Fed brings the goods; ASX200 makes its own records

The Fed is no longer “patient”, nor are the pressures weighing on US inflation “transitory”.

Federal Reserve chair Jerome Powell Source: Bloomberg

The Fed re-fills the punch-bowl

The US Federal Reserve came to the proverbial table with the goods, last night: without explicitly stating so, the American central bank stands poised to cut interest rates, in the expected event of a US economic slow-down. The Fed is no longer “patient”, nor are the pressures weighing on US inflation “transitory”. Instead, as revealed by the bank’s “dot-plots”, interest rate cuts are expected in order to “sustain the (economic) expansion”. Needless to say, markets have reacted favourably to the Fed’s decision, and Fed Chairperson Powell’s subsequent press conference, on the hope that it can perform a famous “soft-landing” of the US economy.

What is the Fed on about?

As well, of course, the bullish-sentiment in financial markets can more appropriately be attributed to the greater prospect of cheap financial capital being injected into markets. The cynics are salivating over what came out of this Fed meeting: their argument for rate cuts seems tenuous and opaque. The Fed pointed to weaker inflation expectations, softer financial conditions, and deteriorating market sentiment as justification for its new bias. Demonstrably, none of these factors have changed dramatically in recent months, begging the questions: is the Fed tip-toeing around the true causes of its shift in tone? Or have they just lost their marbles?

Markets like what they hear

Whatever the answer to that (too) binary question of policy, markets don’t care. They have just received a cheap “Powell-Put”. The result today is a market pricing in 32-basis-points of cuts at the Fed’s next meeting in 6 weeks. That has sent the US 2 Year Treasury note yield down 11-points, and the USD Index down 0.5%. The S&P 500 has rallied (on below average activity) towards new all-time highs, industrial metals and oil have climbed higher, while gold prices are nearing $US1360 resistance. Unfortunately, the bullishness is yet to rub off on SPI Futures: they are projecting a flat open for the ASX.

ASX clocks its own milestones

Yesterday, the ASX 200 ran with North America and Europe’s lead, to clock new 11-year highs, in its own burst of bullishness. The stories that catalysed the bullish-sentiment formed a sweet balance for the ASX. On the one hand, ECB President Mario Draghi’s suggestion that his central bank stood prepared to inject fresh stimulus into the European economy elicited excitement at the prospect of looser global financial conditions; and on the other hand, US President Trump’s announcement of an official meeting between himself and Chinese President Xi Jinping at this month’s G20 bolstered hopes that the trade-war, and its stifling effect on global economic growth, may soon diminish.

Cyclicals and risk outperform

The sectors in the market that outperformed yesterday were those most sensitive to the emerging optimism surrounding global financial conditions and trade. Cyclical stocks rallied, with the energy sector leading the way, in line with a lift in oil prices, as did industrial stocks and materials stocks. Greater risk appetite manifested in a lift in the information-technology sector. And of course, the banks added the most to the ASX 200 in nominal. Though the leaders were clear, it was a bullish day for the ASX across the market: breadth was a solid 80 per cent, and trading volume was 16% above the 100-day average.

ASX200 technicals become stretched

Naturally, the question in these “record-breaking” scenarios is: how far can the ASX 200 go? A question as impossible to answer, as it is enjoyable to ask; there are some technical signs the market is running a little hot right now. This isn’t to portend an imminent retracement, but just that perhaps the market is looking stretched, in the short-term. The RSI is flashing overbought signals on the hourly, daily, weekly and monthly charts; and while Momentum is clearly skewed to the upside still, the ASX 200 is pushing some way from its 50-day moving-average – an indicator that has proven a reliable fulcrum for the market in the past.

Aussie stocks still looking attractive, fundamentally

Market fundamentals would somewhat attest to this, though the longer-term investment case remains a solid one. Valuations are looking tighter than what they’ve been for the last 12-months, however at a P/E ratio of 17.9, price-to-earnings is still below the ASX 200’s 5-and-10-year averages. Earnings growth is looking positive in the year ahead, with 12-month forward earnings suggesting earnings will expand by 7.3%. And crucially, the dividend yield across the ASX 200 is also looking increasingly attractive right now at 4.52% -- especially as capital-flow chases returns, in what is become a low-yield environment for cash and fixed income.


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