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ASX News Live | ASX To Rise; Fed Raises Rates 25bp But Warns More to Come

Market’s game of chicken with the Fed in charts

Before we wrap up, here are some great charts summarizing the current state of play between the US Fed and the markets.

Fed chair Jerome Powell wished to reiterate to the market that the battle to tame inflation was not over and flagged more interest rate hikes to come. But his press conference sent a different message to his written statements.

Source: Bloomberg

‘Bigmouth’ Powell may have misspoke when in a Q&A session he said financial conditions were ‘tightening’ instead of easing.

Source: Bloomberg

Maybe Powell meant to say that monetary policy was finally catching up with inflation. The Federal funds rate can finally be considered restrictive.

As Bloomberg’s Robert Burgess noted earlier today, the upper end of the Fed’s target for the funds rate of 4.75% already exceeds the central bank’s preferred measure of inflation — the core personal consumption expenditures price index.

In the quarter just ended, the index rose at an annualised rate of 3.9%.

Source: Bloomberg

ChatGPT fastest-growing consumer application in history

The hype is real.

ChatGPT is the fastest-growing consumer application in history, according to a UBS study.

UBS estimates that ChatGPT has already reached 100 million monthly active users in January alone, two months after launch.

“In 20 years following the internet space, we cannot recall a faster ramp in a consumer internet app,” UBS analysts wrote.

For comparison, Instagram took 2.5 years to hit that many active users. TikTok took 9 months.

The monetisation of ChatGPT begins

If everyone keeps talking about your free service and lauding its historic adoption curve, you’re unlikely to keep the service free for long.

So it is with OpenAI’s ChatGPT.

Microsoft, a big investor in OpenAI, is integrating the latter’s versatile chatbot with its premium version of communication software Teams.

The premium version of Teams will cost US$10 a month from July, with ChatGPT expected to help generate automatic meeting notes, recommend tasks (I thought generative AI was meant to reduce human tasks, not recommend them), and create meeting templates.

Whether this will prove a productivity booster or productivity buster awaits to be seen.

On Thursday, too, OpenAI itself announced a US$20 monthly subscription aimed at superfans in the United States only. The paid subscription will offer a faster and more feature-laden service.

Did Powell give the rally a green light?

Did Powell further stoke 2023’s rally during his press conference following the Fed’s 25 basis point rate hike?

Stephen Stanley, chief economist at Amherst Pierpont, thought so:

“Chairman Powell should have used every word of his statement and his answers to every reporter’s questions to hammer home why the committee believes that the market view is probably wrong. Instead, he failed to do so.”

The market’s optimism hasn’t been tempered despite Powell saying the job is not yet done and further rates — plural — are coming.

Australian Financial Review’s James Thomson didn’t mince words when he claimed:

“But for now, investors should realise that Powell has given a rallying market fresh momentum. That’s great news for the bulls, but painful for bears and anyone sitting on the sidelines, who must now decide how much FOMO they can handle.”

 

 

Geopolitical risk raises investment premium for mining jurisdictions like Australia and Canada

Higher royalties, state-owned companies, and outright nationalisation are some of the risks resource companies face as pressure mounts on critical metal supplies.

Don’t be mistaken…as a commodity investor, selecting the right location for investment is just as important as finding the right project.

But the options are dwindling…

So how do you capitalise on this global problem?

Accumulate companies holding quality assets in regions with a long history of civil and political stability.

One of those locations is Australia.

In terms of mining, Australia is indeed an enviable place to invest…access to skilled labour, industry-leading infrastructure, technological innovation, and supportive rural communities, there’s a lot of upside for majors and juniors operating on the world’s largest island.

However, in terms of the global critical metal supply chain, Australia is just a very small part of the pie.

As someone that’s looking to capitalise on the full potential of a global boom in mining stocks, you need to look beyond…

Another viable option is Canada…the country certainly shares similar attributes with Australia, including low geopolitical risk.

In fact, the Toronto Stock Exchange (TSE) is the world’s largest exchange for listed resource stocks.

According to the TSE, it holds no less than 43% of the world’s public mining companies.

But take care…unlike Australia, many Canadian miners are leveraged to operations in South and Central America.

