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Chart of the Day: ASX 200 to print new all-time high?

With the FOMC meeting behind us, and traders hearing that the door is now open to rate cuts this year, the equity rally continues in earnest. The markets have now fully discounted a cut from the Federal Reserve at its 31 July FOMC meeting, and global bond yields have moved aggressively lower.

ASX 200 to print a new all-time high?

We’re seeing Australian bond yields falling across the curve. This is important for the equity markets, especially when we look at relative returns. Considering that we see the current earnings yield in the ASX 200 some 424bp (or 4.24ppt) above the Aussie 10-year bond yield, for those who want income it’s not a hard choice. In fact, if we adjust the Aussie 10-year bond for inflation expectations and look at the “real” return, we can see that this is negative.

While the move we see in the index is a clear momentum play, there’s now a strong element of fear of missing out in play. For example, active fund managers are seeing the index +7.5% for the quarter, and one questions how many of these are outperforming this benchmark. If the index is going up, they have to be involved in the rally or risk underperforming the benchmark and not getting much-needed performance fees.

Don’t discount this index finding continued buying support into the quarter end, even if the index trades on consensus forward price-to-earnings ratio of 16.22x — the highest since December 2017. I’m not sure valuation matters too much, though, when we see negative real yields and subdued realised volatility. So, the risk premium applied to valuation falls.

Perhaps the most interesting aspect is that we’re less than 3% away from the all-time high of 6851 printed on 1 November 2007. A market at all-time highs is bullish, but will the bulls have the impetus to push the index through 6851?

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