The RBA, Fed and ECB all raised interest rates earlier this month and the Bank of England (BOE) joined the party last week when they hiked rates by 0.25% taking their main bank rate from 4.25% to 4.5%. The BOE also added they no longer expect the UK economy to enter a recession this year, the overall accompanying rhetoric was mildly hawkish although the UK short-dated gilts only ended the week slightly higher.
This week was the famous Sohn Investment Conference in the US, the original event that is now also run in Australia under the Hearts & Minds banner. At Market Matters, we do our best to consume as much information as possible, and distil it down into actionable insight for our members, applying our own lens. This week’s event had some interesting nuggets as always and we’ll touch on a few in today’s note, but here’s what we gleaned from a high level.
The ASX200 edged marginally lower yesterday, although it was a choppy session with an upside bias throughout the day. National Australia Bank (NAB) & Bank of QLD (BOQ) traded ex-dividend weighing on the index that saw a very muted reaction from the Federal Budget that was released on Tuesday evening, as we said yesterday morning, budgets don’t typically have a major influence on markets despite the continual probing of what stocks will or won’t benefit, a topic discussed yesterday here.
In April, the $250bn Future Fund said it was now backing active fund managers switching out of the passive approach they had employed for the past 6 years. The changing economic backdrop now lends itself to active management, with Chief Executive Raphael Arndt declaring that “Conditions have changed. Economies are diverging and companies can better distinguish themselves in a more challenging environment”. We certainly agree at Market Matters with our portfolios enjoying the changing dynamics that are at play as tougher macro conditions are making it easier to distinguish the haves and have-nots.
There has been phenomenal hype in recent years around Lithium and other key commodities that underpin the global move towards Electric Vehicles (EVs), and we think there is a solid foundation to this sector, however, the shorter-term movements in the Lithium price for example, where a pullback of ~70% has recently played out, highlights a theme that MM often speaks of, around crowded trades creating risk.
The ASX200 reacted badly to the “surprise” RBA rate hike but after a rapid 250-point drop buyers returned albeit in very specific pockets of the market e.g. ESG and gold names. The markets experienced a rollercoaster ride of sentiment over the last 2-year yet the markets remained largely range bound between 6500 and 7600, in this case we believe it’s a case of if it’s not broken don’t fix it i.e. de-risk in the 7400-7600 area and increase market exposure/risk below 6750.
The ASX200 had felt tired over recent weeks but that’s now translated to outright vulnerability as buyers retreat on worsening economic/company news which is leading to increased weakness in the current low-volume environment. However, not all stocks/sectors are moving as one as we saw yesterday when the banks fell after NAB’s result while the resources enjoyed a strong session e.g. oil stocks rallied even after a more than 4% dip by crude oil.
The ASX200 has felt tired over recent weeks, as we’ve been highlighting, but that’s translated to outright vulnerability following a couple of weak sessions on Wall Street and the surprise rate hike by the RBA on Tuesday – recession fears are clearly gathering momentum. At MM we had adopted a more defensive stance into May but after seeing the local index fall over 100 points at one stage yesterday it poses the question of whether we should migrate even further down the risk curve.
The RBA surprised the vast majority of market participants at 2.30 pm yesterday as they hiked the Official Cash rate from 3.6% to 3.85%, a brutal outcome for homeowners languishing under the mounting pressures of rising mortgage repayments. Our preferred scenario was they would hold at 3.6% until Christmas, that opinion went up in smoke after just one pause in May. The decision by Philip Lowe et al could prove the correct move but it was extremely confusing considering the guidance in the lead-up to Tuesday – they paused in May to watch and consider future economic data, the CPI print came in better than expected and they hike, on this occasion, it’s not surprising that most people called it wrong.
The Australian Banking Sector has noticeably outperformed its US peers courtesy of the strength of the “Big Four” - the press so often likes to knock our banks but they’ve definitely helped most Australians super over the last few years. The sector is trading on an inexpensive valuation relative to its long-term average but most analysts believe the banks will be close to peak profit for their 1H23 results. At MM we are expecting strong results overall, driven mainly by timing differences on interest rate increases and NIM (net interest margin) tailwinds. Conversely, headwinds we must be aware of are higher funding costs, strong competition for deposits and loans, worse-than-expected bad debts, and ongoing tightening of bank regulation.
