Rising bond yields and increased geopolitical tensions saw global equity markets in October experience their weakest month of performance year-to-date with the ASX 200 down 2.9%.
Inflation and Rates
Last month I was discussing getting long exposure to the US 2-year bonds as we were approaching the top of the rate hiking cycle. This trade is now starting to work.
Inflation has continued to trend lower, and many economic metrics continue to show a slowing economy. Commodity prices continue to fall, which suggested slowing demand. The Fed now appears to have done their last rate hike of this cycle, which has been taken as very good news for equities, with markets rebounding strongly in November. We’ve just been through the highest inflation in decades, followed by the most aggressive rate hiking cycle in monetary history, and yet stocks are back to near record highs. It might seem like all fun and games right now, but my fear is eventually the equity markets will figure out why inflation is falling and why rates are heading lower. Commodities have been weakening, and oil prices are coming down despite two major conflicts. Commodity markets tend to be a lot smarter than equity markets, and right now they are saying recession.
Either way, what is likely now is that US bond yields have likely peaked and should start trending lower. The Fed is likely done, economic data is likely to continue to deteriorate as recession risks are rising. Perhaps my recession fears are overblown, and we do get a soft landing, but when you can earn a risk free 5% in 2-year government bonds, why would one want to overpay for equities when they are trading at historically stretched valuations. Westpac just offered a 7.2% yield on a $1.2 billion tier 2 bond – rates unheard of just a few years ago.
Over the last decade with yields falling to near zero, it didn’t make any sense to allocate money to bonds. Bonds increase in value when yields fall. The last time the US 2 year was trading at 5% was at the eve of the GFC in 2007.
Infinite Green
Infinite Green, our unlisted green hydrogen investment, was supposed to be having their Initial Public Offering (IPO) this month, but it appears they have delayed their plans. Despite making repeated attempts, I have been unable to obtain any further information and the company is remaining very tight-lipped about the length of the delay. They have said they will reveal the full roadmap at the AGM on the 30th of this month. I shall thus provide a full update in next month’s newsletter. The company continues to execute on its strategy with further progress their Arrowsmith project and have announced they are pursuing the delivery of an Early Production System (and supporting eco-system) to help facilitate the uptake of hydrogen fueled vehicles in Perth, WA. “This project will provide visible and tangible proof of concept demonstrating how hydrogen can be successfully used for transportation.”
