Note from the MD: Markets resilient to rate hikes, eyes on China

Another 25 basis point rate hike has brought the cash rate up to 2.85% and drawn defence from the RBA, with governor Philip Lowe highlighting the greater risks associated with the slower rate lifting path they could’ve taken.

Another 25 basis point rate hike has brought the cash rate up to 2.85% and drawn defence from the RBA, with governor Philip Lowe highlighting the greater risks associated with the slower rate lifting path they could’ve taken.

With inflation now forecast to peak higher than expected at 8%, investors are eagerly awaiting to see at what point the CPI will buckle.

The ASX reacted well to the news, with the XJO rallying almost 1.7% yesterday. The S&P 500 finished its Tuesday trading session flat from the week before, dropping just 0.078% in the lead-up to the Fed’s rate hike decision due today – which is widely expected to be a 75 basis point lift.

An interesting disparity has emerged between two usually intertwined commodities. Iron ore plunged to US$75.20/t on Monday morning – its lowest level in more than two years. At the same time, coking coal (the fossil fuel burned in the steel-making process) is still trading above US$300/t

Australians are all too familiar with the perils associated between these two export staples. The 2012 supply and demand imbalance brought on by China sent both commodities plummeting and put many coal mines out of production.

China woes continue to breed angst among economists, as key indicators start to show investor sentiment is fast turning negative in the world’s second-largest economy. A week ago, the global markets witnessed the largest annual depreciation of the Chinese yuan against the USD in 27 years.

Looking at the MSCI China index over the nearly 30 years since its inception doesn’t generate much confidence either, with its cumulative return (including dividends) sitting around 0%.

On the homefront, the XJO has rallied strongly over the past week and broken through the 50-day moving average and previous resistance at 6894. If momentum continues higher, we could see the XJO test the highs from August above 7100.

Implied volatility has fallen discernibly lower amid this continued rally and is now at 15.75% with an IV rank of 33, down from 23.31 on 3rd October.

With IV now much lower, it may be a good time to buy some cheap protection before the FED is expected to raise rates 75 basis points and add volatility into the global markets. 

The medicinal cannabis sector has also had its share of positive news recently, with leading biotech investor Andrew Chapman predicting a ‘Cannabis 2.0 Boom’ and suggesting that investing in the sector would be ‘like investing in an alcohol company at the end of Prohibition’ (see our interview with Andrew here).

With the sector (and interest in the sector) on the rise – the TGA’s greenlight for over-the-counter low-dose cannabidiol products has created what some companies consider a potential opportunity for it to grow from its current $250 million to a forecasted ~$3 billion by 2024 – we’re hosting the second instalment of our two-part online summit to help investors better understand the opportunity and to know what to look for. Our panellists will also share their favourite stocks.

Bell Potter healthcare equities research analyst Dr Anubhav Saxena, Merchant Funds Management MD Andrew Chapman and Wellnex Life CEO George Karafotias will join us this Friday at 12pm (AEDT) to discuss why they think that investors can expect more money to move into medicinal cannabis stocks, how this may create a potential opportunity for the first movers and how investors can assess possible opportunities. To join us for this session, click here.

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Sources:

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