The ASX200 enjoyed another strong day on Tuesday rallying +0.9%, although over 40% of the main board closed down on the day – it was a stellar performance from the Resources Sector that dragged the index higher e.g. BHP Group (BHP) +4.3%, Fortescue Metals (FMG) +3.8% and South32 (S32) +3.7%. One of the main themes over the last 6-months has been the huge gyrations across the relative stock/sector performances which definitely remains in play today:
- The resources stocks stormed back into favour yesterday after China eased travel restrictions raising hopes firstly of an improvement on the supply disruption front.
- Secondly a healthy Chinese economy is almost a must for global economic growth and by definition strength in the resources stocks.
- However it was interesting to see the leading commodities fail to get overly excited in our time zone with both copper and crude oil rallying by less than 2%.
- A number of resource stocks have been factoring in much lower prices for their underlying commodities hence the strong bounce but nothing more at this stage.
Importantly we have to remind ourselves that MM has been targeting a recovery into the 6750-6800 area before another test on the downside, in our opinion 2 storm clouds are building over the market:
- A global recession remains a strong possibility moving towards 2023 and while it may be avoided, market volatility is likely to remain elevated as economic data dictates market sentiment akin to the weather.
- Secondly and now arguably most importantly we feel there are plenty of risks as we approach the US reporting season with analysts upping their 2022 forecasts to see profits grow by 10.6%, we see risks both here and in forward guidance from the companies.
MM is expecting the ASX200 to grind higher over the coming weeks with ongoing rotation under the hood but I reiterate we don’t feel the June low is the major low for 2022, we may have seen a degree of panic but it didn’t screen as total capitulation and hence an “all in” style contrarian buying opportunity. Like all opinions, we may be wrong with this call but from a risk/reward perspective we are keen to migrate down the risk curve over the coming weeks i.e. we want the flexibility to buy if we are correct.
Overnight US stocks were sold off following a disturbing read on consumer confidence as it tumbled towards a fresh decade low, as we alluded to earlier recession fears won’t vanish overnight. Quarterly rebalancing also helped fuel volatility with the S&P500 reversing early gains to close down -2% with tech again noticeably weighing on the market. The Fed needs a strong economy as it normalises interest rates and this is likely to remain the market’s focus until the start of reporting season. The strong reversal on overseas bourses fuelled selling in the overnight SPI futures which are calling the ASX200 down around -1.2% this morning.
MM is neutral the ASX200 around 6760
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