The Macro backdrop remains so important for equities

If the bond market is correct, two more rate hikes will take the cash rate to 4% for the first time in well over a decade.
James Gerrish

Market Matters

The RBA is expected to raise interest rates from 3.35% to 3.6% on Tuesday while in the process making it 10 consecutive hikes without any reprieve for those getting increasingly strapped for cash. If the bond market is correct we have 2 more on the menu this year taking the Official Cash Rate back above 4% for the first time in well over a decade.

  • We expect the RBA to hike rates to 3.6% tomorrow with the accompanying rhetoric (policy statement) likely to determine any stock market’s reaction.
  • Most pundits will be focusing on whether Philip Lowe maintains the following hawkish line – “further increases in interest rates will be needed over the months ahead”.

Interestingly over the last week, we’ve witnessed a run of weak economic data which would normally signal rates were topping out but the RBA is being as stubborn now towards hiking as it was 18 months ago in maintaining a stimulatory environment – as subscribers know we believe they’re set to get things wrong for a 2nd time in just 2-years!

  • Australian Inflation (CPI) for January came in below expectations at 7.4% v an expected 8%, GDP Growth for the 4th quarter was 0.5% v an expected 0.7% and Building Approvals slumped -13.5% to their lowest level since 2012.
  • Over the weekend China targeted this year’s economic growth at “around 5%” well under the 5.5% forecast by most economists – not a good read-through for our Resources Sector.

Supporting this view on the corporate level locally Healius (HLS) has just announced it is going to cut 500 full-time employees while in the US both Mark Zuckerburg & Elon Musk are calling 2023 “the year of efficiency” i.e. more layoffs & little hiring.

MM is leaning towards the RBA not pushing interest rates above 4%

Australian RBA Cash Rate

Over the last 4 months the likes of the banks & miners have helped the value sector significantly outperform growth with tech lagging as interest rates surged higher. However, we believe bonds are approaching a pivot and US tech is set for another leg higher to address some of the significant underperformance since October.

MM continues to believe growth stocks will catch up to value over the coming months

S&P500 Growth v Value Index

Equity Indices

The ASX200 edged marginally lower last week as broad-based selling was offset by strength in the resources i.e. it’s not often that the ASX can shrug off a bad week for the banks – we can see this relative performance reversing throughout the coming week, especially after Chinas modest 5% growth target.

  • We can see the local market trading between 7200 and 7400 over the coming weeks as the market weighs up the impact of central banks & China on future earnings.

MM is now neutral to bullish towards the ASX200 around 7300

ASX200 Index

ASX200 Index

On Friday US stocks roared back to life closing on their weekly highs led by the tech stocks as US yields edged lower. After absorbing so much pressure from the Fed, we believe when bond yields just pause on the upside stocks will enjoy a relief rally – at MM we believe there’s a growing sense that the Fed is approaching the end of its tightening cycle.

  • The NASDAQ 100 in our opinion remains on track to test the 13,500 area, or 8-10% higher.

MM remains mildly bullish on US equities over the coming months

US NASDAQ 100 Index

US NASDAQ 100 Index

European stocks remain extremely strong despite ongoing energy concerns, courtesy of the Russia-Ukraine conflict plus the much-discussed risks of a global recession through 2023/4. As we often say “don’t fight the tape” and at this stage, we believe a test of new highs ~4500 is almost inevitable.

  • The EURO STOXX 50 looks on track to follow the FTSE to all-time highs over the coming months.

MM remains mildly bullish on European indices


Interest Rates / Bond Yields

Australian short-term bond yields edged higher last week primarily due to overseas influence but the important local economic data was far weaker than expected and we believe tomorrow’s hike by the RBA will slow down an already weakening local economy.

  • We believe the risks for local bond yields are increasingly on the downside as the market positions itself for rate cuts into 2024.

  • We expect to see official rates reach ~4% before entering a period of stability for the following 12-18 months.

Equities continue to pay significant heed to bond yields and if we are correct on bonds it ties in with our sector outlook toward growth stocks over the coming weeks/months.

MM remains neutral toward local short-term bond yields over the coming weeks/months

Australian 3-Year Bond Yield

Last week, US short-dated bond yields kicked up above 4.9% for the 1st time since July 2007 as the 5-handle gets ever closer – importantly we don’t believe sustained levels above 5% are currently built into equity prices and while it’s not our preferred scenario it does bring with it a degree of risk as the worst case scenario is being discounted.

  • The US yield curve continues to flag that a recession is looming on the horizon something we believe stocks are largely ignoring.

We believe a technical recession in the US is very likely but their economy is proving very resilient which is a good sign as to the depth and length of such a period of economic weakness.

MM is neutral towards US bond yields after their recent rally

US 2-Year & 10-Year Bond Yield

US 2-Year & 10-Year Bond Yield


The iron ore price has rallied well from its late 2022 low on optimism that China’s emergence from its COVID-zero policy will increase steel demand pushing up the price of iron ore in the process. However, after advancing well over 60% we believe the short-term risks are now increasing on the downside following China’s latest disappointing growth forecasts/targets announced over the weekend.

  • If we see the bulk commodity pullback towards the $US110/MT area following the latest news from China we believe it will be a buying opportunity.

