The Fed to raise interest rates, commodity prices claw back, and why we are underweight China

Updated: Mar 14

The ASX ended the week down just 0.7%, recovering after initially falling 1.8% in the first few days. Markets in Australia and the US have remained choppy with no real sense of direction as investors try to figure out what the invasion of Ukraine means for it. Due to the volatility, we have increased our cash holding to allow us to quickly rotate into any oversold companies that we deem to be an attractive investment. We have already found opportunities in agriculture and defence sectors.

With Russia and Ukraine exporting nearly 30% of the world’s wheat, the onset of the war caused wheat prices to soar from around US$800 per bushel to US$1,250/bu. This has recently clawed back to still elevated levels of US$1,080/bu. Another concern has been oil prices, with Russia being an important exporter of oil to the world. With Brent crude oil reaching US$130/barrel last week, this has tempered back down to around US$110/barrel.

With a large proportion of the ASX made up of miners, we do note some positive tailwinds with iron ore prices topping US$150 per tonne, which has seen significant price appreciation since it hit recent lows of US$85/tonne at the end of November last year.

There were 11.26 million job openings in the US for the month of January, which beat economists’ forecasts of 10.93 million. It was pleasing to see the momentum in the job market, employers look ahead and see opportunity to fill more jobs, despite the unemployment rate being at just 3.8%, its lowest level since the pandemic begun.

Core CPI in the US for the month of February came in at 0.5% month-on-month growth, which was in line with expectations.

Chinese e-commerce giant reported yesterday. They are the main direct-to-consumer competitor to Alibaba’s Tmall. posted strong results, beating both revenue and earnings expectations. In fact, the earnings beat was quite significant, where they reported an earnings per share of $2.21, compared to expectations of $1.83. Despite this, the stock tumbled around 15% as its revenue growth dropped to its slowest pace in six quarters, as well as broader fears concerning China. This includes the US mulling delisting 5 Chinese companies for failing to adhere to the Holding Foreign Companies Accountable Act, as well as concerns of increasing government interventionism as Xi Jinping continues his new “Common Prosperity” policy.

This gives further justification to why we are underweight in China. Although many of the leading companies may appear cheap compared to historical multiples, we believe there is now a regulatory risk discount to justify these lower multiples


The upcoming week will be headlined by the Fed’s interest rate decision. With Fed Chair Jerome Powell confirming an interest rate rise, this will be a formality. Unless there are any major surprises, we will see rates rise 25 basis points from 0.25% to 0.5%. The CME Group 30-Day Fed Fund futures prices indicates there is a 97% chance of this happening.

The market was previously pricing in a 50 basis points rise to combat inflation and with the US economy in a strong position, but the impacts of the invasion into Ukraine has shifted this stance. Although the conflict adds further inflationary pressure, particularly to food and oil, the impact of heavy financial sanctions causes some uncertainty on how this will impact the economy and its growth. The Fed will want to see how this plays out rather than rushing into a 50 basis points rate rise. We will be closely scrutinising their statement to get an indication on how they will utilise monetary policy levers to delicately balance the situation in upcoming months.

The print for employment change in February for Australia will also be coming out as well as the unemployment rate. This is expected to come in flat at 4.2%. Prime Minister Scott Morrison has expressed he wants to see a ‘3’ to start off the unemployment figure in the coming year, and believes this is very achievable.

Have a great week,

Sam Waldron - Research Analyst

12 views0 comments