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First Up

Firstly, expect a large amount of news flow across the miners this week as Diggers & Dealers gets underway in Kalgoorlie, WA, with ~70 mining companies presenting – the Agenda available HERE

The Fed raised interest rates another 0.75% last week but just a few words were enough to change the crowd’s hawkish mindset which not surprisingly sent major ripples through financial markets i.e. bond yields slipped, equities rallied and the $US fell which helped kick start the commodities back into gear:

  • Fed Chair Jerome Powell said the Fed could slow rate hikes in the months ahead as there could be some further financial “tightening in the pipeline” from the cuts to date i.e. the aggressive hikes through 2022 probably haven’t taken full effect yet.

MM had been looking for this pullback in yields for over a month and as is so often the case the move unfolded following comments from the Fed, no surprise when the market remains gripped by the adage “don’t fight the Fed”. Jerome Powell et al told us they were going to fight inflation hard & fast which indeed they have, now they’re softening this rhetoric implying it’s almost time to sit back and evaluate the impact of its most aggressive sequence of hikes in over 20 years – all seems very logical to MM.

  • We feel the markets still caught a touch too hawkish and the US 2-year yield could easily fall towards 2.5% on a washout of cascading stops.

However on the macro level, it boils down to whether central banks can hike further to kill off inflation or is the risk of a recession simply too great, or indeed are some of the leading economies already spiralling into economic contraction:

  • US Non-Farm Job Openings have already turned lower suggesting the jobs market/unemployment will follow suit and potentially a recession i.e. historically this has been a reliable leading indicator.
  • The NYSE Advance-Decline line turned lower last October and it still hasn’t recovered suggesting liquidity remains tight which will weigh on the economy and equities moving forward.

Hence at this stage, while MM is enjoying the bounce by stocks we continue to believe the prudent course of action is to take a little cream off the milk into the current rally – ideally we will pick up some bargains in the coming months. The ASX200 has exceeded our “bounce target” looking set to challenge the psychological 7000 area this morning but after being fully committed to the market in our Flagship Growth Portfolio, a degree of flexibility now feels optimum as the inflation v recession tail is likely to have further twists over the coming months which by definition should provide some opportunities.

MM is neutral to slightly bearish US bond yields short-term
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US 2-year Bond Yield
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