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Further consolidation at the index level today, though there was some big moves in stocks and some clear divergence across sectors, unfortunately, we were end of a downgrade from Mirvac (MGR) while weakness amongst resources and energy stocks worked against us.
A reasonable day for the ASX buoyed by relative calm in Asia, the Nikkei in Japan up ~1% while US Futures also improved during our time zone. Buying was tentative, but broad-based, with 9/11 sectors trading higher. We get the sense that volatility is not over, more likely to be a pause, the carry trade in Japan still has some way to play out, and given we don’t get any data of substance in the US for the remainder of the week to throw markets much in either direction, a period of consolidation in the very short term seems the most likely scenario.
The market clearly doubts whether the RBA seriously considered another hike. We’ve been saying for months that the RBA doesn’t want to hike, although it’s not totally off the table, and this view still feels on point. A few days of market volatility, largely driven by the unwind of the “Yen Carry Trade”, isn’t enough to make central banks cut interest rates; inflation is their primary focus, although they will remain vigilant to external circumstances, including ongoing market volatility. If we stand back and put things into context, the ASX200 is up +1.2% in 2024 and posted new all-time highs last week, numbers that shouldn’t unsettle the RBA.
No change as expected today from the RBA with rates staying at 4.35%. They talked to the pace of disinflation slowing, while they maintained its previous guidance that it was not “ruling anything in or out” when it came to interest rates, the board said policy would need to be “sufficiently restrictive” until the board was confident inflation was “moving sustainably towards the target range”. This view is at odds with the market, Interest rate futures fully pricing in a cut before Christmas as the table below shows (29bps priced in), and an interest rate of ~3.5% by the end of FY25. The new press conference format provided a bit more meat on the bones of this view, and the Governor even had a crack at explaining volatility in equities over the past 48 hours, saying that one employment print in the US shouldn’t have us running for the hills…not bad advice from Governor Bullock!
The ASX200 plunged almost 300 points on Monday as global equity markets continued to panic that a recession was imminent for the US and the rest of the world would follow suit. Nobody felt the pain more than Japan following the BOJ’s rate hike last week; the Nikkei was down a staggering 12.4%, its worst day since “Black Monday” in 1987, wiping out all of this year’s gains in one fell swoop. We believe the unwinding of the “Carry Trade” has been the catalyst that has ignited the current volatility – more on this later. Market sentiment has turned on a sixpence as reduced liquidity collided with the perceived increased risk of an economic slowdown; cash has become the asset class of choice for many investors, i.e. if in doubt, get out! Everything from stocks, gold and Bitcoin, has sold as “risk off” ruled dominated over recent days.
A brutal day across markets, the worst since 2020, with the ASX200 whacked 3.7%, Small Caps hit 4.5%, Japanese stocks down over 10%, with 99% of the main board in Australia closing lower (i.e. 2 stocks out of 200 finished up)! Our market started on the back foot but as Asian markets struggled and US Futures continued lower (Nasdaq Futures down 5.5% at our close), there was no reason to stand in front of the momentum – the index closing only ~15 points above its nadir. This is a headline-grabbing day, and taken in isolation, it’s a big move by the market, however, the magnitude is at least partially a product of just how strong the market has been, hitting a new record high at 8148 only 3-sessions ago.
We are taking profit on a stock across both the Growth & Income Portfolios
The end of last week saw a significant change in the market’s perception of “bad economic news”. Instead of being embraced by equities in anticipation of future interest rate cuts, it led to aggressive selling as fears of a recession escalated exponentially.
