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A very bullish session for the ASX today, pushing the market to within 10 points of its all-time high. A more benign inflation read in the US overnight, with CPI printing lower month-on-month had the bulls up and about early, before softer employment data locally saw interest rate traders ramp up their bets for an RBA rate cut this side of Christmas – all in all, a great day for risk assets.
We are amending our property exposure in the Income Portfolio
US short-term bond yields tested multi-week lows overnight following the cooling US CPI, but they are still nowhere near as dovish as they were back in January/February. Last night’s numbers were undoubtedly encouraging, but more proof will be required for credit markets and, most importantly, the Fed to conclude that inflation’s contained. Bond markets are often thought to be smarter than equities, as they are significantly larger, and at the moment, they are saying stocks are getting a touch overly optimistic. We believe stocks will ultimately be proved correct, but we must remain cognisant that any deterioration in the interest rate picture could easily see stocks pull back to their April lows.
The ASX was on the front foot early today before paring gains as the session wore on in the post-budget trade. UBS thinks the budget is ultimately good for stocks given its pro-growth even though that could mean interest rates remain higher for longer. The ASX200 finished up 26pts, though this was ~30pts from the intraday high, still only 2% from the all-time high.
Overnight, Jim Chalmers delivered his pre-election budget, and not surprisingly, he “splashed the cash.” The government has committed to increasing net spending by over $24bn over the next four years; the Treasurer believes his budget will cut inflation by 0.5% next FY, but financial markets were not convinced. The deficit was forecast to be around $18bn in December; already, 6-months later, the figures jumped by a whopping +55%, while the forecasted 2025 deficit is more than double economists’ previous estimates – why bother!
The ASX drifted back today ahead of the Federal Budget due for release tonight, some headlines already coming through suggesting a ~$9b surplus will be announced alongside some support for critical minerals including nickel and copper. We suspect some of the weakness today was a risk-off move ahead of US inflation data on Wednesday though stocks in Asia were fairly quiet while US Futures were unchanged during our time zone.
Overnight, we heard that the BHP v Anglo-American story had entered and finished Chapter II, and the saga could potentially have taken its final twist:
BHP increased its bid for Anglo-American (AAL LN), which would have given AAL shareholders 16.6% of the new group, up from 14.8%.
According to BHP, the revised bid of 0.8132 BHP shares, up from 0.7097, for each AAL share values the London-based miner at £27.53 – a 14.6% increase to bid 1.
The second more attractive bid by BHP was rejected by the AAL board overnight.
The UK miner now needs to deliver a compelling vision of how it can survive and flourish independently without merging with the “Big Australian.” The synergies were undoubtedly there, although it wasn’t the cleanest deal in town, but AAL don’t appear keen to tango. The deal was offered to the AAL board last week and formally rejected overnight.
A quiet start to a busy week from a data perspective, the Australian Budget is out tomorrow (not usually market moving), ahead of the US Inflation Data on Wednesday (which is usually market moving). Today, stocks moved in a tight ~20-point range with little conviction in either direction, before a spurt in the last hour pushed the index into positive territory (just).
April witnessed a bearish move by bonds and equities, driven by escalating interest rate fears as “sticky inflation” became a regularly used catchphrase across financial markets. Conversely, so far in May, we’ve witnessed a complete reversion in the market’s thinking/pricing for the future path of interest rates after both the Fed and RBA left rates on hold and delivered less hawkish rhetoric than many feared. Also, for good measure, markets embraced the recent “goldilocks” US employment data, which was a miss on job creation, while monthly wage growth slipped 0.2% from March; the latter was the number that caught most people’s attention.
The ASX200 enjoyed a strong week, closing up +1.6% even after a sharp drop on Thursday when the retail and banking sectors dragged the broader market lower. By Friday’s close, 10 out of 11 sectors on the main board had closed higher, with only the Consumer Discretionary Sector finishing in negative territory. On the stock level, there were some standout performances on both sides of the ledger, while the local index finished 2% below its all-time high, lagging slightly on the global stage:
