My my, a big market shift happened last Wednesday.
Did you see it? Your bank stocks might like it.
The RBA governor, Philip Lowe, upended market expectations about the future path of interest rates.
Señor Lowe gave a speech that day indicating the threshold for further cuts is higher than Mr Market was previously thinking.
The hoary old goat got a little wrong-footed here.
We can see a big move in trader positioning around this if we look at 90-day bank bill futures.
See for yourself:
I’ve circled the move on Wednesday.
The chart going down like this is the market repricing the odds of a cut.
It was quite a move.
You’ll recall that, just before this, Mr Market was beginning to price in pressure to cut rates in response to the coronavirus hit to Chinese GDP.
That makes this Wednesday a key date or ‘most interesting’, as Belgian detective Hercule Poirot might say.
‘Big Wednesday’ approaches…
Wednesday is the day Commonwealth Bank reports its half year results.
Let me put this in context…
Previous market expectations were for the cash rate to go down in 2020 to 0.25% before the RBA was forced to consider ‘Quantitative Easing’.
I tabled this possibility strongly myself.
One sector this outlook damages is the banks.
That’s because low to zero interest rates hit their net interest margin and erode their competitive advantage from low-cost deposits.
Philip Lowe said it himself in his speech on the topic.
Now here’s the thing…
Philip Lowe has now given the outlook for the banks — temporarily at least — a bit of a reprieve.
Now, the Commonwealth Bank is the biggest of the banks in terms of market cap.
It’s also arguably ‘priced for perfection’ as it goes into its next set of results (due Wednesday).
It has a rich valuation relative to the modest credit growth and legacy issues of the banking sector in general.
It’s not all bad…
It’s also possible it announces a special dividend on Wednesday and the property market is clearly heating back up.
Either way, the set of results due from CBA — and the market reaction — is going to be very intriguing to watch.
It’s likely to prove a bellwether for the other big three, and perhaps the overall index for the next six months. Stay tuned!
A nice set of numbers for JBH
In the meantime, it’s interesting to note that JB Hi-Fi Ltd [ASX:JBH] has come out with a nice set of numbers this morning — record sales and earnings in the first half no less.
They’ve given no great concern for worry over their retail trading so far in 2020 either. The stock is up 6% in early trade.
Retail in Australia is tricky to read at the moment.
It was only last week that jewellery and accessory chain Colette announced its collapse.
Now we have news that the company of former MasterChef judge George Calombaris is in serious trouble.
Perhaps taking a ‘sector wide’ view here is unwise. There are a lot of variables at play.
JB Hi-Fi’s results show clearly that a retailer can attract customers for discretionary products.
The Reject Shop Ltd [ASX:TRS] has doubled off its recent low too. The market must be pricing in at least some decent trading conditions for it to find its feet again.
But the spate of bankruptcies across the sector suggests the margin for error is slim.
Even in the main strip near the office here in Albert Park — one of the richest suburbs in Melbourne — there are a lot of empty shopfronts.
There was a lovely French bakery and café that just shut down.
Clearly every related stock has to be judged on its merits as far as retail goes.
It’s unlikely they’re all going to rally together, as can sometimes happens when a sector catches the eye of the crowd for whatever reason.
I’m sticking to my cautiously bullish mantra for the moment.
To return to our original discussion, the upcoming announcement from CBA is a key guidepost on that.
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