ASX 200 Could Benefit from American Surprise

• US Core CPI m/m falls short.
• The inflation picture seems to be cooling globally.
• Small caps benefit in the US, will Australia follow suit?

The Australian markets will have a lot to pay attention to at the end of the week, as the Americans released a surprising Consumer Price Index announcement, and the Producer’s Price Index will certainly be parsed quite aggressively. 

The Core CPI came out at 0.1% month over month, instead of the expected 0.2%. However, it is worth nothing that what we witnessed in America was more or less a situation where there was massive rotation in what traders were willing to buy. After all, a lot of the trading public had been so heavily concentrated in the same handful of stocks, mainly Artificial Intelligence related companies. However, by the end of the day, the Americans poured money into the Russell 2000, which is the index of most of the smaller companies listed in the USA. This shows a real push into riskier assets, as the interest rates in America got crushed.

ASX 200 Continues to Rally. Will Traders Continue to Buy?

The ASX 200 will more likely than not look even more appealing to international traders, as the large firms will be looking to expand their risk. The ASX 200 features so many commodity-related companies, and as a result, it means that those who are banking on the idea of central banks stepping in and trying to stimulate.

However, it is worth noting that the miss in CPI wasn’t a massive one, but it does give the idea that the Federal Reserve could start to cut later this year. However, there is also an election to worry about in November, and the Federal Reserve typically won’t do anything to be seen as interfering in the electoral outcome. The Fed might just be stuck in a box at the moment. However, it appears that the market might not focus on that possibility just yet.

Smaller Companies to Shine Now?

At this point, we could see a similar reaction in the Australian markets, and some of the smaller companies might be in focus for value hunters. In this environment, we could see smaller companies like Life 360 (360), Perseus Mining (PRU), and the Breville Group Ltd (BRG). These are all on the smaller end of the market cap in the ASX 200 and are often overlooked. Because of this, they could start to play “catch up” to some of the stalwarts in Oz.

Keep in mind that the Australian markets could be effected on the periphery by Bank of Japan actions, as the yen has seen intervention earlier in the day. Will the BoJ continue to get involved? We don’t know, but at the end of the day, sudden moves in the currency markets can sometimes have an effect on what most traders will have to buy and sell in order to stomp out volatility in their portfolio. For example, in the past we have seen gold sell off viciously after a big move higher, when there is some kind of trouble elsewhere. It isn’t gold failing, its people taking profit to cover other losses. The markets are likely to see a lot of volatility in the near future, but it looks like buyers are becoming more and more aggressive in Australia.

Disclaimer: The material provided here has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Whilst it is not subject to any prohibition on dealing ahead of the dissemination of investment research we will not seek to take any advantage before providing it to our client. No representation or warranty is given as to the accuracy or completeness of this information and therefore it shouldn’t be relied upon as such. Any research provided does not have regard to specific financial situations, needs or investment objectives. Vantage accepts no responsibility for any use that may be made of these comments and for any consequences that result. Consequently, any person acting on it does so entirely at their own risk. We advise any readers of this material to seek professional advice where necessary. Without the approval of Vantage, reproduction or redistribution of this information isn’t permitted.