Weekly Market Update – 01 Feb 2021

Global equities weaker but business conditions reach 2-year high.

Global equity markets posted negative returns last week with the outcome from the Federal Reserve meeting in the US the catalyst for some widespread profit taking.

The MSCI World Index in AUD terms fell -2.8% with the second half the of week seesawing from a -1.4% fall on Wednesday, a +0.8% gain on Thursday followed by a further -1.8% fall on Friday.

Equity markets had been stable until Wednesday, however, the Federal Reserve’s statement which indicated a slowing in the pace of the US recovery caused markets to fall.

Interestingly, the statement from the Federal Reserve did not really contain much new information so the market weakness appears to be more a case of disappointment amongst investors that the Federal Reserve did not take its accommodative monetary policy stance further.

The central bank kept the overnight interest rate near zero and made no changes to its monthly bond purchases as had been expected.

However, it pledged to keep its accommodative policy measures in place until a full economic rebound is in place. With the acknowledgement that the pace of the recovery is indeed slowing the Federal Reserve is unlikely to wind back its asset purchases in the near term.

Despite the ongoing impacts the virus continues to have on economic activity, employment, and inflation we remain comfortable with the Federal Reserve’s commitment to supporting the economy through this turbulent period.

Supporting individuals, businesses and the economy is key to reigniting growth and these measures of support will continue to provide a positive backdrop for equities.

With interest rates at record lows, continued support from the central bank and the likelihood additional stimulus will be announced under the Biden Administration we believe the economic recovery, whilst it may be slowing, is indeed still recovering, not reversing course.

Australian Inflationary data

Locally, the Australian economic recovery continues to unfold before our eyes.

Having already exited recession territory with confirmation in December that Q3 GDP jumped +3.3% reversing some of the prior quarter’s -7% fall, inflationary data released this week continues to show the Australian economy tracking in the right direction.

The December quarter consumer price index (CPI) rose +0.9% following on from a +1.6% rise in September and was well above economist forecasts of +0.7%.

The most significant price rises in Q4 were tobacco, up +10.9% as a result of the annual excise tax increase and childcare which jumped +37.7% with free childcare having been unwound and out-of-pocket expenses returning to pre-COVID levels.

A re-opening of state and territory borders in the lead up to Christmas also saw domestic holiday travel surge +6.3%.

The Reserve Bank of Australia’s preferred measure – trimmed mean inflation which strips out those more volatile components thereby producing a more accurate measure of core inflation rose +0.4% in Q4 in line with forecasts.

On an annual basis, trimmed mean inflation held steady from the September quarter at 1.2% – well below the 2% lower bound of the RBAs target band set back in early 2016.

As a reminder the RBA has committed to not increasing interest rates until inflation is sustainably within its target band of 2-3% with its own accommodative monetary policy stance designed to revive the economy and boost employment.

Whilst inflation currently remains subdued, there is a growing consensus amongst investors that rising commodity prices along with the global economic recovery may lead to inflationary shock sooner than expected.

Australian 10-year Government Bond yields have risen steadily from 0.75% in November last year to 1.1% currently whilst US 10-Year Treasury Bonds have similarly climbed higher. As a proxy for inflationary expectations the rise in bond yields indicate the potential for some inflationary shock in the coming months.

Considering last week’s inflation data remains well below the RBAs target we believe the risk of higher-than-expected inflation prompting the RBA to rethink its target and consider raising cash rates is minimal.

The RBA holds its first meeting for 2021 this Tuesday which should provide us with some further insight.

NAB Business conditions & Westpac Leading Index

Business conditions rose further in December to its highest level since late 2018 marking a fourth consecutive month of improvement.

Encouragingly, employment conditions are now back in positive territory for the first time since the start of the pandemic with the employment index driving most of the gains. Business conditions are now well above average, further supporting the notion that there is strong momentum in Australia’s economic recovery.

Business confidence meanwhile suffered in December with the COVID-19 outbreak in Sydney leading up to Christmas resulting in greater pessimism amongst businesses. NSW, Victoria and Queensland were the major drag on the overall confidence figure.

Capacity utilisation continues to rebound rising to 80.9% and is now around its long-run average (and pre-virus levels), while forward orders pulled back but still remain in positive territory.

These leading indicators suggest the pipeline of work continues to build – pointing to further recovery in the months ahead. Most indicators within the survey are now broadly at or above pre-virus levels.

Meanwhile the Westpac Leading Index which is a composite index based on nine economic indicators that seek to predict the future direction of the economy fell slightly in December.

Westpac’s Chief Economist believes the six-month annualised growth rate implies growth of +4% for the Australian economy in 2021 – marginally lower than UBS’ recently upgraded forecast of +4.2%.   

