Seven ASX stocks to outperform the bear market rally: Macquarie

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 - 3,655 (-1.08%)
• NASDAQ - 11,254 (-0.51%)
• CBOE VIX - 32.26
• USD INDEX - 114.09
• US 10YR - 3.926%
• FTSE 100 - 7,021 (+0.03%)
• STOXX 600 - 388.74 (-0.43%)
• UK 10YR - 4.285%
• GOLD - US$1622/oz
• WTI CRUDE - US$76.40/bbl

WHAT'S UP WITH THE POUND?

Before we do anything, we need to talk about the British Pound. The currency of the United Kingdom broke through multi-decade lows before reaching record lows in the Asian session yesterday. In the last year, it's lost 30 pence of its value against the US Dollar. But rather than me spit stats out at you, I'm just going to mic drop this chart:

Why the sudden drop? It's all been fuelled by new UK Chancellor (read: Treasurer) Kwasi Kwarteng's mini-Budget which turned out to be anything but a placeholder. Kwarteng, under new boss Liz Truss, instituted a whole suite of tax cuts to make the cost of living crisis easier in the UK. The only problem? Not only did people not believe him, but traders also didn't know if the UK is going to be able to pay for it.

There is now a slew of bets on whether the Pound will hit parity or worse. And some speculate the Bank of England will have to hold an unprecedented emergency meeting to hike interest rates to cool the Pound's collapse. The Pound has not been this bad since the abolishment of the Bretton Woods system in 1971, as this chart from Bloomberg's John Authers shows:

Watch this space. I know currencies aren't always a top topic on this website, but this time, it may matter more than you think.  

THE CALENDAR

A quiet one tonight, but only interesting in the sense that Federal Reserve Chair Jerome Powell is speaking at a forum on digital currencies. Why fight inflation when you can create an e-US Dollar, right?

STOCKS TO WATCH

It's all about bear market rallies today, with Macquarie believing there are more coming. Specifically, analysts believe that another new low will be breached before the next bear market rally. As of the ASX 200 close yesterday, that level is likely to be the one recorded on June 20th (around the 6,433 level). I won't get into technical analysis, deferring that to my learned colleague Chris Conway (who writes this report on Fridays.)

But bear market rallies are something we have all become accustomed to in the last year or so. In the US, the average bear market rally return for the Dow Jones Industrial Average is 15.6%, with returns rising as the bear market progresses. The analysts' research suggests rallies tend to start when prices are 20% or more below the long-term trend. BMRs end at or near the long-term trend or key retracements (sometimes 50% above the relative lows.)

So what does that mean for Australia? Here, P/Es have been falling but are still not near recession levels. But the ASX is also an outlier in that there have been fewer EPS revisions (negative ones) here than in the US. Nonetheless, analysts have worked out seven stocks that have outperformed during recent declines - and these are the ones they back to outperform the most during the fall-to-bear market rally stage.

• Mineral Resources (ASX: MIN)
• Computershare (ASX: CPU)
• Treasury Wine Estates (ASX: TWE)
• Qantas (ASX: QAN)
• CSL (ASX: CSL)
• QBE Insurance (ASX: QBE)
• Santos (ASX: STO)

Today's chart is all about inflation - but this time, it's about how past inflation cycles have affected the path for interest rates. BofA put out this chart on the number of years it takes for headline inflation figures to return to target zones (in most cases, 2-3%). And I hate to break it to you - the history suggests it won't be easy or quick. 

Then again, so many people have said this time is different. So maybe this time will be different again.

THE TWEET

Hans Lee wrote today's report.