James Cooper: growing nationalism is a threat to future critical metal supplies

Don’t be mistaken; as a commodity investor, selecting the correct location for investment is just as important as finding the right project.

Geopolitical risk is on the rise for resource investors.

Changes to a country’s constitution opening the door for nationalisation, rioting, political instability, and punitive taxes are just some of the challenges faced by international mining operators.

That includes Australian-based producers ‘diversifying’ into these increasingly unstable regions.

Geopolitics is a key aspect to consider as an investor, but very few are paying attention to this important issue.

You see, mining is unique as an investment class.

With an asset (ore body) sitting somewhere between 100 and 500 metres below the surface, miners can’t pick up their business and shift it to a different state or country when conditions change.

Resource companies are stuck wherever the mineralised rocks occur…that includes regions with political uncertainty, civil unrest, or countries with a history of suddenly changing mining laws or royalty taxes.

But there’s a big problem in the industry RIGHT NOW…geopolitical instability is brewing across the globe.

According to the major US-based fund manager BlackRock, geopolitical instability spiked sharply in 2022.

In its December 2022 report, it identified major issues stemming from war and trade tensions:

‘A new geopolitical world order is coming into view. The Ukraine war and escalating U.S.-China competition have deepened fragmentation. Our BlackRock Geopolitical Risk Indicator hit a high amid increased market attention to U.S.-China relations, emerging market risks, political upheaval in the UK and the Ukraine war.’

The international fund manager has its own model for calculating the level of risk…the global BlackRock Geopolitical Risk Indicator (BGRI).

As the chart shows below, the Indicator hit an all-time high in 2022:

Source: Blackrock Investment Institute

Global insecurity breeds protectionism, and that’s having a major influence on metal supplies RIGHT NOW.

Just look at the recent events taking place at the Cobre mine in Panama.

Hailed as one of the best copper mines to enter production within the last 10 years, this large, relatively high-grade porphyry deposit was the flagship operation for the Canadian producer First Quantum Minerals [TSE:FM].

Development got off to a solid start…the Panamanian Government supported the company throughout its early years of production, keeping royalties relatively low at around 2% per annum.

For First Quantum, the stage was set for a strong long-term partnership…

But with analyst signalling looming supply deficits for copper, the Panamanian Government rapidly changed tact.

With the potential for higher copper prices in the years ahead, leaders were eager to secure a MUCH larger slice of the mine’s mineral rich pie…a whopping 20% of revenue, no less!

Battle lines were drawn…First Quantum refused to accept the new demands, and the government reacted with a shutdown of the Cobre operation.

But with the issue reaching a climax in December 2022, it was clear First Quantum had very few cards to play…with a hefty US$6 billion already poured into the project, the company couldn’t afford to walk away.

It was a case of accept the punitive tax or suffer the consequences of a prolonged shutdown.

The company chose the former; there was NO alternative.

The tax represented a ‘raw deal’ according to most analysts…

Importantly, it demonstrated the VERY REAL risk that international miners take when venturing into new frontiers.

Has the Fed pivot arrived or is Powell delivering false hope?

The punters certainly got it right this time with the Fed delivering a 0.25% hike overnight, but the bigger story was the massive spike across the Nasdaq following Powell’s comments:

Fat Tail Investment Research
Source: Google

You can see the stark response for yourself right around 2:30pm, smack-bang in the middle of Powell’s presser.

So, what did he say to stir the bulls?

As far as anyone can tell, it seems Powell’s admission that the ‘disinflation process has started’ was enough to spur a mini market rally. It certainly helped that the Fed chair was quick to reassure the public on his ability to switch to looser monetary policies if need be:

‘If we feel like we’ve gone too far, and inflation is coming down faster than we expect, then we have tools that would work on that,’

And this, in my view, is perhaps the key point.

Because while interest rates have always been imperfect in terms of their ability to control the levels of cash in an economy, they’re typically better at increasing liquidity compared to restricting it.

In other words, it’s far easier (and usually quicker) for the Fed to get the desired response with rate cuts than rate hikes. The real question is just how stubborn Powell and co may be in releasing the floodgates.

After all, it’s not like the US has beaten inflation just yet.

