Local and global markets
The domestic market was up around 2% over February. Contrasted by global equities that were down between 3%-6% led by sharp falls in both European and US markets.
Bond markets were also down with domestic and global down about 1.0%-1.5%, there was no real respite for investors in either growth or defensive markets during February with only the commodity markets continuing to rally.
The commodity rally
The war in Eastern Europe shows no signs of abating. Combining with economic sanctions placed on Russia, commodity prices are remaining elevated. It is our expectation they will continue to increase throughout the course of this year. Particularly those commodities that are experiencing supply chain constraints with Russia and Ukraine being contributors around oil, wheat and other major commodities.
Fed poised to move imminently on rate rises
With inflation on a global scale running above central bank targets, this has left central banks poised to raise rates. The Federal Reserve Chair, Jerome Powell indicated that the US Fed would look to move rates higher in March. While we anticipated a 50-basis point move, we have moderated that to now be a 25-basis point rise, but we expect those rises to continue across the world throughout the year.
RBA won’t be as aggressive
Domestically, inflation is still in the upper to mid-range of the RBA’s target, so we do not anticipate the RBA to move as aggressively as other central banks may look to the second half of the year before considering moving rates higher. We have not seen wage growth at the same levels relative to other countries, and it remains one of the RBA’s key pillars in their decision-making process. With wage growth in Australia sitting at 2%-4%, which is half of what we are seeing in the U.S. Additionally, real wages in Australia are negative despite declining unemployment. While there is potential for a rate rise domestically, we believe the RBA will be more cautious.
Impact on bond markets
Central banks aggression is being consistent in the way that they are managing monetary policy going forward. This is another headwind for financial markets, particularly bond markets highlighted by the fact that despite challenges we have seen and the conflict in Europe, we have not seen a big shift downwards in bond yields. Central banks need to deal into that; therefore, bond markets are reactive, and we have seen either move sideways, or in most cases higher.
ASX Reporting Season
The domestic 1H22 reporting season remained solid despite occurring in a challenging market environment. Hit and misses on company EPS growth targets, these were split quite evenly across the across the ASX at around 38% each, with those companies reporting in-line with market estimates, laying around 24%. We view the growth in the earnings outlook as a potential to underpin higher moves in the domestic market, despite the obvious geopolitical risks. Another catalyst for Aust equities is that dividends are exponentially moving higher after a period where corporates replenished their balance sheets. We expect dividends to continue to move higher over the next 12 months, which should provide another positive backdrop for the domestic equity market.
Overall, February was an incredible month and it has continued into March. The immediate issue is clearly what we are seeing in Eastern Europe with the current conflict. There will be knock-on impact of sanctions from Western powers. We are positive they are going to be with us for several years and will not dissipate quickly, no matter how or when the conflict ends. This will have further implications for financial markets, more importantly it will have significant implications for commodity markets in the short to medium and that is something that we are focusing on, along with the overall knock-on impact to both equity and bond markets.
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