- The US S&P 500 & S&P ASX/200 were lower by 7-8% in September.
- The RBA raised the benchmark borrowing rate by 0.25% less than the expected 0.5% rate hike.
- After stocks were sharply lower in September, October opened a window to a relief rally, and a more dovish RBA brought a breeze to Tuesday morning trading.
The major international indices were down markedly in September. They were pushed down by dour economic outlooks, record inflation, hawkish central banks, and decidedly questionable government policy out of the UK.
The losses in major international indices could not continue indefinitely. A linear extrapolation of the NASDAQ’s 10.5% devaluation in September wipes out 100% of the value within ten months.
The decision to offer a top-rate tax cut to the wealthy under difficult macroeconomic conditions and a negative balance of payments was met with incredulity by holders of long-term UK debt (Gilts).
The run on 30+ year Gilts left many pension fund managers and insurers scrambling for liquidity to pay margin calls on imploding future funding. If left unattended, the market action could have floored the UK economy for generations.
A last-minute intervention by the UK government and the Bank of England (BoE) rescued the Gilt market and has propped the British Pound (GBP). Liz Truss’s government has backtracked on the tax cut, and the financial markets have stabilised.
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The UK government’s surprise move did little to assuage nervous international investors in September who were already dealing with S&P 500 down 8% on the month, NASDAQ down 10% and the S&P ASX/200 by 7%.
A Change of Tack
With international assets suffering under the weight of inflation, and fiscal and monetary policy, central bankers may be taking a step back. The financial markets expected an aggressive 0.5% interest rate hike from the RBA and were pleasantly surprised by a more modest 0.25% rate hike.
Investors aware of the relative value on offer and a near future of stabilised interest rates have re-entered the market from Monday. The good feeling in the markets has carried over to Australian shores.
The Australian resource sector outdid the technology companies in gains on Monday morning. BHP Billiton ASX:BHP (BHP) up 3.3%, Woodside Energy Group ASX:WDS (WDS) higher by 3.5% than Monday.
The big banks were the biggest beneficiaries of the current market setup on Tuesday morning. Westpac ASX:WBC (WBC) is up 4% in morning trading, and ASX:ANZ (ANZ) is leading the way with a 4.8% gain.
A slowing in the interest rate cycle will help consumers who have been confronted with higher borrowing costs. Lower rates will boost mortgage applications and improve the retail outlook. A general settling of the nerves for investors is being reflected in Tuesday’s gains.
It is too early to say if this relief rally is a turning point in the stock market. The selling in September was likely overdone, and the new month gives bargain hunters a fresh perspective.
Oil is up by over 3 USD/ barrel this week after OPEC signalled production cuts. Signs that OPEC is less than pleased with the US winning a significant share of the oil export market. The balance of the global economy is still delicately poised, and a sharp rise in the oil price could undo the recent progress.
With the near-term outlook still uncertain for investors, Monday’s rally is a welcome relief and provided inflation is kept in check, better days lie ahead.