Weekly financial market update - 20th of March 2023

The S&P/ASX 200 was -2.1%, in a week where headlines were dominated by turmoil within global banking markets. The collapse of Silicon Valley Bank and Signature Bank triggered concerns of global contagion, only partially eased by regulator assurances, whilst the fire sale of Credit Suisse to UBS at CHF3b and a US$30b emergency injection into First Republic Bank did little to calm investors.

Bond yields were sharply lower across the curve, with a significant drop at the shorter end highlighting an expectation that central banks will tread more carefully in further raising rates amidst this uncertainty. This is despite continued strength in recent economic data suggesting that more work is required to moderate inflation. Further rate increases by the RBA have now been priced out of the market, whilst the US market is pricing a 62% probability of a 25 b.p. rise by the US Federal Reserve this week  (38% for nil change) - this compares to pricing a 40% probability of a 50 b.p. rise only a week ago (and 0% for nil change). As further evidence of how quickly expectations have shifted, the implied US Fed Funds rate for December 2023 is more than 100 b.p. lower than was being priced just 1 week ago, with rate cuts now again assumed from June 2023.

The S&P 500 in the US was -1.1% on Friday, with futures markets implying a -1.4% lower start to our week

KEY MARKET DRIVERS

• US CPI data took a back seat to bank sector turmoil, driving significant equity and bond market volatility. The collapse of Silicon Valley Bank and Signature Bank triggered concerns of global contagion, only partially eased by regulator assurances. Liquidity issues facing Credit Suisse have ultimately culminated in a fire-sale to UBS for CHF3b, whilst First Republic Bank received a US$30b emergency injection of funds. The S&P Banking Index was -11.2% for the week, whilst S&P 500 Regional Banks Index declined -22.7%.
• The S&P/ASX 200 was -2.1% for the week, its sixth consecutive weekly decline. The turmoil in the global banking sector left markets with a heightened sense of unease about the potential for contagion and a hard landing. Our local banks have a significantly lower risk profile with excess liquidity buffers, more stable funding structures, hedging in place, and healthy capital positions. Sector -1.5% for the week, CBA +1.0%.
• A volatile week in US bonds with the curve flattening and yields closing sharply lower. US 2-year bond yields declined 77 b.p. against a -31 b.p. decline in 10 Year yields. In Australia, yields were also priced lower. Markets dialled back RBA tightening expectations with an April pause and no further rate hikes are now being priced in. Some economists maintained their view of a 25 bp rate hike in April and/or May, citing the strength of the February jobs data and the resilience of Australia's financial system.
• Whilst strong recent US data saw a repricing upward of nearer-term US rate expectations, turmoil in financial markets has seen a sharp turnaround. Market pricing now suggests a 62% probability of a 25 b.p. rise by the US Federal Reserve this week (38% for nil change), compared to a 40% probability of a 50 b.p. rise last week. Multiple US rate cuts are once again priced in from June. The implied cash rate in December 2023 is more than 100 b.p. lower than it was just one week ago, highlighting the significant shift in expectations.

MACRO / ECONOMIC NEWSFLOW

• Overall consumer sentiment was unchanged in March at 78.5pts, after a sharp fall in February. Rising interest rates and inflation continue to weigh heavily on sentiment as intentions to buy a major household item fell to a record low. The survey showed a deterioration in expectations for family finances and the economy over the coming year while confidence in the jobs outlook is also beginning to soften.
• Surveyed business conditions eased -1pt to +17 in February but remain well above the long-run average of 6pts. Business confidence eased -10pts to -4. Measures of price pressures were mixed. Labour costs rose, whilst purchase costs and final product prices remained largely unchanged.
• Local employment rose +64.6k in February, higher than the consensus of +50k. The rebound was concentrated in full-time employment (+74.9k), with part-time employment -10.3k. Consistent with the strong rebound in employment, the unemployment rate fell 13bp to 3.54% (consensus 3.6%), back around Dec-22 levels.
• The employment data confirmed the RBA's view that the weakness in January's labour force report was largely due to distortions from unusual seasonality, with strong underlying momentum in the labour market.
• Headline US February CPI +0.4% m-o-m was in line with consensus (January's 0.5%). Headline annualised CPI was 6.0%, the lowest since September 2021. Food prices continued to increase while energy prices declined with help from a sharp drop in natural gas prices. Core CPI (ex-food and energy) of 0.5% m-o-m was a bit higher than the consensus of 0.4% (January also 0.4%). Core prices were up 5.5% year on year.
• The ECB delivered on its well-flagged 50 b.p. hike to 3.0%, undeterred by recent market ructions. Although indicating that there is more work to do (headline February CPI 8.5%), forward guidance was scratched.

MAJOR SHARE PRICE MOVES - S&P/ASX 200

• Ramelius Resources +20.9% Gold stocks are up strongly, with the USD gold price +5.8% as the recent global bank collapses and unwinding of US rate expectations aided sentiment
• Capricorn Metals +17.4% As per above, more macro than micro. In the prior week, CMM reported profit before tax +13% on p.c.p. and confirmed guidance of 115-125k oz in FY23
• Silver Lake Resources +10.2% No company news. The stock/sector had corrected lower in Feb after hawkish commentary from the US Fed. The recent unwinding of rate hike forecasts has aided
• Perpetual Limited -12.4% Stock -21% since its 23 Feb result. Underlying profit in line with guidance but H.1 cost growth of 8%, no Pendal synergies upgrade, payout guidance moderated
• Lake Resources -12.6% Continues to track lower. Now -80% from Apr-22 highs. First production is not due until 2024, and concerns re project delivery have seen solid short interest
• Computershare -13.2% CPU earnings strongly benefit from rising rates, so recent unwinding of terminal rate expectations seems to have driven profit taking from momentum investors guidance was scratched.

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