A familiar point too: the previous market pullbacks were characterized by the evacuation of momentum chasers from the market, after US indices began to test “overbought” levels, somewhat like they are beginning to do now. The growth and earnings outlook then, as compared to what it is currently, was also much more favourable, giving credence to the notion that this market isn’t being supported by strong enough fundamentals.
3. Valuations are (relatively) favourable: Of course, it’s impossible to predict these things with any certainty; however, for US equity bulls, confidence can be taken from a few facts. The first, is that that valuations aren’t looking quite as stretched as they were in February 2018 and October 2018 when the last two corrections hit.
As of today’s close, the S&P500’s price-to-earnings ratio of 19:1 is markedly below the 24:1 and 21:1 that defined those two market-corrections. Furthermore, yields are still attracting flows into stocks over other asset classes, with the S&P500 still boasting a relatively attractive 1.89 per cent yield overall.
4. The core risk missing this time: As might be inferred from these statistics, the key risk absent now as compared to when the S&P500 hit its last record highs is the prospect of interest rate hikes from the US Federal Reserve. One might even suggest that the cause of and solution to Wall Street’s volatility has been the Fed.
Recall: the February 2018 market correction was sparked by a surprise increase in US wage growth that forced bond markets to price in the greater prospect of Fed rate hikes; and the October 2018 market correction came subsequent to Fed-Chair Jerome Powell’s now infamous “a long way from neutral (interest rates)” comments.
5. The Fed unlikely to remove the punchbowl: It was the unwinding, if not flat-out reversal of the Fed’s policy bias, that inspired the most recent ascent to all time highs for the S&P500. And as opposed to the corrections of 2018, the chances that the Fed will “pull away the punch bowl” as this party is getting started is quite low.
Instead, the muted inflation outlook, combined with economic and policy related realities, has led market participants to bet that the next move in US interest rates will be a cut. Hence, financial conditions are likely to be supportive of risks assets, with the key now ongoing economic, and corporate earnings growth.
6. ASX to join the party? In light of Wall Street’s quick-sip of euphoria, SPI Futures are suggesting that the ASX200 will back up yesterday’s strong showing and add around 20 points at today’s open.
Though missing true volume through the market, the ASX demonstrated signs of robustness during Tuesday’s session, with breadth solid at 76 per cent, every sector in the green, and the major energy, mining and financials stocks all adding substantially to the index. It was enough to push the ASX200 into and beyond the 6300 level, and clock highs not witnessed for Australian stocks since September 2018.
7. Event risk centres on Australia today: A few supportive inter-market variables have underwritten the strength of Australian stocks this week: a tumble in the Australian Dollar, and Australian Government Bond yields. Arguably, it’s in anticipation for today’s headline event-risk that this has been so: quarterly local CPI figures.
Though not as significant as labour market data to the RBA, the inflation numbers will offer some insight into the RBA’s potential next move. Australian inflation, as it has been globally, has been stubbornly low. A matching or missing of today’s 1.5 per cent estimate for CPI only adds weight to the idea the RBA’s next move will be a cut.
8. Market watch:
SPI futures up 22 points to 6331 at 2.49am AEDT
- AUD -0.6% to 70.92 US cents at 3.50am AEDT
- On Wall St at 1.44pm: Dow +0.6% S&P 500 +0.9% Nasdaq +1.2%
- In New York, BHP -0.6% Rio +0.2% Atlassian +1.8%
- In Europe: Stoxx 50 +0.1% FTSE +0.8% DAX +0.1% CAC +0.2%
- Spot gold -0.2% to $US1272.26 an ounce
- Brent crude +0.4% to $US74.34 a barrel
- US oil +1.1% to $US66.25 a barrel
- Iron ore -0.05% to $US94.53 a tonne
- Dalian iron ore -0.6% to 625 yuan
- LME aluminium -0.1% to $US1866 a tonne
- LME copper -1.1% to $US6407 a tonne
- 2-year yield: US 2.37% Australia 1.46%
- 5-year yield: US 2.36% Australia 1.51%
- 10-year yield: US 2.57% Australia 1.89% Germany 0.04%
- US-Australia 10-year yield gap: 48 basis points
This column was produced in commercial partnership
between The Sydney Morning Herald, The Age and IG