Another week, another odd rally

March 28, 2022
Markets were up again last week for the third week in a row which leaves the US, Japan, and Australia up over 5% and even Europe up a few percent since the invasion of Ukraine.

The week that was

Markets were up again last week for the third week in a row which leaves the US, Japan, and Australia up over 5% and even Europe up a few percent since the invasion of Ukraine. Much of the financial press has focused on the tight spot that the Fed is in which has only been made worse by the Ukraine war and now more severe lock downs in China, which for now remains the factory of the world. Accordingly, inflation gauges and interest rate expectations have been rising just as expectations of GDP growth have been progressively paired back and there is even talk of a more imminent recession (see our podcast with Andrew Hunt from last Friday). We haven’t seen many compelling explanations for the 10% rally in stocks since the 8th of March apart from an oversold market and stronger than expected liquidity trends (for now the Fed’s talk is more hawkish than its walk).  There might also been some ‘buying on the dip’ by retail investors witnessed in fund flows which have been strong for US equities and much less so for bond funds. AGG, the largest US bond ETF is now down over 10% and most of that has occurred this year. For Australian investors it has been a slower burn but investors in government bonds are also down now by 5% this year and even high-grade floating rate credit funds are down 1-2% this year although credit spreads have remained fairly tight in recent weeks all things considered.

The reasons for the strong performance of the Australian equity market are perhaps easier to explain with gains coming from the traditional commodity plays (energy, iron ore and gold) now being supplemented by even stronger performance from commodities that are particular beneficiaries of the transition to Net Zero. Last week this gathered pace with gains of 10-20% across the commodities spectrum and materials and energy stocks in aggregate added 2.5% to the overall return of almost 4%. Banks were also helpful but below the surface there was quite a lot of cross-sectional volatility and a quite a few mid-sized stocks also by down 10-20%. These included Aristocrat Leisure, Dominos, Magellan, Virgin Money, Super Retail, and Blackmores to name a few. These were for quite disparate reasons and perhaps the underlying tone was still of a jittery market supported by strong global thematics. Similarly, within the ‘buy now pay later’ sector, Block (the new owner of Afterpay) bounced by some 25% while Zip Co was down 40%.

Overseas the greatest contributions came from a curious mix of tech stocks (such as Tesla, Amazon, Microsoft, Nvidia, Google) and Energy stocks (Chevron, Exxon) along with defensive healthcare stocks. Otherwise, the rally in US stocks was quite broad based while European stocks were generally weak across the board.  The other prominent negative contribution came from Chinese tech stocks which gave up some of the gains off the preceding few weeks amid US regulatory concerns and more severe lockdowns in China (including an unprecedented lock down and testing blitz of Shanghai where 26 million people will be tested over 9 days.)

For now at least, markets are proving remarkably resilient and perhaps there is a hope that a slightly lower Personal Consumer Expenditures inflation measure to be published this week will herald some kind of a peak in short-term inflation pressures.

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