The Fed reiterated that it is expecting to cut interest rates three times in 2024, with June the most likely start of the pivot, and as we saw overnight, it is great news for risk assets. However, it might surprise some to see the Real Estate Sector struggle to keep up with its peers overnight, only advancing +0.26% compared to the S&P500, which advanced by +0.9%, and there are no obvious signs that this relative underperformance will change, primarily because the sector has already moved 25% from its late 2023 low – it’s a very similar picture on the ASX where most names remain up in the short term, but are still well below their post-COVID highs.
Yesterday was all about central banks, with both the RBA and Bank of Japan (BOJ) updating their respective official cash rates. There were no major surprises from either, but equities embraced the cleared uncertainty, at least for another month. As I’m sure most subscribers know, the RBA left the cash rate at 4.35%, as was widely expected, and it was encouraging to see bond yields slip after the release as Michele Bullock & Co. dialled back their previous interest rate tightening bias now saying they are “not ruling anything in or out” on the next move in rates being either up, or down.
The big news yesterday was China’s industrial production, which came in stronger than expected, rising 7% year on year in February, beating the anticipated 5% and making it the fastest pace of growth in two years. Notably, the markets are very negative towards China; hence, any ongoing signs of improvement are likely to see a dramatic move in some related areas of the market. Even retail sales came in better than expected yesterday, printing 5.5%, above economists’ forecasts of 5.2%, with online sales up an impressive +14.4% to start the year. With fixed asset investment up 4.2%, more than the expected 3.2%, it was a rare good day for the Chinese economic outlook.
Copper was the shining light in an otherwise tough week for local stocks, with the industrial metal surging almost 6%, testing 12-month highs in the process. Ironically, the advance coincided with iron ore making fresh 7-month lows, with the divergence between two of Australia’s most important exports certainly garnering plenty of attention. Iron ore has slipped over 30% since early January as Beijing fails to lift hopes around the health of their construction industry, leading to loss-making steel mills buying less ore and creating stockpiles at Chinese ports.
Yesterday, Macquarie came out with a rare call that it’s time to sell the “Big Four Banks,” and they’ve also advised clients to be underweight in everything! The crux of their view is that the current high valuation of the Australian banks isn’t justified by the fundamentals. They even doubled down on Westpac (WBC), moving from outperform to underperform; by definition, they must think their own shares are a sell. Last week, the banks hit multi-year highs, led by Commonwealth Bank (CBA), which posted all-time highs; hence, it's not hard to comprehend some kneejerk profit-taking.
Overnight, the AFR led with the story that Singtel was in advanced discussions to sell Optus, Australia’s second-largest telecommunications group, to Toronto-headquartered private equity giant Brookfield, a major deal worth around $16-18 billion. Singtel have denied the rumours, but often where this is smoke there is a fire. After over two decades of ownership, Singtel will pass the reins over to private equity, which will have to deal with regulators for Australia’s second-largest telco. It will be interesting to see how Brookfield plans to turn around Optus after its recent outage and cyber-attack issues.
For most local investors, the million-dollar question is what impact the ongoing Chinese stimulus will have on local stocks, particularly the Resources Sector. Our opinion is not a great deal if they fail to lift economic growth, but financial markets should enjoy a period of optimism at least once in 2024, which is likely to lift resources with a number having struggled through 2024, e.g. BHP Group (BHP) -15.1%, RIO Tinto -14.8%, Fortescue (FMG) -13.7%, and South32 (S32) -12.3%. Iron ore is the standout theme across the underperforming heavyweights, with the bulk commodity trading around a five-month low as steel mills cut production as construction continues to struggle.
From conversations we had yesterday, it was clear that one large down day was enough for investors to question the valuation of the local market around the 7700 level. Our answer has been consistent since the market spiked under 7000 in late 2023 – “don’t look at the index; focus on individual stocks and sectors” because overall selling across the market often provides excellent opportunities to accumulate quality stocks. We believe the macro backdrop will support equities through 2024 as we frequently hear and see, not all boats will float as one.
Gold advanced again on Friday, taking it up +5.6% year-to-date and posting fresh all-time highs in the process. Increasing optimism that the Fed will start cutting rates in 2024 has been the backbone for advancing precious metals, but the early foundations were laid in China. The gold market turned higher three weeks ago, with the $US2,200 level now only one good day away. The move has danced to the same tune as most risk assets, from equities to crypto, with algorithmic momentum traders set to become increasingly interested as gold rallies on the upside. However, it’s been a tough journey for investors in gold stocks, who have largely struggled over the last year while the precious metal rotated around the $US2,000 area.
At MM, we missed the rally in discretionary retailers, but what about now? Arguably the only thing worse than missing a strong move is being sucked into a FOMO trap and buying just before it pulls back. Ironically, several analysts have fallen on the sword only to see some decent corrections unfold over recent weeks, but as we saw last night, rates are set to fall, and the Consumer Discretionary Sector is highly correlated to bonds, i.e. if the sector remained strong with high rates, it's not surprising to see it rally higher with markets looking for the Fed to start cutting in June. Some of the takeouts across the sector from the recent reporting season provide us with some clues as to what comes next.