US Q4 Earnings

It was a big week for the FAANG stocks in the US with Facebook (FB) and Apple (AAPL) releasing Q4 earnings figures.

The NYSE FANG+ Index fell -4% for the week with AAPL falling -5% despite beating analyst expectations as new 5G iPhones contributed to record revenues in its handset division. Meanwhile strong sales of Mac laptops and iPads due to the working from home migration also bolstered underlying revenues.

AAPL revenues for the quarter rose +21% to US$111.4b whilst earnings per share rose to US$1.68 from US$1.25 outpacing analyst estimates of US$103b in revenues and US$1.41 in EPS.

Facebook (FB) likewise topped expectations but was also caught up in the market weakness falling -6%.

FB beat estimates for quarterly revenue, powered by increased ad spending by businesses given the shift in physical shopping to online caused by the pandemic.

Monthly active users rose +12% to 2.8b, above the 2.75b expected by analysts whilst total revenue rose to US$28.1b in Q4 from US$21.1b, a year earlier and ahead of forecasts of US$26.4b.

ASX

The ASX200 performed in line with the global benchmark falling -2.8% for the week.

Sectors leveraged to growth and those that generally perform well when sentiment is strong were understandably the worst performers last week with energy stocks falling -9%, miners -6% weaker and IT stocks down -3%.

Woodside (WPL), Oil Search (OSH) and Santos (STO) were all weaker falling between 8-10% whilst miners fared only marginally better as the iron ore price fell on concerns over Chinese demand.

Iron ore fell -7% to trade US$158/tonne on the back of Chinese steel mill utilisation falling for a fifth consecutive week.

More ‘defensive’ sectors outperformed with consumer staples and utilities rising +1.1% and +1.3% respectively.

Wesfarmers (WES) rallied +2.3% following last week’s +6% gain after a broker upgrade led to WES shares trading at a record high of $55. 

The upgrade was primarily based on expectations of continued strength in sales in 2H21 and FY22 with Bunnings expected to deliver 2H growth of 3%+ compared to a -12% fall in the prior corresponding period. 

Locally, reporting season kicks off this week and then really ramps up over the course of the next three weeks so we will have plenty of information to interpret and dissect and fingers crossed the portfolios perform well.

Looking ahead

Monday 1st February – Friday 5th February 2021

  • Monday: AU Construction Index (DEC), Markit Services PMI (JAN), CN Caixin Composite PMI (JAN)
  • Tuesday: AU RBA Meeting, US Markit Manufacturing PMI (JAN), ISM Manufacturing New Orders (JAN)
  • Wednesday: AU Ai Group Construction Index (DEC) Markit Services PMI Final (JAN), CN Caixin Services PMI (JAN)
  • Thursday: AU Balance of Trade (DEC), US Markit Services PMI (JAN), UK BoE Interest Rate Decision
  • Friday: AU Retail Sales (DEC), US Weekly Jobless Claims

Friday 29th January, 5pm values

 IndexChange%
All Ordinaries 6871-208-2.9%
S&P / ASX 2006607-193-2.8%
Property Trust Index1384-23-1.6%
Utilities Index6395+81+1.3%
Financials Index5558-159-2.8%
Materials Index15496-971-5.9%

Friday 29th January, closing values

 IndexChange%
U.S. S&P 5003714-127-3.3%
London’s FTSE6407-288-4.3%
Japan’s Nikkei27663-968-3.4%
Hang Seng28284-1164-4.0%
China’s Shanghai3483-124-3.4%

Key dividends

Monday 1st February – Friday 5th February 2021

  • Monday: Div Ex-Date – Betashares Legg Mason Australian Bond Fund (BNDS)
  • Tuesday: Div Ex-Date – Saracen Mineral (SAR)
  • Wednesday: Div Ex-Date – Nickel Mines (NIC)
  • Thursday: Div Pay-Date – Arena REIT (ARF) )
  • Friday: Div Pay-Date – Select Harvests (SHV)

Contact

Mark Johnson – Chairman of Investment Committee(03) 8825 4738
Guy Silbert – Investment Manager(03) 8825 4750

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

Mark JohnsonT: (03) 8825 4738Cameron MorcherT: (03) 8825 4737
Livio Caiolfa T: (03) 8825 4748Michelle BromleyT: (03) 8825 4751
Marcus AingerT: (02) 9134 6292Nicole LewisT: (03) 8825 4734
Dylan CresswellT: (03) 8825 4707 Nicholas Miller T: (03) 8825 4722
Jarrod Rodda T: (03) 8825 4729

The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG (www.primefinancial.com.au/fsg) for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.

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