April had a quiet start and moved sideways for the first two weeks. With an election underway, key institutions (read: RBA) usually prefer to hold fire until ballots are counted. The Russia-Ukraine conflict has developed into a full-blown war of attrition, further dragging down sentiment. Decent numbers from the US earnings season managed to push our market higher briefly, but mixed results from the likes of Amazon and Netflix kept expectations in check. The XJO lost 193 points – or just shy of 1% – for the month but managed to finish up in decent nick compared to other major markets.
Macroeconomic figures released at the end of the month brought everything to a head: the biggest impact on valuations was the inflation rate. Inflation came in 0.5% higher than official estimates and sent equities into a sell- off. Underlying inflation (the Reserve Bank’s preferred measure) is now sitting at 3.7%, smashing the target band of 2-3%.
The next point of call is interest rates. The New Zealand and Canadian reserve banks each put through a 50-basis point rise, while Governor Lowe seemed content to play the patience game; the most recent inflation reading may force his hand. Market expectations for a rake hike is including a potential increase in May (which has now happened), meaning a hike in June is all but certain. Openmarket’s investors responded by buying heavily into the banks, who will take the opportunity to widen margins once a rate increase in confirmed. Those hoping growth stocks had finally found a bottom will have to keep waiting. The ASX most-shorted list is littered with tech stocks who have found themselves even more heavily shorted than they were at the beginning of the month.
The Information Technology Index (XIJ.ASX) and All Technology Index (XTX.ASX) finished 10% and 8% lower respectively. A correlation has been developing between technology indices and battery minerals, as first discussed in our Trading Edge live webinar series.
China’s COVID zero policy is putting downward pressure on the resources sector with the ASX 200 Resources Index (XIR.ASX) finishing up 4.8% lower. With 23 cities in full or partial lockdown, 13% of China’s GDP is at risk. This led to an understandable market expectation of a contraction in manufacturing output, which will have a flow-on effect on the Australian economy. Currently the Chinese government appears willing to bear the economic impact of having over 165 million people in lockdown.
Consequently, ETF Securities’ Battery Tech & Lithium ETF (ACDC.ASX – yes, that is the ticker!) finished 4.8% lower with a little less energy than it was showing two weeks into April.
Uncertainty still plagues the market, however some of that uncertainty will begin to unwind in the coming months. We are scheduled to or have just entered the first rising interest rate market in almost fifteen years, and we may finally get some answers as to what is happening to the market – this time around at least. Investors should remain wary of lockdowns in China and the Russia-Ukraine conflict (as well as its impact on the rest of Europe) as they will have direct impacts on primarily commodity markets, but also overall sentiment.
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