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The Australian equity market closed weaker falling -2.9% as month end and quarter end provided fund managers with the opportunity to rotate and update portfolios.

After staging an impressive intra-day rally on Friday, the market gave back all its gains and more in the final hour as US futures sold off when news of Donald and Melania Trump’s COVID-19 infections hit the headlines.

September was the first month of negative returns (-4%) since the COVID crisis hit our market in Feb-Mar this year.

Driving this weakness in September were energy stocks which fell -11% for the month on the back of falling oil prices which resulted in heavyweights Woodside Petroleum (WPL) sliding -10%, Oil Search (OSH) -19% and Santos (STO) -14%.

IT stocks also reversed a five-month winning streak dropping -7% as the tech-heavy NASDAQ index finally saw some profit-taking falling -5%. Investors took the opportunity to book profits on account of recent strength with local tech-stocks Afterpay (APT), Wisetech (WTC) down roughly -10% mirroring the falls in global giants Facebook (FB), Apple (AAPL), Amazon (AMZN) and Google’s parent company Alphabet.

Big week ahead locally

The RBA meeting tomorrow and Federal Budget tomorrow evening are major catalysts for the ASX this week.

With the size of the FY21 deficit anticipated to be in the vicinity of $200b many expect the government to announce the fast tracking of its proposed stage two income tax cuts which are legislated to begin in July 2022.

Such a move would go some way towards addressing weak household consumption which fell a whopping

-12% in the June quarter.

Fiscal spending is also set to play a key role in the Budget with the Government pre-announcing a $1.5b investment in manufacturing to kickstart the economic recovery.

Financial markets are now anticipating a 50% chance that the RBA will cut the official cash rate before the end of the 2020 calendar year. Forecasts suggest any rate cut will likely be a “micro easing” with the cash rate likely to be cut from 0.25% to 0.10% and the RBA to commit to similarly managing the three-year Government bond yield better known as Yield Curve Control (YCC.)

With the unemployment rate predicted to deteriorate further it is likely a further easing of monetary policy will need to be implemented. However, the likelihood of the RBA doing this on Tuesday is falling. RBA Governor Phil Lowe, a strong advocate for fiscal policy, would ideally want to see and assess the outcome of Tuesday evening’s Federal Budget before committing to a rate cut.

Economic data

Last week we saw private sector credit come in flat month-on-month while building approvals fell -1.6% vs last month which was discouraging but not surprising.

Given the more subdued business activity locally as a result of the COVID-19 pandemic and the complete closure of certain industries in Victoria new consumer and business credit is likely to remain under pressure until 2021.

Retail sales were also weak falling -4% month-on-month in August. While most states were down, the setback was disproportionately driven by sales in Victoria which fell -12.6% due to the strict lockdowns.

Offshore saw encouraging economic data out of China with the Purchasing Managers Index (PMI) for September better than expected. Manufacturing PMI improved to 51.5 from 51.0 in August, ahead of market forecasts. Services PMI was also strong at 55.9 indicating manufacturing and service sectors are expanding.

The strong data was due to a strong recovery in both demand and supply and a positive boost for the Chinese economy ahead of its week-long Golden Week holiday.

Iron ore added +2% to trade $US120/ton after a decrease in steel inventories supported expectations for increased demand in iron ore. China’s strong PMI print was another positive signal for iron ore given its heavy reliance on the commodity.

Friday also saw the US release its September jobs report with nonfarm payrolls rising by 661,000 (forecasts were 800,000) which translates to an unemployment rate of 7.9% compared to estimates of 8.2%.

At a headline level the numbers continue to move in the right direction but there remain some inconsistencies in the data. The labor force participation rate for September fell 0.3% to 61.4% meaning that because many unemployed people stopped looking for work, the labor force contracted and the remaining unemployed people represented a smaller percentage of the workforce.

With September’s monthly job gains the lowest since May we are starting to see signs that the pace of the recovery is slowing.

The (great?) debate

With one month to go ahead of the US Presidential election equity markets continue to trade with a lack of conviction. This is understandable given the different investment thesis under a Biden Presidency which would see corporate taxes increase alongside minimum wages.

You would think some of these policies may have featured in last week’s debate between the two candidates but that was clearly not the case.

It was somewhat surprising that equity markets took any notice given the ineffectiveness of the debate, but they did. Despite a lack of any material policy discussion equity markets rallied initially as Trump attacked Biden before reversing course and sliding as Biden managed to withstand the verbal bout.

All in all, it was quite disappointing with key topics on healthcare, racial justice, COVID-19, the economy and climate change barely scratching the surface. Biden firmed further in the polls following the debate and hopefully a second debate provides voters with a little more clarity.

Interestingly, 90% of surveyed US voters came into this debate saying their minds were already made up with many having already submitted their ballots.

It’s unclear but unlikely this debate would have done much to change that.

Looking ahead

Monday 5th October – Friday 9th October

• Monday: AU NAB Business Confidence (SEP), Services PMI (SEP)
• Tuesday: AU RBA Meeting, FEDERAL BUDGET, Job Advertisements (SEP), Balance of trade (AUG); US ISM Non-Manufacturing Business Activity (SEP), Balance of trade (AUG)
• Wednesday: US Fed chair Powell Speech
• Thursday: US Jobless Claims (Oct)
• Friday: AU Home Loans (AUG); UK GDP MoM & YoY (AUG)

Friday 2nd October, 5pm values

Friday 2nd October, closing values

Key dividends

Monday 5th October – Friday 9th October

• Monday: Div Ex-Date – Nick Scali Limited (NCK); Div Pay-Date – Invocare Limited (IVC)
• Tuesday: Div Ex-Date – Reece Limited (REH); Div Pay-Date – Cleanaway Waste Limited (CWY), NIB Holdings Limited (NHF), Woolworths (WOW)
• Wednesday: Div Pay-Date – Adbri Limited (ABC), Carsales.com (CAR), NABPD (NABPD), Pact Group Holdings (PGH)
• Thursday: Div Pay-Date – Bingo Industries Limited (BIN), Breville Group Limited (BRG), BWX Limited (BWX), Costa Group Holdings (CGC), South32 Limited (S32)
• Friday: Div Ex-Date – Harvey Norman (HVN), MFF Capital (MFF); Div-Pay Date – CSL Limited (CSL), MCP Income Opportunities Trust (MOT), MCP Master Income Trust (MXT), Reliance Worldwide (RWC)

Contact

If you would like to discuss your situation, please speak to your adviser or email clientservices@primefinancial.com.au

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