Markets were up last week, led by the US which finished up 3% having been down 2% earlier in the week. Other markets were less volatile but were mostly also in positive territory for the week. After the falls of the previous 4 weeks, explanations for the rapid about turn in sentiment ranged from improving fundamentals with falling oil prices, to another short squeeze, to the market sniffing out the signs of Ukrainian military success that came to the fore during the weekend. It was probably a combination of all of those things, and the gains were broad-based across sectors and regions. At a stock level it was the large US tech stocks that led the charge along with many stocks that had been the most shorted(hence the short squeeze rationale). The overall impression is that so-called technicals, including fund flows, sentiment indicators and of course chartist resistance levels and such like have become enormously important, and there is a higher than usual level of discussion about these metrics. Most recession indicators are now suggesting that there is a roughly 50% chance of a recession, and subjectively one could probably apply a similar probability to inflation pressures receding swiftly over the next 12 months or proving persistently high. These are wide open odds about quite polar outcomes, and it is perhaps not surprising that pundits are sifting through the tea leaves to determine whether ‘we are there yet’ - that is to say: have we reached the cyclical low in stocks or is the latest rally just another ‘short squeeze’ on the way down. In fact, it appears that there are many in the market with a shorter-term horizon who actually don’t care too much about that question and just want to work out whether they can make money out of a trend that may or may not last a matter of weeks. In that sense it feels like a traders’ market, and those looking for more fundamental clues are likely to wait until those odds shift one way or the other.      

In Australia, on the other hand, it was another one of those weeks where we were reminded just how dependent on resources we are. The market was up a modest 1% or so, but that was entirely due to a 6% rise from the 20% of the market that is invested in the materials and energy sectors.

Our local miners were helped by a jump in iron ore prices (along with most industrial metals)while credit spreads eased considerably. Taken together, these could be a sign that ‘good news can sometimes just be good news’ without the associated fear of further rate hikes. In that sense, the market could be hoping that the US Federal Reserve’s tough rhetoric on inflation could eventually lead to less severe rate hikes. This week’s US CPI print will again provide a vital clue as to whether this latest bout of market optimism continues.

Government bond yields rose slightly in Europe and the US while retreating slightly in Australia, but under the surface short-term real rates (which have remained at extraordinarily low levels) continued to climb. This could be good news (bond markets are correctly forecasting a swift drop in inflation) or bad news (bond markets are forecasting a swift drop in inflation because there is a severe recession around the corner). Or it could be just because some large investors have been dumping a lot of Treasury Inflation Protected Securities into the market for a combination of those reasons, and it is a relatively small and illiquid market compared to fixed coupon treasuries.  So far there is little evidence in the economic or corporate profitability data to corroborate the severe recession scenario, but we will keep looking for clues.  

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