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We already believe stocks are pricing in a best-case scenario of lower rates without a recession, i.e. the Goldilocks scenario; hence, any bumps in the road through 2024 could see setbacks for stocks and, in particular, the “risk-on” trade, e.g. gold is a high Beta example having retraced ~$US100/oz of its recent gains after bond yields bounced over the last few days. As we mentioned earlier, US credit markets are attributing a 40% chance that rates will be cut by March 2024, but at MM, we believe it won’t be until the next FY and, more than likely, the 4th quarter, which suggests some market disappointment at times next year.
The ASX 200 broke out this morning, up through 7200 to hit a morning peak of 7226, but the gains were forfeited as the session wore on – the market closed flat on the day, coming off the back of a strong week. Not a lot on the docket to drive stocks, some bits and pieces on the corporate front but a fairly muted session on low volumes.
Global equities have driven higher over the last 7-weeks, fuelled by dovish optimism that international central banks will start cutting interest rates in 2024 as they appear to be winning the battle against inflation. Since late October, the US 2-year yield has fallen from 5.26% to 4.54%, while the local 3s reversed from 4.47% to 3.84%, as credit markets have decided it’s a case of “when not if” rate cuts will commence, very different sentiment to that which prevailed through September & October. Not surprisingly, the winner’s enclosure over the last month has been dominated by the rate-sensitive stocks/sectors such as the Real Estate and Healthcare Sectors.
The ASX200 pushed higher last week, ultimately closing up +1.7%, posting fresh 11-week highs into the close on Friday. The last 2-days caught our attention as the local market reversed early weakness as belief in a 2023 Christmas rally gathers momentum – for the statisticians amongst you, if we’ve already seen the low for the month at 7041 and December delivers the average monthly range of 2023, by extrapolation, the index is destined to test the 7400-7450 resistance area.
The market opened on the backfoot, down early, before rallying ~50pts into the close to finish at session highs, clearly a bullish tone to end the week with the solid intra-day move. The lack of selling as December wears on is the theme we’ve been highlighting in recent reports with a few examples taking shape in recent sessions.
What Matters Today: Is it time to consider the Energy Sector as Santos & Woodside consider a merger?
Yesterday, we heard that Woodside (WDS) and Santos (STO) are considering a $80bn oil & gas merger following the global trend as their operating landscape changes with decarbonisation pressures increasing rapidly. Discussions are at an early stage, with no certainty a deal will be forthcoming; they might be testing the market’s response following the overnight announcement. Over recent months, major shareholders have been touting ideas on how STO could unlock shareholder value, including a break-up of the business.
There wasn’t much on offer for the ASX today, a much calmer session after the fireworks of yesterday. Shares traded in a tight ~30pts range with a strong rally through the afternoon seeing it close marginally lower.
We remain bullish equities through December with the ASX200 Accumulation index poised to make fresh all-time highs, i.e. the ASX200, including dividends. Hopes of lower interest rates are driving the recent rally through 2024. However, investors are largely ignoring the risks of an economic contraction as the hiking cycle bites consumers and borrowers – the “Goldilocks scenario” is the market’s current preferred scenario.
Stocks enjoyed the best one-day jump in over a year today as peak rates met solid but not spectacular growth numbers supporting the ‘goldilocks’ economic scenario, which is very bullish equities if it comes off. The ASX recouped all of yesterday’s losses and some as we experienced a bottom left, top right sort of day, sessions like this are what equity investing is all about!
The ASX200 reversed lower for the week on Tuesday as the Resources Sector led the declines, e.g. Pilbara (PLS) -8.5%, IGO Ltd (IGO) -6.7%, Northern Star (NST) -4%, and Sandfire Resources (SFR) -3%. However, with well over 80% of the main board closing lower, there were few bright pockets, with the exception of the Healthcare Sector, which enjoyed a defensive bid, ultimately closing up 0.03%, not conclusive but at least positive.
