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The ASX200 rallied +0.6% on Monday following a positive lead from Wall Street, the gains were broad-based with over 70% of the main board advancing which was made even more impressive by several stocks trading ex-dividend e.g. Bendigo Bank (BEN), Ramsay Healthcare (RHC) QBE Insurance (QBE) and Iluka (ILU). Ironically the day before the RBA’s set to hike rates for a 10th consecutive time the best-performing sectors were the interest-sensitive names, i.e. Consumer Discretionary +1.95%, Tech +1.8%, and Real Estate +1.7%.
A choppy session that saw the best of it early thanks to a bullish session overseas where stocks continue to climb the wall of worry. Interest rate-sensitive sectors were the driver today with Aussie 3-year yields off 9bps underpinning buying in retail, IT and Property sectors ahead of key central-bank updates headlined by the RBA tomorrow (+25bps expected) & Fed Chair Jerome Powell’s semi-annual testimony to the US Senate on Wednesday.
The RBA is expected to raise interest rates from 3.35% to 3.6% on Tuesday while in the process making it 10 consecutive hikes without any reprieve for those getting increasingly strapped for cash. If the bond market is correct we have 2 more on the menu this year taking the Official Cash Rate back above 4% for the first time in well over a decade.
The ASX200 slipped another -0.3% last week but in our opinion, it felt like a solid performance as equities shrugged off short-term bond yields continuing their unrelenting march to multi-month/year highs i.e. The Australian 3-year closed above 3.6% as they edged ever closer to fresh 20-year highs around 3.8% while the US 2-years did scale fresh 15 year highs above 4.9%. As we often say markets that don’t fall on “bad news” are strong:
A broad-based rally helped recover some of the losses seen on the index earlier in the week. The banks found some buying to round out the week after a few softer sessions, while the resource heavyweights continued their march higher. Real Estate was the only area of the market still struggling today with the market still concerned about interest rates and their impact on property valuations. Despite the bounce today, the index closed -23pts/-0.32% lower for the week.
Fund managers appear to be very comfortable switching between stocks and sectors but there’s not a great deal of appetite towards increasing/decreasing overall market exposure – the latest Bank of America Fund Managers Survey showed cash levels remained at 5.2%, down from 5.3% in January. Although we suspect these levels might have again edged higher following the latest strong US economic data which sent bond yields higher.
While the index was largely unchanged, there were some big swings from a sector point of view. Both Materials & Energy was strong, but that’s where the good news ended. The remaining nine sectors closed lower, albeit dividends weighing on some areas more than others as a total of 9 shares in the index traded ex-dividend today.
February saw short-dated bond yields test multi-month/year highs but their longer dated peers have been fairly subdued remaining well below levels reached in 2022. We have a bearish bias towards these longer dated yields due to our view that the domestic economy is weaker than the RBA believe – yesterdays data implies we may be proved correct sooner rather than later.
It was a soggy start to the session today, but buyers came to life mid-morning when some local data prints landed. Inflation (CPI) for January came in below expectations at 7.4%, below the 8% expected by the market while GDP Growth for the 4th quarter was 0.5% vs 0.7% expected. The data took some heat out of bond yields and helped support shares today, while China’s Caixin PMI was also above expectations which supported resource names into the afternoon.
January saw investors become overly optimistic that central bank pivots were close at hand and rate cuts would add some cheer for mortgage holders into Christmas, the net result was the ASX200 roared +9.6% in less than 6 weeks i.e. more than the market average annual gain over the last 20-years. However, as we all know following some surprisingly strong economic data the RBA & Fed have stamped aggressively on any dovish outlook and suddenly markets are looking for official interest rates to peak at 4.4% in Australia and 5.4% in the US.
