sectors i.e. the same story as the ASX on Thursday. Locally we expect to follow through on the sector performance front this morning with copper falling -5% in the US and crude oil down -2.8% hence the SPI Futures are ignoring the US gains and are pointing to the ASX edging lower. However following weakness in US bond yields after some unimpressive economic data overnight elevated recession worries we saw strength in rate-sensitive sectors such as real estate, healthcare and utilities, MM expects this to flow through to the local market this morning.

MM is neutral to the ASX200 around the 6500 area
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