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Yesterday saw the ASX200 slip another -0.2% having opened strongly with Tuesday’s RBA rate hike appearing to take the wind out of the sails of an already tired market – over the last 2 days we have spent hours reading both local and international equity/economic research and the bulls have definitely gone into hibernation, just like a grizzly in December. Losers only marginally edged the winners on Wednesday but a pullback in the banks was enough to drag the index lower in a fairly lacklustre but evidently weak session which was characterised by an absence of buyers as opposed to aggressive selling.
The local bourse was on the front foot initially, rallying ~0.5% early in the session before caution returned, seemingly the market has lost its mojo after the RBAs hike, failing to hold on to gains. The end result from the index perspective was a small fall as the ASX200 closed on the intraday lows, but there was significant volatility on the sector front.
The ASX200 tumbled -1.2% on Tuesday with over half of the losses unfolding after the RBA’s hike – the move may have been a surprise to some but heavyweights UBS, Goldman Sachs & Deutsche Bank called it correctly with all looking for at least one more sooner rather than later. Only the Utilities Sector managed to advance yesterday while not surprisingly the Consumer Discretionary Sector was worst on the ground falling -2.2%. Our stance toward the ASX hasn’t deviated over recent months and considering the index continues to tread water we feel on point until further notice.
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.
