The markets are bouncing back but still risks remain

It’s worth noting that 69 per cent of Tuesday’s 0.6 per cent rise in the sharemarket came from a hefty increase in BHP after the miner’s results shot the lights out.

It’s worth noting that 69 per cent of Tuesday’s 0.6 per cent rise in the Australian sharemarket came from a hefty 4.1 per cent rise in BHP after its results shot the lights out, David Rogers writes. Picture: Lisa Maree Williams/Bloomberg

Analysts are sticking to their guns after strong gains in shares since June. That makes sense because the market has risen so strongly, yet some major risks remain.

The Australian market has bounced 10 per cent and the US market has recovered 18 per cent.

Moreover, while central bank pricing on interest rates has improved on the back of slightly lower than expected inflation data in the US and Australia, there remains a significant risk of a hard landing smashing corporate earnings as unacceptably high inflation drives a normalisation of monetary policy by central banks.

But to the extent that what people say reflects their positioning, folks sticking to their bearish views is a sign they’re still underweight and likely to buy in response to further gains, pushing the market higher. When they start to capitulate, it might be a sign of a top on a contrarian basis.

JPMorgan’s Cross-asset Strategy team – which has been right on the money in terms of predicting the rebound – said tail risks were “diminishing” post-US CPI as “markets see continued tailwinds from light positioning”, with Volatility Targeting and High Frequency fund exposures both around their 10th percentile and sentiment is “weak”. But BlackRock strategists – who haven’t been on the right side of this rebound – said “we don’t think the equity bounce is worth chasing”.

Interestingly, the S & P 500 has now retraced more than 50 per cent of its bear market since January, and chartists have noted that since World War II, the US shares benchmark has never gone on to make news lows for that bear market. And in another bullish sign, the number of S & P 500 components trading above their 50-day moving average has broadened to over 90 per cent.

Bad news on the Chinese and US economies was seen as good news for monetary policy again – and China did actually ease rates on Monday – but things are still nowhere bad enough for a Federal Reserve pivot toward rate cuts or even as a pause in aggressive rate hikes to control inflation.

Indeed that’s more or less been the message from multiple Fed officials in recent days.

“It still feels it has a bit more in it before a September sell-off,” said Bell Potter’s head of institutional sales and trading, Richard Coppleson, who was early to predict the recent rebound.

“Some are running around now saying we are in a new bull market – I think they are wrong – it’s still too early still and we are yet to see more economic damage to economies. So for me, we will have another leg down from here in September, but a final capitation by some shorts who just cannot stand the pain any longer are forced to cover. I still think raising a bit of cash in late August ahead of a correction in September is the safest way to play it.”

For the Australian market, which finally exited a year-long technical “correction” of its post-pandemic bull market – during which it fell from a record closing basis high of 7628.9 points last August to a 19-month low close of 6407 in June – the 200-day moving average at 7161 and nearby 61.8 per cent retracement of the correction is now in sight.

But it’s worth noting that 69 per cent of Tuesday’s 0.6 per cent rise in the Australian sharemarket came from a hefty 4.1 per cent rise in BHP after its results shot the lights out. Results from Goodman, James Hardie, Challenger, Seek and Sims disappointed. Meanwhile, NAB economist Tapas Strickland has looked at what the hot inflation reads seen in the NAB Business Survey may mean for CPI pressures in Australia, particularly this quarter. The July Business Survey reported purchase costs and final product prices at record highs, with purchase costs growing at a massive 5.4 per cent quarterly, and product prices at 2.7 per cent. Since early 2021, these cost indexes were near long-run averages of 1.0 and 0.5 per cent.

The bottom line is that trimmed mean CPI could print anywhere from 1.5-2.0 per cent on quarter, and the inflation pressure in July continues in August and September; it will be at the top end. Mr Strickland noted that offshore business surveys suggest inflation pressures are easing from high levels, aligning with some easing of global supply-chain disruptions, easing in freight rates, and oil prices falling back from their highs, and Australia tends to lag these trends by four to five months.

“Outside of these global influences, the labour market remains tight with the RBA likely to continue to hike rates into mildly restrictive territory,” he said.