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A quieter end to a more volatile week for equities with a US rating downgrade, continued volatility in bond markets, while overlapping quarterly earnings in the US and the start of FY reporting locally kept things interesting. Ultimately, stocks ended lower, bond yields were generally higher while commodities by in large remained resilient.
The Australian consumer is under pressure from both rising prices (inflation) and interest rates and this is translating to reduced spending at the supermarket, household goods appliances to takeaway food. Theoretically, the often referred to mortgage cliff is about to hurt homeowners hard which could see the average Australian continue to think twice before spending. A couple of pauses by the RBA should help, but we believe discretionary spending is unlikely to improve significantly until people feel more comfortable as to what comes next on the economic front.
The ASX was down in line with overseas markets, although the selling was far from aggressive and we did bounce off the session lows. US Futures were subdued while Asian stocks were more mixed after a poor session yesterday.
Yesterday’s price action reminded us of August 2011 when another credit rating agency S&P downgraded the US debt from AAA to AA+, only days after Washington narrowly averted a default citing heightened political polarization and insufficient steps to right the nation’s fiscal outlook.
A sea of red today from Shanghai to Sydney with stocks pulling back from recent highs, the RBA’s dovish move yesterday a distant memory as local reporting stumbles into gear.
MM is adding two new positions to the Emerging Companies Portfolio.
The retiring Governor Philip Lowe has put the RBA firmly into “data dependant mode” as they monitor inflation, consumer spending, wages and overall business conditions – most of which have been heading in the correct direction over recent months. Our preferred scenario at MM is that both interest rates & bond yields have topped for at least 2023.
The ASX was enjoying another positive session ahead of the RBA decision at 2.30 pm, with their call to sit pat at 4.1% supporting another leg higher for stocks and a leg lower for bond yields and the AUD. The associated messaging sounds increasingly like a central bank that sees the hiking job as complete, and while they will remain data dependent, this move can only be described as a ‘dovish pause’.
The last 1-2 years have been all about the “strong getting stronger” and vice versa but like all good trends, long and short, they eventually turn &/or simply run out of steam. However, we believe it’s very important with today’s theme, which we have touched on previously, to adopt the simple adage of “if in doubt stay out” as not all companies will turn the corner if bond yields for example move lower, some are simply in need of serious repair.
The calm before the earnings season to start the week & end the month of July with the ASX higher on open, soft in the middle before a recovery into the close, ultimately ending the session little changed in aggregate and still only ~3% below all time highs. July has been a volatile month for equities.
