Market Matters Macro: Why we are bullish

James Gerrish

Market Matters

The end of last week painted a picture to encourage the bulls although as we often say most statistics can be skewed to tell any specific tale:

  • US 2-years and 10-year bond yields both posted fresh 2022 highs last week but they fell on Friday as traders reduced bets that the Fed would hike by 0.75% in December after aggressive moves in October and November.
  • The glimmer of optimism towards rates sent the Dow up 748-points on Friday taking US indices to their best week since June e.g. S&P500 +4.7% and the tech-based NASDAQ +5.2%.

The key take-out in our opinion is that when things aren’t “too bad” stocks demonstrate their ability to rally strongly, primarily we feel because the market is significantly underweight stocks. However, it’s not all a bed of roses as stocks that miss earnings expectations are still being absolutely crucified:

  • Last week two stocks held by MM in our Flagship Growth Portfolio were on the receiving end Sandfire Resources (ASX: SFR) -10.5% and Megaport (ASX: MP1) -24.9%.
  • Similarly, on Friday night in the US, we saw Snap Inc (SNAP US) smacked -28% after missing on quarterly revenue, even while the NASDAQ surged +2.4%.

We’ve been saying over the last few weeks that MM believed that stocks “were looking for a low” as bond yields’ upside momentum waned, with the Fed’s next policy decision less than 2-weeks away we now actually feel that the low for 2022 is already behind us following last weeks strong rally.

MM believes US bond yields are poised for a pullback

US 2-Year Yields (White) Versus Nasdaq (Orange)

Equity Indices

The ASX200 is set to open up around +1.4% this morning, as it again threatens to break clear of the psychological 6800 area. If we follow Friday’s stellar performance on Wall Street the influential resources, consumer discretionary, and financials are likely to lead the gains while selling should be conspicuous by its absence across the board.

  • No change, we still believe equities are likely to be trading in the 6400-7200 range over the next 6 months although we do feel potential surprises are more likely to be on the upside.

MM remains bullish on the ASX200 into Christmas

ASX 200 Daily Chart

From a risk/reward perspective we now believe US stocks have bottomed and will rally into Christmas and potentially 2023 – this view is primarily based on how short/underweight traders and investors are positioned. Last week’s rally was the best since June by the US equities, even while bond yields posted fresh highs, suggesting to us the selling has simply exhausted itself leaving room for a pop on the upside.

  • After the pullback since mid-August MM remains bullish on US stocks now believing they’ve probably bottomed for 2022.

MM remains bullish on US equities into Christmas

S&P 500 Daily Chart
S&P 500 Daily Chart

The UK FTSE is shrugging off bad news with ex-Prime Minister Liz Truss becoming the shortest-serving PM in British history, not a statistic to crow about. Technically we can see a break by the FTSE of its post-Covid highs over the coming months which illustrates its relative strength compared to the ASX and S&P500 which are languishing well below their equivalent level.

  • Similar to local and US equities we believe even while the country’s government is in disarray the stock market looks solid.

MM remains bullish on the UK FTSE into Christmas

UK FTSE 100 Weekly Chart

Interest Rates / Bond Yields

Australian short-dated bond yields continue to feel comfortable around the 3.75% area but upside momentum is slowing as economists try to pick peak interest rates, at least for this leg of the cycle. Obviously picking the moves and logic of the RBA is fraught with danger but we believe they are approaching a period of consolidation as it feels like Philip Lowe et al don’t want to hike too much further as many Australians look destined to experience a tough 2023 courtesy of a large number of fixed home loans rolling over to variable.

  • The Australian 3-years have followed our road map through most of 2022, over the coming months we are looking for them to drift lower but there aren’t any signs just yet.

MM is neutral to bearish Australian 3-year bond yields into Christmas

Australian 3 year Bond Yields Weekly Chart

US bond yields continue to march ever higher although the short-dated 2-years did ultimately close marginally lower last week, with the next Fed policy statement due on the 2nd of November it feels unlikely that we will see any change in the trend without some official commentary from Jerome Powell et al.

  • We are looking for at least some consolidation by US bonds but again there is no sign of a reversal at this stage.

MM is neutral US bond yields

US 10 Year Bond Yields Weekly Chart


The copper price continues to illustrate the market’s lack of clarity on where global growth is headed through 2023 as we look set to enter our 5th month of trading around the $US350 area. The bulls would argue that it’s been extremely resilient in the face of increasing recession fears whereas the bears will counter with the industrial metal cant even bounce after plunging ~35%.

  • We remain mildly bullish on copper and very keen buyers of another test of the $US300 area.

MM is neutral to mildly bullish copper 

Copper Dec’22 Futures ($US/25,000lbs) Daily Chart

The CRB Index has more than tripled from is post-Covid low helping to fuel surging inflation but over recent months the rally has stalled and prices have slipped over 15% implying that we may have reached peak inflation for at least the foreseeable future.

NB The index is made up of 19 commodities: aluminium, cocoa, coffee, copper, corn, cotton, crude oil, gold, heating oil, Lean Hogs, live cattle, natural gas, nickel, orange juice, silver, soybeans, sugar, unleaded gas, and wheat.

  • We can see the CRB index rotating in the 250-350 area through 2023.

MM is neutral on the CRB Index

Refinitiv / Core Commodity CRB Index


The $US feels like its rallying ever higher because of the headlines it grabs on some cross rates but through October the Greenback has failed to break its September high although it’s still only 3% below its multi-year peak. With the likes of the BOJ starting to flex their muscles we may have already seen the end of the $US’s appreciation for at least a few months.

  • We are looking for a period of consolidation by the $US which may have already commenced.

MM is neutral on the $US

US Dollar Weekly Chart

The British Pound was smashed to fresh all-time lows in late September following Liz Truss’ ill-fated tax package but it’s starting to feel like the capitulation heralded the end to its 27% decline since mid-2021. The risk/reward is starting to look interesting in tests below 1.10 although the upside feels likely to be capped by the 1.20 area i.e. choppy range trading following the market re-rating of the Pound.

  • The Pound looks to have entered a period of “buy the dips and sell the rallies” with an upside bias.

MM is now neutral to bullish the Pound under 1.15


Chart of the Week

The S&P500 has now corrected 28% from its January high and we simply believe enough is enough at least for this leg of the decline, this view is supported by investors’ sentiment hitting another bearish extreme, recently the AAII bearish consensus reached nearly 60%, a level not seen since the sheer panic of the GFC in 2008.

  • We are looking for the S&P500 to challenge its August highs after reaching extreme bearish levels.

MM is bullish “risk” at current levels

S&P500 Index v AAII Bearish Consensus

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James Gerrish
Portfolio Manager
Market Matters

James is Portfolio Manager & Primary Author at Market Matters, a daily investment report with over 2500 subscribers that offers real market insight. He is also Senior Portfolio Manager within Shaw and Partners heading up a team that manages...

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