Powell was quick to point out that today’s rates rise isn’t likely to be the last. He still foresees a need for a ‘couple more rate hikes’.

But for the forecasters and market predictors out there, it seems many are now banking on cuts starting in the second half of this year:

Source: Bloomberg/Zero Hedge

As the chart above shows, terminal rate expectations dropped significantly. And expectations for cuts in the second half of 2023 (H2) plummeted even lower.

Despite this overnight jubilation, I wouldn’t get carried away.

There are still some big concerns and big challenges ahead for not only the US economy, but the entire globe…

https://www.moneymorning.com.au/20230202/has-the-fed-pivot-arrived-or-is-powell-delivering-false-hope.html

Who will be today’s displaced textile workers and who the next Ned Ludd?

What technological breakthrough led to the largest displacement of labour?

More bluntly, what technology cut the most jobs?

Or does this question focus only on one part of the equation? Technology creates as much as it destroys. So what if, on net, technological innovation creates more jobs than it obliterates?

A Deloitte paper from 2015 was optimistic about technological change:

“Machines will take on more repetitive and laborious tasks, but seem no closer to eliminating the need for human labour than at any time in the last 150 years. It is not hard to think of pressing, unmet needs even in the rich world: the care of the elderly and the frail, lifetime education and retraining, health care, physical and mental well-being.
“The stock of work in the economy is not fixed; the last 200 years demonstrates that when a machine replaces a human, the result, paradoxically, is faster growth and, in time, rising employment. Indeed, in the UK employment has more than doubled in the last one and a half century. The work of the future is likely to be varied and have a bigger share of social interaction and empathy, thought, creativity and skill. We believe that jobs will continue to be created, enhanced and destroyed much as they have in the last 150 years.”

But the authors did warn rapid adoption of technology — like ChatGPT and generative AI, for instance — can lead to elevated ‘technological unemployment’.

“If the pace of adoption of technology is accelerating, society will need to prepare for higher levels of technological unemployment. And the way in which change increasingly rewards high-level education and skills suggests that income inequality may yet widen. Rapid advances in technology mean that education, training and the distribution of income are likely to be central to the political debate for many years to come.”

Who will be today’s textile workers and who the next Ned Ludd?

Source: Smithsonian

Bitcoin is still going to US$1 million — Cathie Wood’s ARK Investment Management

Cathie Wood’s ARK Investment Management still stands by its prediction that Bitcoin will hit US$1 million in the next decade — that’s US$1 million per Bitcoin.

The firm’s bear case is Bitcoin hitting US$258,500. The bullish case has Bitcoin hitting US$1.48 million in 2030.

ARK’s bear case assumes Bitcoin will rise ~970% by 2030 from current levels. The most bullish scenario has Bitcoin gaining ~6,000%.

Bulls beware — this rally is about liquidity, not fundamentals | Greg Canavan

Our editorial director Greg Canavan recently published a piece for Livewire Markets that offers a different explanation for the strong start to the year for markets.

Liquidity. Not fundamentals.

“But the market and the economy are hardly ever in synch. The market moves ahead of the economy. And the market is also influenced by short-term liquidity flows.

“And it’s this topic of market liquidity that we need to look at because it explains the recent movements in the S&P 500 nicely and will give us some clues about what comes next.

“Let’s take a look…

“Let’s start with QE, or ‘quantitative easing’. This is how the Fed provides monetary stimulus when the interest rate they control — the fed funds rate — is already at zero.

“They do this by buying assets like US Treasury bonds and mortgage-backed securities in return for ‘fed funds’, which the Fed simply creates out of thin air. These funds – bank reserves (aka ‘liquidity’) – circulate in the financial system (but not the real economy). They lead to inflation of asset prices but not inflation in goods and services.”

Read Greg’s full explanation here, including his elucidation of this chart:

Source: Fidelity

What ASX stocks are rising on the back of Wall Street’s optimism

The Nasdaq flexed its bullish muscle overnight and the confidence carried over to the Aussie market.

So what ASX stocks are pumping today?