This week was the famous Sohn Investment Conference in the US, the original event that is now also run in Australia under the Hearts & Minds banner. At Market Matters, we do our best to consume as much information as possible, and distil it down into actionable insight for our members, applying our own lens. This week’s event had some interesting nuggets as always and we’ll touch on a few in today’s note, but here’s what we gleaned from a high level.
The ASX200 edged marginally lower yesterday, although it was a choppy session with an upside bias throughout the day. National Australia Bank (NAB) & Bank of QLD (BOQ) traded ex-dividend weighing on the index that saw a very muted reaction from the Federal Budget that was released on Tuesday evening, as we said yesterday morning, budgets don’t typically have a major influence on markets despite the continual probing of what stocks will or won’t benefit, a topic discussed yesterday here.
In April, the $250bn Future Fund said it was now backing active fund managers switching out of the passive approach they had employed for the past 6 years. The changing economic backdrop now lends itself to active management, with Chief Executive Raphael Arndt declaring that “Conditions have changed. Economies are diverging and companies can better distinguish themselves in a more challenging environment”. We certainly agree at Market Matters with our portfolios enjoying the changing dynamics that are at play as tougher macro conditions are making it easier to distinguish the haves and have-nots.
There has been phenomenal hype in recent years around Lithium and other key commodities that underpin the global move towards Electric Vehicles (EVs), and we think there is a solid foundation to this sector, however, the shorter-term movements in the Lithium price for example, where a pullback of ~70% has recently played out, highlights a theme that MM often speaks of, around crowded trades creating risk.
The ASX200 reacted badly to the “surprise” RBA rate hike but after a rapid 250-point drop buyers returned albeit in very specific pockets of the market e.g. ESG and gold names. The markets experienced a rollercoaster ride of sentiment over the last 2-year yet the markets remained largely range bound between 6500 and 7600, in this case we believe it’s a case of if it’s not broken don’t fix it i.e. de-risk in the 7400-7600 area and increase market exposure/risk below 6750.
The ASX200 had felt tired over recent weeks but that’s now translated to outright vulnerability as buyers retreat on worsening economic/company news which is leading to increased weakness in the current low-volume environment. However, not all stocks/sectors are moving as one as we saw yesterday when the banks fell after NAB’s result while the resources enjoyed a strong session e.g. oil stocks rallied even after a more than 4% dip by crude oil.
The ASX200 has felt tired over recent weeks, as we’ve been highlighting, but that’s translated to outright vulnerability following a couple of weak sessions on Wall Street and the surprise rate hike by the RBA on Tuesday – recession fears are clearly gathering momentum. At MM we had adopted a more defensive stance into May but after seeing the local index fall over 100 points at one stage yesterday it poses the question of whether we should migrate even further down the risk curve.
The RBA surprised the vast majority of market participants at 2.30 pm yesterday as they hiked the Official Cash rate from 3.6% to 3.85%, a brutal outcome for homeowners languishing under the mounting pressures of rising mortgage repayments. Our preferred scenario was they would hold at 3.6% until Christmas, that opinion went up in smoke after just one pause in May. The decision by Philip Lowe et al could prove the correct move but it was extremely confusing considering the guidance in the lead-up to Tuesday – they paused in May to watch and consider future economic data, the CPI print came in better than expected and they hike, on this occasion, it’s not surprising that most people called it wrong.
The Australian Banking Sector has noticeably outperformed its US peers courtesy of the strength of the “Big Four” - the press so often likes to knock our banks but they’ve definitely helped most Australians super over the last few years. The sector is trading on an inexpensive valuation relative to its long-term average but most analysts believe the banks will be close to peak profit for their 1H23 results. At MM we are expecting strong results overall, driven mainly by timing differences on interest rate increases and NIM (net interest margin) tailwinds. Conversely, headwinds we must be aware of are higher funding costs, strong competition for deposits and loans, worse-than-expected bad debts, and ongoing tightening of bank regulation.
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