When markets are around inflection points it’s important to remain focused on what is unfolding and of course how to invest accordingly, our core market view through the 2H and into 2024 is that bond yields will retrace some of their strong gains over the last 18 months as central banks start to win the battle against inflation
As most probably know by now June’s inflation data was extremely market-friendly coming in at +5.4%, well below the +5.6% median forecast of analysts, but importantly, the quarter-on-quarter run rate was 0.8% (i.e. annualised that’s 3.2%). As would be expected bond yields and the $A fell while the ASX200 rallied ~100 points following the news. The markets are now starting to agree with us, the odds of a hike in July have crashed while there’s an increasing possibility that Official Rates have peaked at 4.1%.
Xi Jinping’s pledge to revive growth is gaining traction even though the latest promises from the Politburo were very skinny on detail/specifics. The sceptics will point to the previous busts of optimism failing to follow through and stocks eventually slipping lower but we believe the tone is the key to the latest rhetoric plus the recognition of the challenges that lie ahead which combine to be bullish in our opinion.
Last week saw a new Lithium Futures contract start trading in China but it was a rocky start for the essential ingredient for current-style electric-vehicle batteries. Contracts for January’24 delivery plunged below 214,150 Yuan on Friday and while paring early losses they still closed -13% lower as the market flags lower prices during that time frame. These new contracts are aiming to provide more transparent lithium pricing while enabling both producers & users to hedge their risk moving forward.
The world’s major central banks meet this week with signs of an improving inflation picture permeating through from recent economic data, and while the ECB and Fed are still largely expected to raise rates by +0.25% it’s the accompanying rhetoric that’s likely to dictate how equities react i.e. are more hikes likely this year or can consumers look forward to an extended pause. With neither institution meeting until September, a hike feels likely this week after both Christine Lagarde & Jerome Powell have stated that inflation remains too high.
Cracks may be forming in the US housing market with total housing starts and permits pulling back in June below expectations - they declined 125K to 1434K. Also, mortgage applications for a home purchase fell 1.3% in the week ending July 14, while continuing to run at extremely low levels, reflecting the lack of activity in the existing home sales market. However, the NAHB’s housing market index ticked up further in the July survey, moving up 1 point to 56.
When we consider the unpopular Coal Sector we cannot ignore the cash it’s generating compared to current valuations e.g. WHC only has a market cap of $5.85bn yet it has $2.7bn net cash and still produced $435m free cash flow in the June quarter with lower coal prices, enabling it to maintain its buyback strategy and pickup other assets that come onto the market at good prices. In our opinion, the sector is simply too cheap given the long lead time associated with the energy transition.
The ASX200 slipped -0.2% yesterday on broad-based selling that saw over 65% of the main board close lower, a strong day by the Banking Sector staved off any major damage at the index level with the “Big Four” ending up an average of +1.3% - they called the overnight move in the US perfectly. After last week’s 300-point drive higher this week has started off quietly with stock moves being dominated by company news and broker up/downgrades with even the RBA minutes failing to catch investors’ attention.
There have been a number of major issues locally with the likes of SGR and unlisted Crown but our penchant for an inquiry in Australia is arguably the main headwind – just ask the banks and aged care operators. We find it hard to imagine that Australian casinos are the only premises used by organised crime to launder funds and we question if the optimum course of action is for large fines to vanish into the government’s coffers while directors who received large bonuses along the way simply walk away untarnished into their next role.
Last week saw the US yield curve remain around levels not seen for 40 years with the 2-Years closing 0.93% above the 10s, traders are still pricing further hikes by the Fed (just fewer) and a likely recession thereafter. However, we believe the economic pessimism has become stretched and the yield curve will move back towards parity over the next 6-12 months which suggests if we do see a recession it will be shallow in nature.
As most probably know by now June’s inflation data was extremely market-friendly coming in at +5.4%, well below the +5.6% median forecast of analysts, but importantly, the quarter-on-quarter run rate was 0.8% (i.e. annualised that’s 3.2%). As would be expected bond yields and the $A fell while the ASX200 rallied ~100 points following the news. The markets are now starting to agree with us, the odds of a hike in July have crashed while there’s an increasing possibility that Official Rates have peaked at 4.1%.
Xi Jinping’s pledge to revive growth is gaining traction even though the latest promises from the Politburo were very skinny on detail/specifics. The sceptics will point to the previous busts of optimism failing to follow through and stocks eventually slipping lower but we believe the tone is the key to the latest rhetoric plus the recognition of the challenges that lie ahead which combine to be bullish in our opinion.
Last week saw a new Lithium Futures contract start trading in China but it was a rocky start for the essential ingredient for current-style electric-vehicle batteries. Contracts for January’24 delivery plunged below 214,150 Yuan on Friday and while paring early losses they still closed -13% lower as the market flags lower prices during that time frame. These new contracts are aiming to provide more transparent lithium pricing while enabling both producers & users to hedge their risk moving forward.
The world’s major central banks meet this week with signs of an improving inflation picture permeating through from recent economic data, and while the ECB and Fed are still largely expected to raise rates by +0.25% it’s the accompanying rhetoric that’s likely to dictate how equities react i.e. are more hikes likely this year or can consumers look forward to an extended pause. With neither institution meeting until September, a hike feels likely this week after both Christine Lagarde & Jerome Powell have stated that inflation remains too high.
Cracks may be forming in the US housing market with total housing starts and permits pulling back in June below expectations - they declined 125K to 1434K. Also, mortgage applications for a home purchase fell 1.3% in the week ending July 14, while continuing to run at extremely low levels, reflecting the lack of activity in the existing home sales market. However, the NAHB’s housing market index ticked up further in the July survey, moving up 1 point to 56.
When we consider the unpopular Coal Sector we cannot ignore the cash it’s generating compared to current valuations e.g. WHC only has a market cap of $5.85bn yet it has $2.7bn net cash and still produced $435m free cash flow in the June quarter with lower coal prices, enabling it to maintain its buyback strategy and pickup other assets that come onto the market at good prices. In our opinion, the sector is simply too cheap given the long lead time associated with the energy transition.
The ASX200 slipped -0.2% yesterday on broad-based selling that saw over 65% of the main board close lower, a strong day by the Banking Sector staved off any major damage at the index level with the “Big Four” ending up an average of +1.3% - they called the overnight move in the US perfectly. After last week’s 300-point drive higher this week has started off quietly with stock moves being dominated by company news and broker up/downgrades with even the RBA minutes failing to catch investors’ attention.
There have been a number of major issues locally with the likes of SGR and unlisted Crown but our penchant for an inquiry in Australia is arguably the main headwind – just ask the banks and aged care operators. We find it hard to imagine that Australian casinos are the only premises used by organised crime to launder funds and we question if the optimum course of action is for large fines to vanish into the government’s coffers while directors who received large bonuses along the way simply walk away untarnished into their next role.
Last week saw the US yield curve remain around levels not seen for 40 years with the 2-Years closing 0.93% above the 10s, traders are still pricing further hikes by the Fed (just fewer) and a likely recession thereafter. However, we believe the economic pessimism has become stretched and the yield curve will move back towards parity over the next 6-12 months which suggests if we do see a recession it will be shallow in nature.
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