  • Rare earths junior Australian Strategic Materials (ASX:ASM) is up 10%
  • Gold producer Pantoro (ASX:PNR) is up 9.7%
  • Debt collector Credit Corp (ASX:CCP) is up 9%
  • Connectivity provider Megaport (ASX:MP1) is up 7.5%
  • Buy now, pay later fintech Zip (ASX:ZIP) is up 7.3%
  • Accounting software firm Xero (ASX:XRO) is up 7%
  • Family safety and communication platform Life360 (ASX:360) is up 6.7%
  • Lithium junior Sayona Mining (ASX:SYA) is up 6.6%
  • Online job search matchmaker SEEK (ASX:SEK) is up 6.5%
  • Another BNPL fintech Sezzle (ASX:SZL) is up 6.4%
  • Online art marketplace Redbubble (ASX:RBL) is up 6%

 

How market boffins are reacting to Fed’s decision

The Fed has raised its federal funds rate 25 basis points and the commentary is off to the races.

Economist Justin Wolfers thinks Fed chairman Jerome Powell is not seeing the full picture, and must soon ‘face up to the accumulation of evidence’:

‘I’m struck by a sense that Powell and the Fed have refused to update their views much in the light of the run of much better inflationary numbers in recent months. It could be they’re right and markets often over-react, but it also feels like the Fed is slipping behind the curve.’

Fellow economist Arin Dube thinks the US central bank is not good at making risk assessment decisions. Pausing rates instead of moderately upping them by 25bp is a better risk management approach:

‘The option value from a pause is substantial. Even if it turns out the current path doesn’t eventually get to 2% [Fed’s inflation aspiration], there’s not much irreversibility and you can re-start rate hikes if needed. But if you engineer a recession by over-tightening the harm is harder to reverse, especially without fiscal help.’

Jason Furman, chair of the Council of Economic Advisers to the Obama administration, was less critical of the Fed … and less wordy.

Sidelining the economists, JPMorgan Asset Management’s Bob Michele took the Fed’s statement as a sign the hiking cycle is about to end:

“They’re getting close to the end of the hiking cycle. We think they will do a 0.25 percentage point increase in March, which will be the last hike. [Powell] undid everything in the press conference, which is why you got the reaction you did in markets.”

Playing semantics with the Fed

Who knew investing involved literary analysis?

While English may become the hottest programming language, it may also hold the key to assessing the direction of the markets.

In its monetary statement, the Federal Reserve members altered one word and it may make all the difference.

The statement previously ran the following line:

‘In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.’

This changed to:

‘In determining the extent of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.’

Deconstructionists, what does the revision reveal about the Fed’s intentions?

The pace of future increases implies the increases are a done deal. The only question is their level.

The extent of future increases questions their future.

Prominent economist Justin Wolfers said the edit acknowledges the Fed ‘might have to stop earlier than it had previously signaled.’

A speedy recap of a big day in markets

Good morning!

It’s been an eventful day.

You’ve likely caught up on most of the major news stories already. So here’s the speed run.

The Fed does the expected but remains cautious

The US Federal Reserve raised interest rates by 25 basis points. The US federal funds rate now sits between 4.5% and 4.75%, the highest level since September 2007.

How did the market react?

The benchmark US S&P 500 was down for most of the day prior to the Fed’s decision and Fed chairman Jerome Powell’s press conference. But the index rallied sharply following Powell’s remarks. The whipsaw change was the biggest intraday jump for the S&P 500 since October 2022. The index closed 1.1% higher.

Fed issues caveat emptor

Jerome Powell warned the Fed sees more interest rate rises ahead; that’s interest rate rises, plural.

Powell said it ‘would be very premature to declare victory or think we’ve really got this.’ The Fed’s statement reiterated a familiar message — rate hikes are still necessary to bring monetary policy to a ‘sufficiently restrictive’ stance.

The key Fed takeaway

In Powell’s blunt words, the ‘job is not fully done’.

Beaten down stocks soar

Last year’s big losers soared overnight in the US.

Used-car retailer Carvana closed over 30% higher.

Memed to death ‘iPad on a bike’ manufacturer merchant Peloton spiked over 25%.

And Meta Platforms — metaverse lout — jumped nearly 20% after beating revenue estimates, despite profit plunging.

 

Kiryll Prakapenka

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