Markets
Local and global equity markets were flat to negative this week with investors initially taking the US central bank announcement in their stride before the positive sentiment faded on virus concerns.
In local stock news, the $22 billion merger of Oil Search and Santos has taken effect after final approval from a PNG court. Oil search will disappear from the ASX and its shareholders will receive 0.6275 Santos shares per Oil Search share.
Shopping Centres of Australasia said its property portfolio gained 9.7% in the 1st half of its financial year, helped by more people shopping closer to home during the pandemic. They also announced a 26% increase in their 1st half distribution.
CSL has revealed a $16.4 billion takeover bid for iron deficiency specialist Vifor Pharma of Switzerland. A $6.3 billion equity raise will help fund the buy. Shares fell sharply on the announcement.
Ramsay Healthcare has bought UK mental healthcare provider Elysium Healthcare for $1.4 billion. Ramsay is using existing debt facilities to buy the company, which runs hospitals and complex care homes. Ramsay expanding their European footprint to gain greater scale.
Woolworths shares fell sharply after the supermarket giant revealed 1st half earnings would be lower due to about $220 million in covid costs.
Wesfarmers will use its shares in Australian Pharmaceutical Industries (API) to vote against a Woolworths takeover. The API board has said Woolworths’ $872 million offer was superior to the Wesfarmers bid. Wesfarmers has the right to match the offer.
Qantas is headed for a billion-dollar loss, but CEO Alan Joyce says ticket sales are improving. The company flagged a 1st half loss of more than $1.1 billion in underlying earnings from lockdown affected 6 months.
Economic
Australian consumer sentiment fell by 1% in December, with the decline driven by a big drop in the ‘time to buy a major household item’ question. Other components like consumers’ economic outlook for the year ahead and the next 5 years also weakened. However, consumer sentiment does remain above pre-pandemic levels. December sentiment varied widely by state, falling in NSW, VIC, and TAS, whilst rising in SA, QLD, and WA. Job security fears increased a little whilst housing affordability concerns appear to be rising.
Business conditions improved a little in November, but confidence fell. Both remained above their 2019 as well as their long run averages. The lift in business conditions was due to a large gain in the employment component. The data also showed no signs that businesses are facing easing pricing pressures.
Australian employment rose by a huge 366,000 in November, coming in above consensus estimates, with NSW and VIC driving the monthly increase. The participation rate shot up to 66.1% whilst the unemployment rate dropped down to 4.6%. Indicators of labour demand are very strong.
The US central bank kept interest rates near zero but said it would increase the taper of its bond purchases (money printing) by $30 billion a month, double the $15 billion monthly pace announced in November. The move was largely expected. If that pace is maintained, it puts the Bank on course to potentially raise rates in the 2nd quarter of 2022.
Annual inflation in the US accelerated to 6.8% in November, the highest level since June 1982, and in line with forecasts. It’s the ninth consecutive month inflation printed above the central bank’s 2% target, as higher commodity prices, rising demand, wage pressures, supply chain disruptions, and low inflation prints last year continue to exert pressure on their monetary policy path.
The world’s largest central banks are diverging on policy, focusing more on their domestic issues, as some tackle surging inflation while others keep supporting demand. This divergence is likely to continue in 2022, potentially creating more risks but equally creating more opportunity in asset markets.
The European central bank indicated it will end its emergency support in March but promised to hold down borrowing costs next year, whilst maintaining they remain ready to restart emergency support if required. The Bank raised its inflation projections to 3.2% for 2022, before a drop to 1.8% in ’23 and ’24, but made it clear they won’t be raising rates until inflation was consistently above target.
Economists are predicting China will start adding fiscal stimulus in early 2022 after the country’s top officials said their goals for the coming year include stabilising the economy.
China’s economy is showing more signs of slowing with retail sales growth weakening to 3.9% in November, affected by worsening property market slump and disruptions from virus restrictions, which has impacted consumer sentiment.
The International Energy Agency announced that the oil market has already returned to surplus and faces an even bigger supply overhang next year as the new variant hits international travel. The agency lowered its forecast for oil demand for Q1 next year by 600,000 barrels per day.
Politics
US President Biden told Russian President Putin that Russia would pay “a terrible price” and face devastating economic consequences if it invaded Ukraine. Putin responded by mobilising another 10,000 troops not long after the meeting. He must have missed the memo. The G7 foreign ministers have also warned Russia to de-escalate its military build-up.
UK PM Boris Johnson suffered his biggest rebellion by Conservative lawmakers since becoming PM, forcing him to rely on opposition votes to mandate the use of covid-passes. Almost 100 Tories opposed his plan. Likely we see a leadership spill pretty soon.
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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