Weekly Market Update – 24 May 2021

Cautious week for equities but economic data remains positive.

Global equity markets recovered from the previous week’s inflation jitters to post positive returns last week with the MSCI World Index rallying +0.6% in AUD terms.

Despite ongoing caution as to when the Federal Reserve will scale back its bond purchasing program, investors continue to focus their attention on the current health of the underlying economy.

US manufacturing data released last week further highlighted the health of the economy with business activity accelerating strongly in May represented by the Purchasing Managers’ Index (PMI) which recorded its strongest figure since October 2009.

A sharp rise in consumer demand for goods and services coupled with continued growth in production capacity, forward orders and a continued deterioration in weekly jobless claims is underpinning this market strength.

Minutes from the Federal Reserve’s April meeting continue to point to a recovering economy with the Committee indicating “it might be appropriate at some point in the upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases.”

Despite this indication, we believe the Fed will continue to allow ‘consistent’ data drive its response. In our view, it is highly unlikely that the Fed will adjust policy settings based on one strong data release given it has been very vocal in its desire for sustainable inflation and full employment.

Additionally, the Fed has stated on multiple occasions that it is willing to let inflation overshoot its target to reach that average. So, we continue to view this month’s strong inflationary data (annual CPI of 4.2%) as a step in that direction, albeit a preliminary one.

Despite the optimistic outlook, US equities underperformed their global peers last week falling -0.5% with accommodation provider Airbnb (ABNB) faring worst (-5%) after its post-IPO lockup expired the week before, meaning insiders can now sell shares.

ABNB shares are -22% in March and continue to be negatively impacted as the travel industry struggles to return to normal following the outbreak of COVID-19.

Australian Unemployment

Once again, the Australian economy continues to defy economist expectations with the unemployment rate falling to 5.5% in April.

What was particularly impressive about this release was the fact that April’s unemployment data was the first month of employment data post JobKeeper.

Given the number of workers on JobKeeper it was widely anticipated that the unemployment rate would climb once the program ceased, so the fact that the unemployment rate managed to fall whilst encapsulating this data was truly impressive and a strong reminder of the health of the labour force.

30,600 jobs were shed in April which drove the participation rate down slightly to 66%. Importantly, one of the most vulnerable and critical areas of work throughout the pandemic – youth employment continues to rebound with employment across the sector now only 1% lower than March 2020. 

Another key determinant in the overall health of the labour force – underemployment which represents those workers who are actively seeking more working hours in the week also decreased by 0.2% to 7.8% highlighting people are slowly getting more shifts and more hours.

Wage Price Index

Australian wages growth picked up from record lows last quarter but remains well below the desired target of the RBA, which has promised not to raise interest rates until inflation is sustainably within its target band.

After two quarters of minimal growth wages climbed +0.6% in the March quarter and +1.5% over the year.

The public sector recorded its lowest annual rate of growth at +1.5% while the private sector remained at +1.4% for the second quarter in a row.

Growth in wages over the March quarter 2021 was mainly influenced by regular scheduled enterprise agreement increases, salary reviews for jobs paid by individual arrangements, and a proportion of modern awards receiving increases as a result of the Fair Work Commission (FWC) Annual Wage Review.

Accommodation and food services recorded the highest quarterly rise of +1.2% whilst education and training recorded the highest annual rise of +2.2%. We think the wage price index is consistent with the tightening labour market and the inability to source labour from overseas as a result of border closures means stronger wages are likely to continue.

RBA Minutes

Minutes from the recent RBA meeting show the Board discussed the impact of global supply chain disruptions that it believes will add to short-term inflationary pressures.

The rebound in demand for global goods has now significantly outpaced the ability for global supply chains to cope which has driven “upward price pressures for key components” according to the RBA.

On top of this, rising commodity prices (iron ore continues to trade around $US200/tonne) and the rising cost of inputs which are ultimately being passed on to the consumer are contributing to higher inflation.

The RBA deemed inflation (currently 1.4%) remains subdued locally but acknowledged that it has the potential to rise quicker than expected.

ASX Weekly Wrap

Australian equities were marginally higher last week with the ASX200 rising +0.2%.

Tech stocks led the charge higher climbing +6% having fallen heavily for the last four weeks whilst miners and energy stocks dragged the market more than -2% lower on account of lower oil prices (-3%) and a pullback in the price of iron ore (-4%).

Best performing stocks last week were Appen Limited (APX) which rallied close to +20% after reaffirming EBTIDA guidance of US$83m-US$90m in FY21 and announcing a new global organisational structure which aims to provide products to major US global tech customers.

Accounting software provider Xero Limited (XRO) advanced +13% on no major news.

Having sold off -15% in the previous week the rally appears to be a more a case of reversion than anything else. XRO is a stock we have previously held in portfolios which we sold on valuation grounds and therefore remains a stock we continue to monitor.  

Across the PRIME Australian Equity Growth SMA, the best performer last week was Ampol (ALD) which rallied +9% after the Federal government’s fuel support package reduces earnings volatility as global refinery margins begin to improve.

On the back of the government’s announcement ALD announced it would continue refining operations at its Lytton refinery until at least mid-2027. The support package includes a variable payment of up to $108m annually for Lytton.

Due to weakness in the energy and mining sectors it was no surprise to see Santos (STO) and BHP (BHP) weakest amongst the portfolios.

BHP fell -4% and STO was -6% weaker as investors rotated out of these stocks in favour of the banks.

All four banks were higher last week for the first time in 6 weeks with ANZ (ANZ) faring best rallying +2%.

Looking ahead

Monday 24th May 2021 – Friday 28th May 2021

  • Monday: US Chicago Fed National Activity Index (APR)
  • Tuesday: N/A
  • Wednesday: AU Westpac Leading Index (APR), US New Home Sales (APR)
  • Thursday: AU Private Capital Expenditure (Q1), US Durable Goods Orders (APR), Weekly Jobless Claims
  • Friday: US Personal Income (APR)

Friday 21st May, 5pm values

 IndexChange%
All Ordinaries 7265+26+0.4%
S&P / ASX 2007030+16+0.2%
Property Trust Index1465+7+0.5%
Utilities Index5804-138-2.3%
Financials Index6376+46+0.7%
Materials Index16864-373-2.2%

Friday 21st May, closing values

 IndexChange%
U.S. S&P 5004156-18-0.4%
London’s FTSE7018-26-0.4%
Japan’s Nikkei28318+234+0.8%
Hang Seng28458+430+1.5%
China’s Shanghai3487-3-0.1%

Key dividends

Monday 24th May 2021 – Friday 28th May 2021

  • Monday: Div Ex-Date – Elders Limited (ELD)
    Div Pay-Date – CGFPB (CGFPB), Seek Limited (SEK)
  • Tuesday: Div Ex-Date – Amcor (AMC)
    Div Pay-Date – CGFPA (CGFPA), CGFPC (CGFPC)
  • Wednesday: Div Pay-Date – Bank of Queensland (BOQ)
  • Thursday: Div Pay-Date – Janus Henderson (JHG)
  • Friday: Div Ex-Date – CSR Limited (CSR)

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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