Economic reality is scarier than RBA fantasy

The local market delivered a negative day on low turnover and hopes for pickup were dashed again. We are now on the fifth consecutive week without a double digit billion-dollar turnover day. The market seems to be moving on global investor trades while local fund managers were missing in action again. You can’t blame the local fund managers. Global funds have jammed up markets in every region and local fundies are sitting back trying to work out when to hit the exit button. Bond yields are climbing again and that drove tech and health care down the most while telecom was the only green sector.

The US market is setting the global sentiment and it’s being driven by historic inflows, buybacks, margin lending and options. Funny how the US market sentiment flips from positive to negative after every option expiry period. Volatility indices are starting to bounce from multi-year lows in Australia and in the US. Expect markets to remain weak this weak!

We have been talking about Producer Price Index at historic high will deliver cost pressure to US industrials. The question for the US reporting season was all about the ability of the business to pass on the cost rise into price rise to the consumer. We had the first global conglomerate in Coca Cola start the proceeding with the first price rise in 3 years due to a rise in input costs. US Fed may claim inflation is transient. US corporates do not see it that way. Expect to hear more cost pressure comments in the outlook statements.

RBA minutes were released today and it was clear that the market thought very little of it. RBA claimed the job market was weak, rates won’t go up till 2024, inflation under control, monitoring property risks. The job market is weak and it’s being window-dressed for the election cycle. Rates will go up before 2024 or we are in another recession. Inflation is not under control. RBA has lost control of lending standards, financial sector regulation, economic stability, currency and the whole narrative of being in control. It is now sticking to hope as the only strategy. Inevitably their view of the economy does not sell well for an election cycle. So, their updates are going to make contradictory views to the government. Unlike RBA buying bonds for loss, markets are into making profits. Bank Bill Swap Rate over six months has already reached RBA’s cash rate of 10bps. It’s at 6-month high and climbing. Banks get 30-40% of their funding overseas and that cost is rising. The clock is ticking for banks to raise rates despite RBA comments. Economic reality is scarier than RBA fantasy!

Comments on US market last close

US markets were weak from the start and stayed there. Stats back US sentiment turning negative after option expiry due to massive leveraged option play in the markets. RUSSELL -1.36%, NASDAQ -0.98%, S&P -0.53% and DOW -0.36%. Bond yields back up to 1.61% while USD keeps sliding. Oil ticked higher on Libya supply issues. Copper ticked higher while Gold ticked lower. European markets were mainly red as well. Retail and Tech were leading the falls while Property and Health Care were the only green sectors. Just about every central bank is talking about digital currency. It’s more disruption for banks who clip the ticket on transactions. Tech results beats are not getting traction while industrials like Coca Cola are raising prices due to rising input costs. Inflation anyone? That’s right...central banks say it won’t last. European soccer breakaway group is the classic example of greed built on tax breaks and handouts...classic late-cycle capitalism going out of control.

Full SUNSET STRIP report with end of day market stats are on the attached link.

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