Weekly Market Update – 02 August 2021

Corporate earnings driving markets but lockdown continues to weigh on sentiment.

Global equity markets were broadly flat last week in AUD terms.

Despite an increasing number of COVID-19 cases, investment markets were more focused on corporate earnings season in the US and Australia than rising case numbers.

Whilst infections are climbing, investment markets are taking some comfort from the number of COVID related deaths which are lower than they were a year ago. Nevertheless, fears over the rampant spread of the Delta variant continues to see a steady uptick in volatility.

The VIX (volatility index) rose +6% last week and more interestingly climbed +15% in July – its first monthly gain since January.

The Federal Reserve predictably kept interest rates on hold at its policy meeting and provided some clarity on the future direction of its bond purchasing program. Chairman, Jerome Powell stated that a reduction of monthly bond purchases (US$120b) would commence if the economic rebound continues at current levels.

Fundamentally, a growing economy will drive further gains in employment and when ‘full’ employment is reached the Fed will likely begin the tapering of its stimulus.

Whilst current employment data is undeniably positive and shows the labour force is continuing to grow, we do believe the true unemployment figure to be slightly higher with a number of those on lay-off still classified as ‘employed’ when in reality they should not be.

With the US unemployment rate at a 50-year low of 3.5% prior to the pandemic there still needs to be a further tightening in the labour market to reach what the Fed would consider ‘full’ employment.

Non-farm payrolls for July are released this Friday in the US with forecasts for unemployment to fall from 5.9% to 5.8%. 

At a stock level we saw some of the major tech stocks report last week in the US.

The FAANGs ex Netflix (NFLX) represented by Facebook (FB), Apple (AAPL), Amazon (AMZN), and Google (GOOG) all reported Q2 and Q3 earnings number last week.

FB fell -3.7% after announcing it expected revenue growth to slow in Q3 and Q4 whilst AAPL shares fell -1.8% despite quarterly sales and profits beating expectations with 5G iPhones and AAPL’s subscription services driving much of this outperformance. 

Microsoft (MSFT) and GOOG also reported strong operating margins but were both ultimately caught up in the overall weakness that plagued the tech sector. The NASDAQ fell -1% for the week.

Inflation spikes

Australia’s annual inflation spiked to 3.8% with headline inflation rising +0.8% over the quarter.

The main reasons behind this inflationary spike were a resurgence in global demand for oil which saw fuel prices rebound to above pre-COVID levels, the unprecedented level of fiscal stimulus provided and the government subsidising childcare throughout the heights of the pandemic.

Stripping out some of the more volatile items embedded in the headline inflation figure, core inflation remains soft coming in at 1.6% for the financial year. This continues to run well below the target band of the RBA who have set a 2-3% inflationary target.

Whilst we had formed a view that inflationary pressures were likely to persist with education, transport and household equipment and services driving much of this increase, the impact of the NSW lockdown on the broader economy is likely to prevent inflation from rising in the coming quarters.

Inflation will ultimately be driven by wages growth which continues to run below the RBA expectations of 3% and with the economy set to contract in the September quarter as result of lengthy lockdowns in various states the near-term inflationary pressures appear to have subsided.

Rate hike expectations delayed as lockdown continues

The prolonged Greater Sydney lockdown has seen a very quick turnaround from Commonwealth Bank analysts who only a fortnight ago called for a November 2022 rate rise.

However, the ongoing nature of COVID cases in NSW which are hovering around 200 cases per day has led to analysts revising their initial estimates with the COVID outbreak pushing out CBA’s rate hike prediction to May 2023.

In addition to the rate delay, economists are now forecasting that unemployment will peak at 5.6% in October (currently 4.9%) and that the RBA will delay its plans to begin tapering QE.

Fundamentally, the NSW lockdown is going to be a major drag on national economic output in September and leading into the December quarter.

We make no changes to our initial forecasts for rates to begin rising in 2H 2023, however, we acknowledge there is great uncertainty over the impact the current NSW lockdown will have on the economy.

If the current lockdown extends well into the backend of 2021 we expect interest rate talk may be replaced with recession talk.

ASX Weekly Wrap

The ASX200 performed in line with peers last week closing broadly flat.

Best performing sectors were miners which rose +2.8% followed by REITs which climbed +0.4% whilst the worst performers were tech stocks and utilities falling -3.6% and -3.3% respectively.

