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Additional points below regarding where our view is on the markets.
Medium to Long Term and Economy View
Bond yields continue to rotate from growth into value stocks. This selloff looks to be limited to a reshuffling of equities, rather than liquidity flowing to gold or bonds.
At this point, bond yields are getting too high and the RBA has responded by increasing their bond buying from $2b a month to $4 a month, to stabilise the yields.
The RBA has also indicated that they will not raise rates for another 3 years, however, the Real Estate market is getting overheated so we may see them bring that forward.
With the RBA’s actions, we could see the rates stabilise at this level.
In terms of rates in the US, the Federal Reserve decided not to act yet, as they feel the sell off in bonds has been orderly.
We could see continued downward pressure on equities in the US which may prompt the Federal Reserve to take action in the near future.
I am currently not worried about inflation. For inflation to become a problem, we will need to see a rise in wage growth and business investment.
Before COVID, we had record low interest rates at almost 0% and we still did not get any growth in those two areas.
Both of these has been anaemic pre-COVID and will likely remain that way post-COVID.
In addition, increased business investment will require international travel to open again. This is something that won’t likely happen this year.
Even though inflation is a concern, a large factor in the rise in bond yields could be attributed to expected economic expansion post-COVID.
Jobkeeper and Government Subsidies
The government has announced they are looking into providing additional support for the hardest hit industries such as tourism after Jobkeeper ends.
The end of Jobkeeper is now much less of a concern due to this announcement.
The government has done a very stellar job in providing support and controlling the virus, Australia has been a world leader in this regard.
Rising Bond Yields
Unlike the US, the Australian stock market is dominated by value stocks rather than growth stocks such as Tech.
High growth stocks have been sold off during the rate rise because NPV and DCF forecasts are very sensitive to rate rises.
The US market rallied over 70% in 11 months, if the ASX performed the same we would be currently sitting at around 8,300 points, or 20% over higher.
Most of this rally can be attributed to the rally in tech stocks, which is a fairly crowded trade.
If the tech thematic continues to deflate, we could see the ASX outperform the US market in the short-term as our overall market is less sensitive to rates.
The market is currently rangebound between 6850 and 6550, with the 6750 level acting as a pivot point.
It is likely that we will revisit the 6550 support level before we try and retest the 6950 resistance level.
Even though the market is being sold off, it has been done in an orderly fashion in Australia.
Volatility remains relatively low at 15 points, with volatility falling in the past two days whilst the market continues to sell off.
Volatility is generally negatively correlated to the market. The change into a positive correlation (fall in volatility along with a fall in the market) indicates that market participants are not worried or hedging the sell off.
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This is general advice only. MF & Co Asset Management has not considered your personal financial needs, objectives or current situation. This information is not an offer, solicitation, or a recommendation for any financial product unless expressly stated. You should seek professional investment advice before making any investment decision.