Markets
Equity markets were mixed this week with plenty of economic news to digest.
Markets took notice after China’s biggest property developer China Evergrande said it expects a significant fall in September property sales and has appointed financial advisers to ease liquidity issues, thus intensifying investor concerns that the cash-strapped conglomerate could default.
In local stock news, plenty happening on the M&A front, with Sydney Airport closer to a decision on a takeover offer after granting an investor group access to their books following an increased 3rd bid of $8.75 per share, valuing the company at $23.6 billion. Santos and Oil Search confirmed their $21 billion oil and gas merger, whilst Iress has granted potential suitor EQT Fund Management more time to assess a takeover. Wesfarmers also looks to have sealed its takeover of Australian Pharmaceutical Industries after an increased offer.
Telstra CEO Andy Penn has ruled out major job cuts as part of efforts to slash costs by $500 million by 2025. Telstra revealed the cost-cutting goal would help earnings improve by mid-single digits by the 2025 financial year.
Oil prices pushed higher this week, arresting declines since OPEC+ confirmed a reduction in supply cuts and concerns arose regarding potential weakening in demand in light of virus concerns. Oil prices were spurred after data showed a larger than expected drawdown in oil stock in the US.
Economic
Australian employment declined by 146,300 in August capturing the impact of lockdown on NSW, coming in worse than consensus estimates. The unemployment rate may have fallen to 4.5% but this was a function of a fall in the participation rate, whilst hours worked was down 3.7%. NSW has now seen 210,000 job losses over the last 2 months.
The Australian central bank governor Philip Lowe renewed his pledge that rates won’t rise until 2024. At a charity event, he outlined stagnant wages and inflation, saying he could not understand expectations of rate rises next year or in 2023.
Australian consumer sentiment lifted by 2% in September with sentiment close to 1% below June levels and more than 10% below the April peak. Results were mixed by state with sentiment rising strongly in NSW and QLD, little changed in VIC, but with sharp falls in WA and SA. Fears regarding job security eased a little in September after rising sharply in August.
There were slight improvements in both Australian business conditions and confidence in August according to a key survey, following large falls in July. The trading and profitability components of business conditions improved in the month, but the employment component fell again.
Commonwealth Bank data indicates the increase in government payments via the “Covid 19 disaster payment” to households in lockdown states has been bigger than the fall in wages and salaries, which may help explain why the central bank and most economists are forecasting a sharp recovery in the economy in the 4th quarter. Still a lot of things to work through.
The Reserve Bank of Australia has lashed out at successive federal governments for failing to address housing affordability, citing negative gearing and capital gains tax discounts as the main cause. Add to that significant and unnecessary bureaucratic red tape and you’ve got a toxic combination regarding affordability.
Lengthy lockdowns are beginning to crush small businesses with new data showing that defaults began rising in August for the first time since May 2020, whilst bank loan deferrals have increased six-fold.
Underlying US consumer prices rose at their slowest pace in 6 months in August with core inflation increasing by 0.1% whilst the headline increase was 0.3%, adding weight to the US central bank’s repeated claims that recent high inflation is likely transitory. Still too early to tell either way, much will depend on the pace of fiscal stimulus and virus health policy response from here.
US producer prices rose 0.7% in August, down from a 1% spike in July, whilst expectations were for a 0.6% increase. Big numbers, supply bottlenecks need to clear fast. A continuation of this trend will likely impact company profit margins ahead. US industrial production rose 0.4% in August compared with the previous month, coming in below economist forecasts, whilst factory output also lost some momentum in August.
UK economic growth rose at a significantly lower pace than expected in July mainly due to staff and supply-chain shortages caused by the health policy response and the UK’s European Union exit.
China’s factory gate inflation rose to a 13-year high in August with soaring raw material prices contributing to the gains, while exerting further pressure on Chinese manufacturers.
Chinese consumer inflation grew 0.1% last month coming in lower than the 0.5% forecast and the 0.3% inflation reported in the previous month. Consumption was hit by tighter restrictive measures due to Covid. The Chinese central bank will likely need to provide more stimulus going forward.
Chinese economic activity in August showed that retail sales growth slowed to 2.5% from 8.5% in July and home sales by value slumped almost 20%, the biggest drop since April 2020.
Politics
US house Democrats have drafted a package of tax proposals which falls short of President Biden’s ambitions, given he needs to raise US$3-3.5 trillion to fund his latest spending program in light of the US government pushing close to their self-imposed debt ceiling. The latest draft lowers the proposed corporate tax increase to 26.5% (up from 21%) and capital gains tax to 25%, in an attempt to keep Democrat party moderates on board.
The Chinese government continued to plough through sectors of their economy, in an effort to “align” corporate and social behaviours to their future plans, with casino mecca Macau coming under scrutiny. Macau authorities indicated they would seek to tighten regulation of gaming in the territory. In other news, the Chinese government clarified they would seek to “slow-down” rather than suspend approvals of new video games, but in the same breath looks likely to break up Ant Group’s (Alibaba’s payments business) Alipay business in order to curb tech monopolies to ensure growth.
Australia, the US, and the UK have announced a new security partnership which aims to deepen cooperation on nuclear submarines, cyber security, artificial intelligence, and more, with many seeing the partnership as a way of countering China. As part of the deal, the Australian government has abandoned its submarine deal with the French and the French aren’t happy.
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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