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Yesterday was all about central banks, with both the RBA and Bank of Japan (BOJ) updating their respective official cash rates. There were no major surprises from either, but equities embraced the cleared uncertainty, at least for another month. As I’m sure most subscribers know, the RBA left the cash rate at 4.35%, as was widely expected, and it was encouraging to see bond yields slip after the release as Michele Bullock & Co. dialled back their previous interest rate tightening bias now saying they are “not ruling anything in or out” on the next move in rates being either up, or down.
- We believe the RBA’s next move will be a rate cut, but we cannot see a dovish bond market pushing the RBA into action before they are ready.
However, it was the market-friendly pivot away from February’s statement, when they said, “A further increase in interest rates cannot be ruled out.” This encouraged investors, and it shouldn’t be dismissed that plenty of thought goes into the writing and subsequent interpretation of these releases. The RBA looks quietly confident that local inflation will be back under 3% by late 2025, but we have no doubt they won’t risk inflation being let back out of the lamp by cutting too hard &/or too fast; hence, we wouldn’t be surprised to see the “rate cut can” kicked down the street for longer than the doves hope as an “if in doubt” hold approach looks the easy call for the RBA.
- The markets are pricing in one cut by September and potentially another by Christmas. While that feels about right, it’s likely to be the best possible scenario; hence, there’s room for disappointment.
Yesterday was a historic day for Japan’s financial markets, with the BOJ raising interest rates for the first time in 17 years, although as the chart below illustrates, it came as no major surprise. The BOJ increased its key interest rate from -0.1% (yes, negative) to a range of 0-0.1%, meaning there are no longer any countries left with negative interest rates, an environment where you had to pay the bank to hold your money. The BOJ also abandoned its yield curve control (YCC) when the central bank bought bonds to control interest rates, i.e. the land of the rising sun finally has a free market, void of government interference and distortion (perhaps).
- We can see the Japanese 10-year Govt. Bonds breaking above 1% through 2024/5 – levels mortgage holders dream of in Australia!
Following the hike on Tuesday Japanese stocks rallied by +0.7%, and the yen slipped lower with the AUDJPY edging closer to the psychological 100 level, i.e. the move was largely dismissed as a small move but no lift-off.
The ASX200 rallied after the RBA’s announcement on Tuesday, ending the session up +0.36%. It was a rare day for 2024 when the resources almost single-handedly dragged the market higher. Under the hood, the number of winners and losers was exactly matched, but only four of the eleven main sectors managed to close in positive territory. Overall performance reversion was the order of the day as the “China Trade” gathered momentum, but buying appeared to be largely funded by profit-taking elsewhere, i.e. more stock rotation.
Winners: West Africa Resources (WAF) +5%, Fortescue Ltd (FMG) +3.6%, Mineral Resources (MIN) +3.1%, BHP Group (BHP) +2.8%, Iluka (ILU) +2.4%, and Woodside Energy (WDS) +2.3%.
Losers: Liontown Resources (LTR) -3.5%, Lovisa (LOV) -2.1%, Xero (XRO) -1.5%, Woolworths (WOW) -1.3%, Telstra (TLS) -1%, and Commonwealth Bank (CBA) -0.6%
Overall, we’re still bullish, but our view that stock and sector rotation is the key to outperformance through 2024 has not wavered. Interestingly, it is 4 years today since the ASX200 hit its panic COVID low at 4402, with the market having delivered a 75% return before dividends during the recovery to date.
- This morning, the SPI Futures are pointing to a small +0.2% gain early in the session, keying off a strong day on Wall Street.
