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Equity markets seemed to forget last week’s struggles, starting the week on the front foot. The best was seen early, at one stage the ASX200 was up more than 110 points before giving back some of the gains. The small cap index held on though and closed on the day’s high today. Improving headlines out of the Middle East was the main driver of the risk on attitude, though this worked against Gold and Energy today. The banks also found another naysayer as Citi moved negative on all of the Big 4, though ANZ was the only one to close lower.
Last week’s Bank of Americas Fund Managers Survey showed the market is the most bullish in over two years on the back of the biggest jump in global growth optimism since May 2022 – allocations to stocks and commodities hit a 27-month high, at the expense of bonds, with cash levels falling to 4.2% from 4.4% in the previous month – just shy of the sub-4% level that traditionally signals a contrarian sell indicator for equities according to the BofA Global FMS Cash Rule. Conversely, an increasing number of fund managers now believe gold is the most overpriced since COVID. The most crowded trade recognized by fund managers continues to be the “Long Magnificent 7.” Overall, last week was not the best time for Fund managers!
The ASX200 endured a week to remember, closing down -2.8% on concerns that interest rates will remain “higher for longer” and increasing concerns that the Middle East tensions will deteriorate further after Israel retaliated against Iran following last week’s drone attack. It’s hard to imagine an amicable conclusion to the current problems in the Middle East, but we all hope it doesn’t become another painful, prolonged affair like the Ukraine–Russia war, which has now entered its 26th month.
Shares tracked pre-market futures lower early in our session before headlines of a further escalation in the Middle Eastern conflict caused another wave of selling took the market to 2 month lows. Energy found support with oil cracking $US90/bbl again which was also a concern for those positioned for inflation to roll off. Until midday, traders had no interest in taking risk in today’s session but the afternoon painted a different picture. The ASX closed well off the intraday lows with many sectors rallying more than 0.5% between midday and the end of trade. Despite the Friday afternoon fight, the local market had its worst week since September, falling -220pts / -2.83%.
We are making several changes to the Active Growth Portfolio Today
Through March and April, we discussed how indices were priced for perfection on the interest rate front. Now, as reality sets in, we consider if/when and how we should consider fading this “less dovish” outlook for US rate cuts. Just like squeezing an orange, removing the last 10% of the juice is far more complex than the first 10%, and this is the case for inflation, which has been demonstrated perfectly over recent months. However, arguably the biggest issue for the Fed and other central banks is the inflationary implications of an elevated oil price courtesy of the tensions in the Middle East, an issue well beyond the influence of Jerome Powell et al. The mantra of “higher for longer” concerning rates feels on point at the moment, which has been the subsequent cause of April’s weakness in equities.
The local market shook off weakness in the US overnight to open higher, largely thanks to our Resources exposure that continues to find some support following trade sanctions on both China and Russia. Late morning saw local employment data land with the mixed numbers largely disregarded by the market. Buying picked up in the early afternoon as yields started to roll off, though equities couldn’t go on with the move, ultimately though the 5-day losing streak for the ASX was snapped with a ~0.5% gain today.
Yesterday saw Gina Rinehart emerge as a significant player in Lynas (LYC) after taking her stake to almost 6% over the last few days, although compared to her net wealth, the purchases were a poultry drop in the ocean. LYC is the world’s largest non-China producer of rare earths, although China still produces almost 70% of the world’s rare earths, with Australia’s ~5% output more of a supporting role. Gina’s move could be largely motivated by her intention to merge US-listed MP Materials (MP US), which has a market cap. of ~$4.3bn, and the local and larger $6bn rare earth player Lynas (LYC), i.e. it would form a relative $10bn rare earth giant.
After a muted open, the market seemed to find its groove, rallying 40pts from early lows into the lunchtime peak before buying stepped away. Shares had given back almost all of the gains by 4pm at which time the UK released their monthly CPI figure which was hotter than expected, sending down for the session, right on the close. There was little diversion between sectors, particularly when you strip out Utilities which was supported by the heavyweights of the area.
Earlier in the year, we felt markets were far too optimistic towards rate cuts, i.e. US futures were pricing in three cuts before Christmas, the best possible outcome and even with the Feds rhetoric continually targeting three cuts, the risks of two remained high. Now, we believe things are swinging in the other direction. The market is now pricing in 1.69 cuts by Christmas; at MM, we’re rarely keen to fight the Fed, and we think two cuts remain a strong possibility, as they remain keen to cut at some stage, i.e. markets are now too pessimistic, ultimately good news for rate-sensitive stocks/sectors.
