Markets have calmed down a great deal in the last two weeks and more recently have mounted a bit of a recovery, with US tech and emerging markets leading the way. Most indices are now a little above where they were before the mini-banking crisis started in the US with the demise of Silicon Valley Bank. The Nasdaq was actually up by almost 10% in March along with gold, and the next best was the wider US market and emerging markets which were up by a few percent during the month. The resource heavy Australian and UK indices were the worst performers. Worries about the US banking sector have now receded (given the Fed and US Treasury’s implicit backing) but the common thread in all of this is the hangover from the turmoil in the banking sector, namely tighter credit conditions and weaker prospects for global economic growth. That has recently been corroborated by weaker US industrial data.

So, what does the market think US tech stocks, gold and emerging markets all have in common? The ‘average’ consumer is still cashed up and labour markets, again on average, remain right. For now this nets off against the weaker industrial numbers, and so inflation (especially for US domestic services) is declining, but at a slow pace, and expectations for the next year or so remain elevated. Meanwhile, there is growing evidence of an economic slowdown that could turn into a hard recession and possibly a corporate credit crunch later this year. This has convinced markets that rates have almost peaked and will decline from some point later this year (Fed Chair Jerome Powell is still at pains to disagree with this thesis but he arguably he has an incentive to talk tougher than he thinks at this juncture). Lower expected nominal rates and sticky prices add up to lower real borrowing rates (in theory), and lower discount rates that analysts use to value cash flows. Tech companies are expected to have a long tail of strong cash flows far into the future, so they benefit disproportionately. Banks are understandably shoring up their balance sheets, and so, overall, credit conditions are tighter, meaning that the price of borrowing is perhaps heading downwards, but the availability of loans is also declining, especially if the borrower has an economically sensitive business. That is why other interest rate sensitive sectors, like real estate, have been left behind in the latest rallies. The gold price is also highly correlated to the real cost of money (the opportunity cost of holding it gets less as real rates go lower) and it can also be seen as a safe haven in times of crisis (when real rates tend to fall). The performance of emerging markets is somewhat related, in that this drop in real rates is one of the factors contributing to a weaker US Dollar, which its seen to benefit most emerging markets. One of the major drivers in Asia was more idiosyncratic and related to Chinese tech stocks. Last week Alibaba announced a 5-way split of its business in a move that is seen by the market as assuaging the Chinese government’s fears of tech companies that are too influential. Alibaba was up 16% on the news, and is up more than 20% for the month (along with much of the China tech sector).

At times in the last three months, it has felt like the nexus between rates and market performance might be breaking down on a day to day basis, but when you zoom out rates are still the main game in town. In January inflation and hence rate expectations ebbed, and markets were up. In February they faltered, as attention turned to persistent US services inflation. In March markets initially fell but have sprung back to life as the banking issues subsided and the prospect of lower rates has trumped even the very likely hangover of a tighter credit cycle and a deeper recession.

Meanwhile Australia has also enjoyed a bounce in the last few weeks, benefitting from some goldilocks retail sales data (robust but not too inflationary) and then a monthly inflation number for February which seemed to strike the same tone. Well, that’s the market narrative anyway. In reality, the market was up mainly because iron ore prices recovered a bit and the miners were up by a bit more, accounting for pretty much all of the rise in the local market since mid-March. Over the month and quarter, the Australian market has traded in a range (along with Iron Ore price and banking sector) and has been more or less flat over both periods, lagging most other markets. Most of the other smaller sectors have been in positive territory so far this year, underscoring the point that a bet on the ASX remains a bet on iron ore and Australian house prices unless you make a conscious decision to do something different.

‍