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The local market was on the back foot for most of the session today thanks to softer US markets overnight before yet another hike by the RBA resigned shares to a drop of more than 1%. The latest hike takes Australian interest rates to an 11-year high while Governor Lowe’s commentary seems to suggest he’s not done yet. Discretionary stocks took a hit as a result with a downgrade in the sector not helping the already negative market view of the space being squeezed by tighter household budgets.
Year to date we have already witnessed the Tech Sector outperform the Resources by over 20% as the strong keep getting stronger and vice versa. Over the last 12 months, we’ve seen investors almost move on mass into and out of hot stocks and sectors with the heard like mentality at times leading to crowded trades which have a habit of unwinding in dramatic fashion at some stage of the cycle, the skill is identifying when the risk/reward has stretched too far and caution is warranted e.g. MM often starts trimming positions when we believe this is the case.
A strong start to the week with the ASX holding onto the majority of the gains that were flagged by futures markets this morning. The recently depressed Consumer Discretionary & Materials sectors bounced back while Technology gave back some recent outperformance.
The RBA will be meeting tomorrow at 2.30 pm with a number of mixed opinions around the likely action from Philip Lowe et al. MM and most market participants were confident that the RBA would hold the Cash Rate at 3.85% for at least a few months and potentially right through until Christmas but following April’s CPI upside surprise to 6.8%, the chances of another rate hike have undoubtedly increased with rising house prices not helping the argument for a pause. Futures markets are now pricing a ~40% probability of a hike tomorrow, however, there is a large cross-section of views in the market making this a very ‘live’ decision.
The ASX200 ended the week down just -0.1% as we waved goodbye to May which ultimately lived up to its bearish seasonal reputation falling -3%. We’re starting to wonder about the magnitude of news that will be required to awaken equities from their current slumber, there were 2 major events last week and yet the index closed basically unchanged
The ASX had a good crack at closing higher on the week today after a very volatile 5 sessions, only just falling short of the milestone in the end. Materials were helped by stronger commodity prices and a softer USD, both reversing moves from earlier in the week with a relief rally for global growth leverage following the US Debt ceiling vote.
The local energy sector has proven very resilient to a weak oil price which is a trigger MM often uses to enter a stock/sector i.e. we like to see markets shrugging off bad news, it’s often the sign of an inflexion point. We still believe that crude oil can dip below $US70/barrel but at this stage, we believe this is likely to provide a buying opportunity into stocks such as Woodside Energy (WDS) and Santos (STO). Medium to longer term we remain bullish on the traditional energy sector but for now, economic concerns are weighing on the likes of crude oil.
A pretty quiet day on the news flow front with the market drifting higher to recover some of yesterday’s freefall. The early session sugar hit came from the US lower house passing the debt ceiling relief bill but aside from that there was little to move markets for the first session of the new month. Tech continued its rally while Healthcare was the star performer of the sectors.
Whenever we see triple-digit losses by the ASX investors become nervous and they question if things will get significantly worse before they improve – understandable in today’s environment considering the negativity in the press. One of the macro-economic factors being cited as the reason why stocks are vulnerable at current levels is rising interest rates but at MM we would counter this with a quick look at the correlation between the ASX and the closely watched Australian 3-year bond yield.
Overseas markets underperformed overnight which weighed on the open here locally. Resources were particularly on the back foot with strength in the USD putting pressure on materials while coal also fell to 2-year lows to hold energy stocks back. The rest of the market followed suit, particularly following a higher-than-expected CPI print at 11.30 am, up 6.8% in April vs the 6.4% expected. A very weak close resigned the ASX200 to its worst day since March.