MM is now neutral to slightly bearish iron ore in the short term

Iron Ore ($US/MT)

Energy prices have been trending lower for over 6 months although it still doesn’t feel like it from a cost of living perspective, plus it’s been largely ignored by many of its related stocks such as Woodside Energy (WDS). Hence when crude can retrace some of its ~30% fall from highs posted last June we expect WDS for example to make new highs up toward the $40 area.

  • Brent crude continues to rotate within $US10 of $85/barrel, in our opinion, there’s no reason to fight this equilibrium until further notice.
  • However when we do see another test of the upper bound of this area, around $US95/barrel we anticipate likely ongoing strength in the local Energy Sector.

MM remains neutral towards crude oil over the coming weeks/months

Brent Crude April’23 ($US/barrel) v Woodside Energy (WDS)


The $US bounced over recent weeks smack into our flagged target zone, what comes next is far more like a coin toss as bond yields in our opinion look for a top i.e. the easy money for the traders on the upside is now in the rear-view mirror.

  • After reaching our initial 105 target area a period of consolidation for the Greenback is our preferred scenario.

MM is now neutral toward the $US

The $US Index

The Australian Dollar held its initial 67c support last week even after we saw several weak economic data prints suggesting the RBA might not be as aggressive as many feared this time last week.

  • We are net bullish on the $A in line with our medium/longer term bearish outlook towards the $US.
  • However we believe the Japanese Yen has the most upside potential against the $US as BOJ starts to reverse years of negative-zero policy on interest rates.

MM is mildly bullish toward the $A over the coming weeks/months 

Australian Dollar ($A)

Australian Dollar ($A)

Crypto Currencies

Bitcoin has now fallen for two consecutive weeks which is no great surprise after the speculative asset class rallied well over 50% from its late 2022 lows, at this stage we can see further weakness back towards 21,000 where the risk/reward might interest the traders but as we often say with cryptos, it’s not for us.

  • No major change, technically Bitcoin still looks capable of having found a low around the $US15,500 area which eventually has a potential target of the $US30,000 area.
  • However in the short term the next 5-7% looks set to be on the downside as rising bond yields continue to weigh on risk assets.

MM is neutral on Bitcoin around $US22,500

Bitcoin ($US)

Bitcoin ($US)

Chart of the Week

The VIX, or Fear Gauge as it’s regularly referred to, is not sitting at complacent levels but there’s not much fear in the market at present as it remains well below the psychological 20 area. Not an exciting chart in many ways but it tells us to be patient toward equities at present as we wait to see what comes next.

  • We often try and pre-empt big swings in stocks but currently several markets like the VIX are telling us that it’s time to let the market show us what comes next.

MM is neutral towards the VIX at present 

The VIX (volatility) Index

The VIX (volatility) Index

Make informed investment decisions

At Market Matters, we write a straight-talking, concise, twice daily note about our experiences, the stocks we like, the stocks we don’t, the themes that you should be across and the risks as we see them. Click here for your free trial.

The Match Out will be available each day after the market close. Follow my profile to be notified when the latest report is live.

Disclosure Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded. Disclaimer All figures contained from sources believed to be accurate. All prices stated are based on the last close price at the time of writing unless otherwise noted. Market Matters does not make any representation of warranty as to the accuracy of the figures or prices and disclaims any liability resulting from any inaccuracy. Reports and other documents published on this website and email (‘Reports’) are authored by Market Matters and the reports represent the views of Market Matters. The Market Matters Report is based on technical analysis of companies, commodities and the market in general. Technical analysis focuses on interpreting charts and other data to determine what the market sentiment about a particular financial product is, or will be. Unlike fundamental analysis, it does not involve a detailed review of the company’s financial position. The Reports contain general, as opposed to personal, advice. That means they are prepared for multiple distributions without consideration of your investment objectives, financial situation and needs (‘Personal Circumstances’). Accordingly, any advice given is not a recommendation that a particular course of action is suitable for you and the advice is therefore not to be acted on as investment advice. You must assess whether or not any advice is appropriate for your Personal Circumstances before making any investment decisions. You can either make this assessment yourself, or if you require a personal recommendation, you can seek the assistance of a financial advisor. Market Matters or its author(s) accepts no responsibility for any losses or damages resulting from decisions made from or because of information within this publication. Investing and trading in financial products are always risky, so you should do your own research before buying or selling a financial product. The Reports are published by Market Matters in good faith based on the facts known to it at the time of their preparation and do not purport to contain all relevant information with respect to the financial products to which they relate. Although the Reports are based on information obtained from sources believed to be reliable, Market Matters does not make any representation or warranty that they are accurate, complete or up to date and Market Matters accepts no obligation to correct or update the information or opinions in the Reports. Market Matters may publish content sourced from external content providers. If you rely on a Report, you do so at your own risk. Past performance is not an indication of future performance. Any projections are estimates only and may not be realised in the future. Except to the extent that liability under any law cannot be excluded, Market Matters disclaims liability for all loss or damage arising as a result of any opinion, advice, recommendation, representation or information expressly or impliedly published in or in relation to this report notwithstanding any error or omission including negligence.

1 stock mentioned

James Gerrish
Portfolio Manager
Market Matters

James is Portfolio Manager & Primary Author at Market Matters, a daily investment report with over 2500 subscribers that offers real market insight. He is also Senior Portfolio Manager within Shaw and Partners heading up a team that manages...

I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.


Please sign in to comment on this wire.

trending on livewire
Get the best of Livewire by signing up to our popular daily newsletter