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We are less than halfway into June, and Europe has already elevated volatility across equity markets following a rate cut by the ECB and looming elections in the UK and France, where, in both cases, the incumbent party is in real danger of being ousted. There is an old saying that when the Dow sneezes, the ASX catches a cold; however, in the current market environment, the ASX is far more correlated to European stocks on a day-to-day basis, although, unfortunately, we have been underperforming both regions so far this year.
- We can see ongoing volatility courtesy of European equities but see no reason to abandon ship at current levels.
The EURO STOXX 50 has been rotating in the 5000 area since mid-March; our preferred scenario is that it pushes higher after digesting the recent unsettling news, but it’s clearly in no hurry. The news flow will likely slow down for the region, but uncertainty remains, especially ahead of the French elections on June 30th and July 7th. The UK election, which occurs in between, already appears a forgone conclusion, goodbye Rishi.
- We are still targeting the 5300 area for the EURO STOXX, or 6% higher.
MM remains cautiously bullish toward European equities
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The ASX200 was hammered on Tuesday, opening down around ~1% before drifting lower through the day to close -1.3% on broad-based selling, which resulted in over 85% of the main board finishing in negative territory. After the strong end to last week, we were looking for the local market to enjoy some “bargain hunting” into early weakness, but the waves of selling that washed through the Resources Sector dragged the index deeper into the red; 15 of the ASX200 miners closed down over 5%. The Tech and Retail stocks stood out in the winner’s enclosure as we continue to see a market of very polarized performance.
Chinese stocks also fell on Tuesday after returning from the Dragon Boat Festival long weekend; the CSI 300 Index closed at its lowest level in six weeks. Renewed concerns about their property sector reinforced doubt about the sustainability of China’s economic recovery. The fragile confidence that Beijing can lift its property market drove negative sentiment across our miners as copper and iron ore tumbled in unison.
- Waning optimism in a Chinese economic recovery is weighing on the ASX’s Resources Sector.
This has been another example of the ASX200 looking set to test 8000 before encountering aggressive selling; a repetitive story through 2024. Although the market felt very soggy yesterday, it is still less than 2% away from its all-time high, but on the stock and sector level, things remain very different, e.g. year-to-date: Tech +25% and Financials +12% whereas the Materials are -10% and Energy -7%. It’s clearly a big ask for the ASX to keep pace with US equities when our Resources Sector is struggling, and their tech names are booming.
- This morning, the SPI Futures are pointing to a decline of 0.5% on the open, with the miners again likely to struggle with BHP down over 70c in the US.
MM is neutral toward the ASX200
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