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Fed Chair Jerome Powell delivered a dovish testimony overnight, warning of the dangers of keeping interest rates too high for too long: “Reducing policy restraint too late or too little could unduly weaken economic activity and employment” and “More good data would strengthen our confidence that inflation is moving sustainably toward 2 per cent.” With the US June CPI set for release on Thursday and PPI on Friday, the groundwork has been laid for rate cuts into Christmas.
When volumes are low, intra-day moves tend to persist in the direction they start given the majority of institutional trading now is done over the day with a greater proportion of the volume completed on the close i.e. in the ‘Match Out’. Yesterday’s price action was down, today was up, but the consistency in the trends were very similar. All 11 ASX sectors locally finished higher mirroring a positive move in Asia, the banks adding the most from an index perspective while Telstra (TLS) also chimed in, with the Telco now up 10% since the start of June.
The ASX200 started the week in poor fashion, following S&P500 futures lower throughout the day in anticipation of a weak opening by Europe following the surprise French election result. Last week, markets were concerned about Le Pen, but as the results rolled in on Sunday, concerns migrated towards potential reckless spending by the victorious Left, i.e. the market interpretation being that it’s good news the Far Right lost but bad news the Far Left won. Ultimately though, moves across financial markets have been relatively muted on the view that political gridlock may at least limit the ability of the Left to enact its big-spending plans.
The choppy price action locally continued today, with the market giving back last weeks gains as low school holiday volumes take hold. While we believe the market will break out of its trading range at some point, for now, the range is being respected which requires a more neutral stance.
Friday’s US jobs data showed further signs of an easing labour market, which adds additional support to the case for the FOMC to begin cutting interest rates over the next few months – the futures market is anticipating the first cut in September. The action under the surface of the US bond market is an interesting one, with the gap between the 2s and 10s steepening to almost 20bps as markets price in more issuance down the track to pay for the likely increased spending of whoever wins the November election
The ASX200 ended the first week of July up +0.7%, an encouraging performance considering the dip on Monday/Tuesday. The Energy and Materials Sectors led the gains, which weren’t broad-based, with seven of the market’s eleven main sectors closing lower. At MM, we haven’t hidden our view that these two sectors are set to outperform through FY25. However, we’re very conscious that one week doesn’t change a trend—the previously high-flying tech and utilities sectors were the market’s worst-performing sectors last week
A bit of a nothing end to the week with the ASX down mildly as we await key employment data from the US tonight, and digest the Labour Party win in the UK, ahead of the 2nd round of French elections this weekend. After a shaky start to FY25, we got our mojo back midweek to chalk up a reasonable gain, underpinned by good moves from Energy & Resources.
The UK election looks already done and dusted, a relatively clear affair with Labour poised to return to power after 14 years in the wilderness. However, the French election on Sunday is still a close call. Recent polls suggest Marine Le Pen will be short of the numbers to achieve a majority, in line with our thoughts over recent weeks, and European bourses rallied accordingly.
Overnight, European bourses improved ahead of Sunday’s French election, with the French CAC 40 closing up +1.2%. At the same time, US indices posted fresh all-time highs in a shortened session ahead of Independence Day. US bond yields fell after weaker-than-expected economic data reinforced the case for the Fed to start cutting rates this year as “bad news remains good news“ for equities – the data showed the US services sector contracted at the fastest pace in four years. The S&P 500 has added more than $16 trillion in value from a closing low in October 2022, thanks to solid earnings, the spectacular surge in artificial intelligence and expectations that interest rates will drop.
