Charts and caffeine: An ASX gold rush

Hans Lee

Livewire Markets

Welcome to Charts and Caffeine - Livewire's pre-market open news and analysis wrap. We'll get you across the overnight session and share our best insights to get you better set for the investing day ahead.

MARKETS WRAP

  • S&P 500 - 3,667 (-3.25%)
  • NASDAQ - 11,128 (-4.02%) - lowest close since November 2020
  • CBOE VIX - 32.25 (+7.39%)

US stocks closed off their lows on the day as investors finally had more than a few minutes to digest what the Federal Reserve said yesterday. Tesla (NAS:TSLA) fell nearly 9% in the session alone. Travel stocks were particularly hard hit with cruise ship companies finishing the day down more than 10% in some cases. For defence, Walmart and Procter and Gamble's shares rose slightly.

  • FTSE 100 - 7,045 (-3.14%)
  • STOXX 600 - 402.88 (-2.47%)
  • USD INDEX - 103.83 (-1.26%)
  • US10YR - 3.182% (-21bp)
  • GOLD - US$1859/oz (+2.15%)

CENTRAL BANK WRAP

Two central bank meetings in Europe overnight led to two hikes. We'll deal with the bigger one first - the Bank of England. By a vote of 6-3, they hiked rates by 25 basis points for a fifth consecutive time (relatively unprecedented in their context). Incidentally, the three that voted against were looking for an even rarer 50 basis point hike. 

Then European investors got an even bigger surprise when the Swiss National Bank hiked rates by 50 basis points to get ahead of inflation. It's their biggest hike in 15 years and the move shocked every economist surveyed by Bloomberg. The Franc surged, bonds were dumped (again) and the plot thickens.

Stateside, the closely watched Philly Fed Manufacturing Index missed expectations and showed a three-point contraction last month. Initial jobless claims also came in slightly worse than expected at around 230,000.

Today, all eyes turn to the Bank of Japan. Can they deliver one more central bank shock to round out what has been a crazy week? We'll also get final Eurozone CPI later tonight but don't expect this to be anything less than boiling hot.

THE CHART(S)

Inflation expectations used to be a problem in the background but now it's well and truly centre stage. The ANZ-Roy Morgan weekly consumer confidence survey takes a look at consumer inflation expectations on a rolling basis and the pattern has been amazing to watch, as this chart shows. (Source: ANZ)

And now - here is the Westpac-MI monthly equivalent. (Thanks to Matthew Bunny at St George for his help.)
Then - the same chart but dated back 30 years and then, annotated by Shane Oliver at AMP Capital. His notes pointed out the rate hiking cycle has a correlation with strong consumer confidence every time since 1990.... except now. The moral of the story is that hiking rates is hard enough, but when the consumer isn't feeling good about the state of the economy before the hike, it makes the task twice as difficult. (Source: AMP Capital/Westpac)

THE QUOTE

Given stubbornly high U.S. inflation and the Federal Reserve’s apparent determination to bring it down, I now foresee a U.S. recession within the next 12 months.

David Bassanese, Betashares Chief Economist, wins the spot for our last quote of the week. In a note released following the Federal Reserve decision, he said he now thinks a US recession is coming within the next year (putting it near or on par with other research houses like Deutsche Bank.) 

The good news for bond investors is that he thinks we are likely close to the worst in terms of global and Australian bond market performance. The bad news is that equity market underperformance is probably going to continue, in David's view.

Mind you, not everyone shares David's view - least of all Chris Watling of Longview Economics who told me recently that recession is still not his base case. You can read up on all that here.

Hint: Chris' views involve this chart.

Learn more about this chart by accessing the story in the link above.a

STOCKS TO WATCH

So if the outlook is so bleak, is it time to return to the old, true, and tried hedge? Today, I thought I'd take a look at the fate of ASX gold stocks in the face of a global monetary recession.

Macquarie analysts note that the gold price continues to trade at a premium to rates despite surging yields and, perhaps most crucially, a rising US Dollar index. Normally, rising rates present a big problem for gold equities. But they have this alternative view:

Although present a significant headwind for precious metals, gold continues to outperform vs. rates, even as the DXY index has also made new cycle. In our view, this dynamic is likely to persist until actual real rates (i.e. Fed Funds less inflation) are moving sustainably higher.

The forecast for which they are making their base case is also pretty rosy - as shown by this chart. Note that I picked the Australian dollar forecast specifically - that's because they believe a soft local currency is presenting the right time to buy in.

With that in mind, Macquarie has four top picks in the space.

  • For the large caps - Northern Star (ASX:NST) and Silver Lake Resources (ASX:SLR)
  • For the small caps - Bellevue Gold (ASX:BGL) and De Grey Mining (ASX:DEG)
  • Note: Newcrest Mining (ASX:NCM) is also an outperform, just not a top pick. However, Evolution Mining (ASX:EVN) is assigned an underperform rating.

THE TWEET

A sign of the times...

BEST READS IN BUSINESS NEWS

China to set up centralised iron ore buyer to counter Australia’s dominance (FT): If this doesn't send shivers down WA's spine, then I don't know what will.

Fed Raises Rates by 0.75 Percentage Point, Largest Increase Since 1994 (WSJ): There is no economics correspondent I probably respect more (and rates traders rely on more) than Nick Timiraos at the Journal in Washington. This article quite literally shocked the world - and was the piece that got all the 75 basis point calls moving.

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Hans Lee
Content Editor
Livewire Markets

Hans writes the website's pre-market wrap "Charts and Caffeine", moderates "Signal or Noise", and leads Stats Incredible in the daily newsletter.

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