Yesterday was all about central banks, with both the RBA and Bank of Japan (BOJ) updating their respective official cash rates. There were no major surprises from either, but equities embraced the cleared uncertainty, at least for another month. As I’m sure most subscribers know, the RBA left the cash rate at 4.35%, as was widely expected, and it was encouraging to see bond yields slip after the release as Michele Bullock & Co. dialled back their previous interest rate tightening bias now saying they are “not ruling anything in or out” on the next move in rates being either up, or down.
The big news yesterday was China’s industrial production, which came in stronger than expected, rising 7% year on year in February, beating the anticipated 5% and making it the fastest pace of growth in two years. Notably, the markets are very negative towards China; hence, any ongoing signs of improvement are likely to see a dramatic move in some related areas of the market. Even retail sales came in better than expected yesterday, printing 5.5%, above economists’ forecasts of 5.2%, with online sales up an impressive +14.4% to start the year. With fixed asset investment up 4.2%, more than the expected 3.2%, it was a rare good day for the Chinese economic outlook.
Copper was the shining light in an otherwise tough week for local stocks, with the industrial metal surging almost 6%, testing 12-month highs in the process. Ironically, the advance coincided with iron ore making fresh 7-month lows, with the divergence between two of Australia’s most important exports certainly garnering plenty of attention. Iron ore has slipped over 30% since early January as Beijing fails to lift hopes around the health of their construction industry, leading to loss-making steel mills buying less ore and creating stockpiles at Chinese ports.
Yesterday, Macquarie came out with a rare call that it’s time to sell the “Big Four Banks,” and they’ve also advised clients to be underweight in everything! The crux of their view is that the current high valuation of the Australian banks isn’t justified by the fundamentals. They even doubled down on Westpac (WBC), moving from outperform to underperform; by definition, they must think their own shares are a sell. Last week, the banks hit multi-year highs, led by Commonwealth Bank (CBA), which posted all-time highs; hence, it's not hard to comprehend some kneejerk profit-taking.
Overnight, the AFR led with the story that Singtel was in advanced discussions to sell Optus, Australia’s second-largest telecommunications group, to Toronto-headquartered private equity giant Brookfield, a major deal worth around $16-18 billion. Singtel have denied the rumours, but often where this is smoke there is a fire. After over two decades of ownership, Singtel will pass the reins over to private equity, which will have to deal with regulators for Australia’s second-largest telco. It will be interesting to see how Brookfield plans to turn around Optus after its recent outage and cyber-attack issues.
For most local investors, the million-dollar question is what impact the ongoing Chinese stimulus will have on local stocks, particularly the Resources Sector. Our opinion is not a great deal if they fail to lift economic growth, but financial markets should enjoy a period of optimism at least once in 2024, which is likely to lift resources with a number having struggled through 2024, e.g. BHP Group (BHP) -15.1%, RIO Tinto -14.8%, Fortescue (FMG) -13.7%, and South32 (S32) -12.3%. Iron ore is the standout theme across the underperforming heavyweights, with the bulk commodity trading around a five-month low as steel mills cut production as construction continues to struggle.
From conversations we had yesterday, it was clear that one large down day was enough for investors to question the valuation of the local market around the 7700 level. Our answer has been consistent since the market spiked under 7000 in late 2023 – “don’t look at the index; focus on individual stocks and sectors” because overall selling across the market often provides excellent opportunities to accumulate quality stocks. We believe the macro backdrop will support equities through 2024 as we frequently hear and see, not all boats will float as one.
Gold advanced again on Friday, taking it up +5.6% year-to-date and posting fresh all-time highs in the process. Increasing optimism that the Fed will start cutting rates in 2024 has been the backbone for advancing precious metals, but the early foundations were laid in China. The gold market turned higher three weeks ago, with the $US2,200 level now only one good day away. The move has danced to the same tune as most risk assets, from equities to crypto, with algorithmic momentum traders set to become increasingly interested as gold rallies on the upside. However, it’s been a tough journey for investors in gold stocks, who have largely struggled over the last year while the precious metal rotated around the $US2,000 area.
At MM, we missed the rally in discretionary retailers, but what about now? Arguably the only thing worse than missing a strong move is being sucked into a FOMO trap and buying just before it pulls back. Ironically, several analysts have fallen on the sword only to see some decent corrections unfold over recent weeks, but as we saw last night, rates are set to fall, and the Consumer Discretionary Sector is highly correlated to bonds, i.e. if the sector remained strong with high rates, it's not surprising to see it rally higher with markets looking for the Fed to start cutting in June. Some of the takeouts across the sector from the recent reporting season provide us with some clues as to what comes next.
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