Equities followed the US market higher this morning, also adding a little premium thanks to a handful of positive quarterly reports that were announced after the North American markets closed. That all took a back seat as inflation data printed late morning, CPI coming in hotter than expected which sent the market into a spin, falling ~0.6% at the time before finding some relief. In the end, the index closed little changed, a good result given the circumstances though largely thanks to support from the Big 4 banks.
Bond markets have struggled over recent weeks as inflation appeared increasingly “sticky,” but it hardly registers on the chart compared to their weakness through 2021/2 and mid-2023. We believe the local credit markets have come back to realistic levels as the RBA awaits further economic data to deliver clarity on the underlying strength and direction of the local economy. Traders have gone from being far too optimistic on rate cuts into Christmas to becoming almost pessimistic; the US futures markets have gone from pricing in three cuts to 1.77 cuts, or one definitely, and probably two.
Investors continued the 180-degree about-face from last week's sentiment, happy to take on risk for the second consecutive day to start this week seeing the ASX200 through a 200pt gain from Friday’s panic lows early in today’s session. Tech was the standout as US 2yr yields retreated (marginally) from the spike above 5% last week while Healthcare and Financials also joined in the rebound. Energy and Gold were the main areas finding it tough again today, for the same geopolitical reasons as Monday’s session.
On Monday, Citi joined Macquarie with a “sell call” on the major banks, which saw the sector reverse early gains to close near their intra-day lows, ANZ even slipped into negative territory. There were two major reasons behind their bearish stance:
• Citi believes the valuations of the banks are stretched considering the potential political “attacks on their profits”, i.e. when the RBA starts cutting, they will be forced to follow suit at the expense of profitability.
• Macquarie said to “sell” the banks in mid-March as the sector posted new highs, again a call on valuation grounds; good timing so far!
The cornerstone of Citi's argument is valuation, which could be applied to the whole market when the ASX200 is challenging new all-time highs. Overall, it is an understandable view, but we question if it's a good enough reason to exit the sector, forgoing enticing dividends and potentially incurring capital gains issues after the “Big Four” have run so hard.
Equity markets seemed to forget last week’s struggles, starting the week on the front foot. The best was seen early, at one stage the ASX200 was up more than 110 points before giving back some of the gains. The small cap index held on though and closed on the day’s high today. Improving headlines out of the Middle East was the main driver of the risk on attitude, though this worked against Gold and Energy today. The banks also found another naysayer as Citi moved negative on all of the Big 4, though ANZ was the only one to close lower.
Last week’s Bank of Americas Fund Managers Survey showed the market is the most bullish in over two years on the back of the biggest jump in global growth optimism since May 2022 – allocations to stocks and commodities hit a 27-month high, at the expense of bonds, with cash levels falling to 4.2% from 4.4% in the previous month - just shy of the sub-4% level that traditionally signals a contrarian sell indicator for equities according to the BofA Global FMS Cash Rule. Conversely, an increasing number of fund managers now believe gold is the most overpriced since COVID. The most crowded trade recognized by fund managers continues to be the "Long Magnificent 7.” Overall, last week was not the best time for Fund managers!
The ASX200 endured a week to remember, closing down -2.8% on concerns that interest rates will remain “higher for longer” and increasing concerns that the Middle East tensions will deteriorate further after Israel retaliated against Iran following last week's drone attack. It's hard to imagine an amicable conclusion to the current problems in the Middle East, but we all hope it doesn't become another painful, prolonged affair like the Ukraine–Russia war, which has now entered its 26th month.
Shares tracked pre-market futures lower early in our session before headlines of a further escalation in the Middle Eastern conflict caused another wave of selling took the market to 2 month lows. Energy found support with oil cracking $US90/bbl again which was also a concern for those positioned for inflation to roll off. Until midday, traders had no interest in taking risk in today’s session but the afternoon painted a different picture. The ASX closed well off the intraday lows with many sectors rallying more than 0.5% between midday and the end of trade. Despite the Friday afternoon fight, the local market had its worst week since September, falling -220pts / -2.83%.
Through March and April, we discussed how indices were priced for perfection on the interest rate front. Now, as reality sets in, we consider if/when and how we should consider fading this “less dovish” outlook for US rate cuts. Just like squeezing an orange, removing the last 10% of the juice is far more complex than the first 10%, and this is the case for inflation, which has been demonstrated perfectly over recent months. However, arguably the biggest issue for the Fed and other central banks is the inflationary implications of an elevated oil price courtesy of the tensions in the Middle East, an issue well beyond the influence of Jerome Powell et al. The mantra of “higher for longer” concerning rates feels on point at the moment, which has been the subsequent cause of April's weakness in equities.