The AUD weakened against the USD falling -0.3% for the week – its fifth straight week of declines. A stronger than expected CPI print insulated the AUD from further weakness, however, the AUD ultimately fell -2% vs the USD in July as lockdowns across NSW, Victoria and SA weighed on sentiment.

Earnings season kicked off this week with a host of company’s reporting full-year and half-year earnings numbers.

Rio Tinto (RIO) rallied +5% after reporting underlying earnings of US$12b for 1H21 and announcing it will return a US$9b dividend to shareholders comprising a US$3.76 interim dividend and a US$1.85 special dividend. The result was well ahead of expectations and was ultimately driven by strong prices in iron ore.

Spark Infrastructure (SKI) received an improved takeover offer from KKR and a consortium of investors valuing SKI shares at $2.95 per share. This is the third adjustment upwards to the takeover price having initially lodged a $2.6375 bid before a second offer of 2.7375 was put forward.

As a result, SKI’s board has decided to grant the KKR and its investors the opportunity to conducts due diligence on a non-exclusive basis.

We flagged this a few weeks back but record low interest rates are providing fertile ground for takeover bids, particularly in the infrastructure space. We have now seen Sydney Airports (SYD) reject a takeover offer from IFM whilst Seven Group recently took control of construction supplier Boral (BLD)

SKI’s high quality assets and the long term nature of its contracts which ultimately mean steady and predictable cash flows make it an attractive takeover proposition. We recommend SKI shareholder do nothing for the time being.

Following on from ANZ’s $1.5b buyback announced a fortnight ago, NAB announced last week that it was intending to purchase up to $2.5b worth of its shares back on-market.

NAB’s CET1 ratio (the amount of money the bank is required to hold on reserve by APRA) was 12.3% at its half-year results, exceeding the top end of APRA’s unquestionably strong benchmark. As a result, NAB has decided to return capital to shareholders through an on-market buyback.

Finally, this morning APT announced it has entered into an agreement with Square Incorporated which sees Square acquire all of APT shares with an implied value of $39b or $129 per APT share – a 30% premium to the last closing price.

And in further M&A developments Santos (STO) and Oil Search (OSH) today agreed to terms on a merger.

OSH shareholders will receive 0.6275 new STO shares for each OSH share held via a scheme of arrangement which will see OSH shareholders own approximately 39% of the new merged company and STO shareholders 61%.

The merged company will create a diversified portfolio of high quality, long life, low-cost assets across Australia, Timor-Leste, Papua New Guinea and North America whilst its pro-forma market capitalisation of $21b will place the merged entity in the ASX top-20.

This week we see ResMed (RMD) and REA Group (REA) report on Thursday and Friday before reporting season really ramps up in the following week.

Looking ahead

Monday 2nd August 2021 – Friday 6th August 2021

  • Monday: AU Job Advertisements (JUL), CN Caixin Manufacturing PMI (JUL)
  • Tuesday: AU RBA Interest Rate Decision, Home Loans (JUN), US Construction Spending (JUN)
  • Wednesday: AU Markit Services PMI Final (JUL)
  • Thursday: AU Balance of Trade (JUN), UK BoE Interest Rate Decision, US Balance of Trade (JUN)
  • Friday: US Non Farm Payrolls (JUL), Unemployment Rate (JUL)

Friday 30th July, 5pm values

 IndexChange%
All Ordinaries 7664-7-0.1%
S&P / ASX 2007391-1-0.0%
Property Trust Index1558+6+0.4%
Utilities Index5942-202-3.3%
Financials Index6412-12-0.2%
Materials Index18393+503+2.8%

Friday 30th July, closing values

 IndexChange%
U.S. S&P 5004395-17-0.4%
London’s FTSE7032+4+0.1%
Japan’s Nikkei27284-264-1.0%
Hang Seng25961-1361-5.0%
China’s Shanghai3397-153-4.3%

Key dividends

Monday 2nd August 2021 – Friday 6th August 2021

  • Monday: N/A
  • Tuesday: N/A
  • Wednesday: N/A
  • Thursday: Div Ex-Date – Djerriwarrh Investments Limited (DWJ)
    Div Pay-Date – Arena REIT (ARF)
  • Friday: Div Ex-Date – BKI Investment Company Limited (BKI)

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 4707Nicholas Miller T: (03) 8825 4722
Jarrod Rodda T: (03) 8825 4729Gina McIntoshT: (07) 3557 2557

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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