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On Tuesday, the ASX200 delivered a perfect example of how investing is far more about stock/sector performance than the underlying index, which attracts too much attention. So far, 2024 has been dominated by interest rate-sensitive stocks, with the Tech, Financials and Real Estate sectors all up over +20%. Conversely, the materials and energy names were down over 15% before yesterday’s dramatic reversion – one day doesn’t make a summer, but it did catch our attention
A mildly weaker day at the index level, though lots going on under the hood with a big rotation playing out causing a 6% price differential in the performance of CBA down -3% v BHP up +3% following a string of stimulus measures from Beijing.
The BofA’s September Fund Manager Survey (FMS) revealed a “big shift” from global cyclicals to bond sensitives. September saw a rotation into defensive sectors and out of cyclical sectors. Fund managers’ relative net overweight stance towards defensives (utilities and staples) versus cyclicals (energy, materials and industrials) is now the highest since May 2020. If/when China does regain investors’ confidence, the unwind is likely to be dramatic.
The ASX opened the week on the back foot giving back around 30% of last week’s gains, weighed by the retailers, supermarkets in particular as the ACCC sets their sights on misleading conduct.
Freight costs are already in a recession, and truckers who bought their rigs back in 2022, when shipping rates were high, are struggling to get enough work to pay for them today after prices plunged. Over the last 20 years, it is not a good sign for manufacturing jobs to have trucking rates falling. We may have solid GDP in the U.S., but every other time, the Cass Linehaul Index rate of change has gone negative; it has brought falling GDP at some point as part of the cycle. Hence, it would be unusual for the U.S. to escape a technical, economic recession this time, with trucking already in one.
Last week, the ASX200 advanced another +1.35%, taking the index to all-time highs. Gains were broad-based, with 8 of the main 11 sectors advancing by over 1.4%, while only the healthcare stocks weighed noticeably on the index. There was also some reversion evident with lithium and uranium plays surrendering some of last week’s gains while the banks returned to the winners enclosure:
The ASX saw the best of it early, before tapering off into the close as China failed to cut rates. Still, a new all-time high today for stocks, the ASX 200 above 8200 while Gold also notched up a milestone trading at $US2600/oz. A good week for equities, the market up 1.4% with strong performances by some interest rate sensitive stocks.
The US energy sector advanced +1.3% on Thursday night, suggesting local names will enjoy a solid end to the week. Crude has struggled through 2024 on global growth concerns, and while China has been front and centre of the market pessimism, the US and Europe haven’t helped. However, recent monetary policy easing by the Fed and ECB has illustrated that Western central banks are focused on engineering a soft economic landing. Brent crude has potentially already experienced the “washout” under $US70, which MM has been anticipating, and a move back towards $US80 would catch many traders on the wrong foot.
A volatile open this morning with the SPI Futures squeezing into the September index expiry – up ~70pts into blue sky territory, before pulling all the way back to par by lunch time. US Futures found some form and the ASX followed suit, rallying throughout the afternoon session to ultimately end up 50pts, chalking up a new all-time high for the ASX at 8200, driven by a big turnaround in the resources sector; the interpretation for now at least being that lower rates will be supportive of global growth and therefore demand for raw materials – though that could simply be back-filling a reason!
This morning, AEST, the Fed cut interest rates by an outsized 0.5%, leading to an initial 375-point surge by the Dow, which subsequently reversed, leaving the old index down over 100 points. Traders initially embraced the large rate cut, though it did raise concerns that the Fed was trying to get ahead of potential economic weakness. We should remember that credit markets were already pricing a 65% chance of such an aggressive move. Comments from the Fed focused on inflation first and foremost, but they are conscious of a slowing economy:
• “The Committee has gained greater confidence that inflation is moving sustainably toward 2%, and judges that the risks to achieving its employment and inflation goals are roughly in balance,”
The Fed are comfortable that inflation is under control, and in the ensuing press conference, Jerome Powell was balanced around the economy: “I don’t see anything in the economy right now that suggests that the likelihood … of a downturn is elevated,” said Powell. However, stocks faltered as they got their anticipated sugar hit, but latched onto commentary that implied we shouldn’t get used to this size of cut.
