Capital Idea: Market wrap, 16 April

• Wall Street hits record highs on hopes for the end of the war

• Investors shrug off geopolitical risks to chase robust earnings

Hope springs eternal in the markets and the prospect of an extended ceasefire and eventual peace deal between the US, Israel and Iran has helped push Wall Street to an unlikely record high. The move in major US indices this month has been nothing short of remarkable: double digit gains to not only erase the war related losses but to rise above the pre-war levels. There’s good fundamental reasons for this, stripping out geopolitical risk. Valuations had fallen to attractive levels, with analysts projecting very strong earnings growth for the earnings season that’s just kicked-off, and even stronger earnings growth for next quarter — a whopping 20% for the S&P 500. With bets placed that the war has passed peak escalation and geopolitical risks are falling, investors have decided they don’t want to miss out on a slice of this earnings growth. The risk from here is that the bar is set too high and investors are paying for earnings that may not materialise. That’s especially given forecasts do not appear to be factoring in the earnings impact of the growth slowing and inflation inducing energy shock.

(Source: Trading View)

(Past performance is not a reliable indicator of future results)

Nevertheless, as the cliche goes, there’s nothing more bullish than record highs and one must sometimes simply trust the tape. The bullishness is likely to spill into Asian markets, which have traded throughout this crisis, as they always do, as a higher beta play on US equities.

While it’ll be secondary or even tertiary for the markets given the focus on the war and the rebound on Wall Street, today’s Australian labour force data could move the needle for the ASX200 and AUD. Forecasters predict that the economy added around 19,000 jobs in March to keep the unemployment rate at 4.3%. The risk around this data is slightly asymmetric for the markets. A soft print way water down the prospects of an imminent rate hike from the RBA. But given the inflation situation, it will only change expectations about timing. However, a hot print would signal the labour market is at the very least no impediment to further rate hikes, increasing the odds of a hike in May and potentially raising the odds of more than just the two hikes baked into the curve from the central bank this year.