Markets
Local and global equity markets were mixed this week as investors fixated on US corporate earnings, inflation concerns, and the next moves by central banks around the world.
The bond market continued to fret this week this time turning its attention to Australian government bonds as the RBA decided to step out of buying 2-year government bonds to keep a lid on yields whilst the higher inflation print didn’t help bond investor sentiment.
US quarterly company results continued their positive run helping to support equity prices, with companies showing robustness in their ability to insulate themselves from global supply chain issues and inflation (ie. either through efficiency gains or passing on costs to customers). More than half of the largest companies have now reported with more than 80% beating analyst expectations thus far. Corporate profits are expected to jump around 35% in the latest quarter from the prior year, according to a large data provider.
In local stock news, rail transport provider Aurizon has bought One Rail Australia for $2.35 billion. Aurizon will sell One Rail’s east coast business and keep the central Australia operations. This will help the company enter the bulk freight business in SA and NT.
Qantas will bring forward more international flights and reinstate 11,000 stood-down staff before the end of the year. The carrier will commence flights to Bangkok, Singapore, Phuket, Johannesburg, and Fiji sooner.
Telstra and the federal government have purchased a south Pacific mobile and broadband company as a sign of its commitment to the region. The government will pay most the $2.1 billion purchase price for Digicel Pacific with Telstra tipping in $362 million.
Woolworths’ share price came under pressure after the company reported sales had slowed following the easing of lockdown restrictions in ACT, NSW, and VIC. The lockdowns did help first quarter sales with a 7.8% increase on the same period last year.
Shares in A2 Milk fell after the company reported sales of Chinese label infant formula were expected to be significantly lower in the 1st half of the financial year. The company said Chinese consumers were no longer prioritising overseas brands and fewer babies being born in China wasn’t helping.
Macquarie Group has reported net profit of over $2 billion for the last quarter with assets under management surging by 31%. Management said the results reflect improved trading conditions across its platforms including asset management and banking & financial services. The company also announced a $1.5 billion capital raising to invest in new opportunities.
The Australian dollar continued to push higher supported by rising inflation which raised the spectre of earlier RBA rate rises than previously expected and helped push government bond yields to more attractive levels.
Economic
Australian inflation rose by 0.8% in the 3rd quarter which meant the annual rate dipped to 3%. The Reserve Bank of Australia’s preferred measure rose by 0.7% for the quarter which saw the annual rate shift up to 2.1%, critically inside of the bank’s 2-3% target band. Housing and fuel were the biggest contributors. The bond market has taken the reading to mean that the bank will need to raise rates well before 2024, but the bank will still need to see evidence of an acceleration in wages growth before it’s likely to change its forecasts and cash rate guidance.
Housing affordability across Sydney has fallen to its lowest level in at least a decade, and Melbourne isn’t far behind, as per Moody’s analysis, with reports that a household with an annual income of $135,000 will spend more than 45% of it servicing their new mortgage. Rental prices are also on the rise, with the fastest gains being reported in Brisbane and Sydney, and Melbourne the most affordable of the major cities. National prices have now risen almost 9% on the same time last year.
Australian goods exports prices rose by 6.2% in Q3 and are up 41% over the year. Goods import prices lifted by 5.4% in the quarter, which is the strongest increase since Q3 2013. This should help economic growth.
The US economy grew at an annual rate of 2% in the Q3, following an increase of 6.7% in the previous quarter. The deceleration of growth in Q3 was led by a slowdown in consumer spending on delta virus concerns and the decrease in government assistance payments. Non-residential investment rose much less than the previous quarter, whilst exports declined, and imports surged.
US economic data showed that consumer confidence rose last month, halting a 3-month decline, and the latest home sales figures showed an increase in purchases across the country, coming in above expectations.
The European central bank maintained their very easy policy stance this month with rates near zero and monthly bond purchases (ie. money printing) of 20 billion euro a month.
The Bank of Japan kept monetary policy steady this week whilst slashing this year’s inflation forecast in a sign it has no intention of removing stimulus any time soon. The board also cut the country’s growth forecast but maintained its assessment of a moderate recovery ahead.
Politics
US President Biden said the US is committed to defending Taiwan from a Chinese attack in some of his strongest comments yet about protecting the democratically ruled island claimed by Beijing. In contrast, the US and China apparently made some incremental progress in their economic and trade negotiations, with both nations agreeing on the importance in strengthening communication and coordination of policies.
President Biden also acknowledged that his proposed multi trillion dollar economic program will need to be cut if it’s to win congressional approval. He’s told lawmakers he needs a legislative win before he departs for the G20 meeting and the United Nations climate summit. His approval ratings at home continue to decline which will likely take tax increases off the table.
German businesses are concerned that the new German government might shift their policy stance on China hurting the significant trade relationship both countries have. The new government’s coalition partners favour a tougher line on China, with the Greens more vocal in condemning the government’s treatment of ethnic Uyghurs and threats to Taiwan.
China’s companies drove the country’s greenhouse-gas emissions above those of all developed countries combined in 2019, according to a recent study. The country’s biggest companies create more pollution than entire nations.
Weekly market updates are written by Chris Lioutas. Chris is on the board of Peer Wealth X Futuro Investment Committee. View LinkedIn
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