Weekly market update - 7th of September 2020
Written and accurate as at: Sep 07, 2020 Current Stats & Facts
The Victorian lockdown continues to drag on Australia’s national economic pulse. As a result, Australia is a negative outlier in global industrial surveys. There was a sharp sell-off in growth stocks late last week, which dragged on markets as a whole. The S&P 500 fell -2.3%. The local market was more than 2%.
Key near-term factors
- US cases: New case numbers are plateauing; it’s important to watch for a pick up as students return to school
- Australian cases: Trends continue — numbers falling in Victoria, steady in NSW.
- Vaccine/therapeutics: No new material news.
- US economy/policy: Stronger data – no signs of lower unemployment insurance payments stalling rebound. Policy impasse remains.
- Australia economy/policy: Rising expectations for tax cuts in upcoming budget
Australian outlook
Victoria’s seven-day moving average of new cases continues to trend lower, dipping back below 100. Having crept back up a few weeks ago, NSW remains steady at around 10 new cases a day. Victoria’s decision to pursue an effective elimination strategy is material. It means stricter restrictions for longer, with a greater impact on activity, the economy and budget deficits.
The number of people dining out demonstrates the impact of Victoria’s lock-down on the national economy. In NSW restaurant-going has returned to pre-COVID levels, while Queenslanders are eating out more than they were in January. However at a national level dining out remains 20-30% below pre-COVID levels, due to the drag from Victoria. This remains a headwind for the domestic equity market and specific companies.
US outlook
The rapid spread of COVID among students returning to university has seen new daily cases in the US plateau at around 40,000 – after falling from a mid-July high of about 60,000. Hospitalisations continue to fall. But this may change given the lagging effect with new cases. Mortality rates continue to fall.
The main news out of the US was last week’s strong jobs data. The payroll data was reasonable – probably a little better than expected. But the household survey of employment was very strong, suggesting unemployment fell 2% over the month to about 8% – half it's pandemic high-point. The hours-worked survey confirmed the same trend.
Margins of error are likely to be larger than normal. But the change is beyond anything that could be explained by such margins – and paints a picture of a strong V-shaped economic recovery.
The easier gains are likely to have been made and it may get harder to maintain momentum from here. But this helps explain why markets have been as strong as they have. The rebound has simply been much better than many feared. It also confirms falling government payments are not crimping the rebound.
Global GDP growth forecasts have progressively improved as analysts become less pessimistic. There’s been a sharp pick-up in expected growth rates for Q3 2020 since mid-August.
This is supported by underlying activity in key sectors such as autos, where US production is now running above pre-COVID levels. The rebound in China and Japan is also strong. This has been driven by income support and pent-up demand helped by an aversion to public transport. Other sectors are languishing, however, this demonstrates the speed with which key parts of the global economy are rebounding.
Most industrial surveys in key economies around the world are in expanding territory and improving. Australia is an outlier in this regard. The drag from Victoria has prompted deteriorating industrial surveys and a more neutral outlook for the economy. The effective elimination strategy is likely to see this drag continue for a while longer.
Markets
US bonds yields fell early last week after the recent sell-off, but they rose again on the strong jobs data.
Brent crude oil fell -5.3% to US$42.66 a barrel, driven in part by a slightly stronger US dollar index. Iron ore made another 4.1% gain, to US$127.53. Stronger auto production is playing a role here, alongside disruptions to Brazilian supply.
US equities sold off as momentum in large-cap tech rolled over. After some unusual days in which markets and volatility were rising, it became apparent there has been some large option-trading in recent weeks. High volumes of call options on large-cap NASDAQ stocks prompted buying by algorithm-driven momentum strategies, which was followed by speculative retail money.
This unwound late last week with material corrections in large-cap tech and the NASDAQ more broadly. This is perhaps compounded by Tesla missing out on inclusion in the S&P 500, which saw those stocks fall 6% in the after-market on Friday.
It remains to be seen whether this is a short, sharp wash-out of some recent excesses or something more sustained. We are mindful that the underlying pre-conditions of recent market strength – low rates, abundant liquidity, and evidence of economic recovery – all remain in place.
The Australian market dropped in line with the US last week, driven by weakness in growth and consumer defensive stocks that had been enjoying recent momentum.
Afterpay (APT, -11.9%) was the worst performer in the ASX100. The fall in growth stocks was exacerbated by news that PayPal will offer a buy-now, pay-later (BNPL) option as part of its existing service to customers. This implies a much lower margin for the PayPal product than APT’s and emphasises our view that margins in the BNPL sector are unsustainably high. The question now is whether this impacts on APT’s demand or whether there is a degree of brand awareness or loyalty to offset the competition.
Elsewhere QBE Insurance (QBE, -7.8%) surprisingly announced its CEO was stepping down following a conduct issue. This may mean near-term uncertainty, but the company is well placed on a medium-term view. It is in better shape than it has been for a while operationally, and is enjoying some cyclical tailwinds. QBE’s chair – an experienced insurance executive – takes the reins for now.
Otherwise, it was mainly the technology and health care stocks that sold off, taking the lead from the US. In Xero’s (XRO, -5.2%) case this was compounded by news that some of its founders were selling parcels of stock. We note they have done so regularly over time.
Lendlease (LLC, +9.1%) did best in the ASX 100. Its well-received investor day focused on the strategy of multi-use developments and urban renewal. We see some reason for caution given its key areas – apartments, retail and office – are all facing some structural and cyclical questions.
Some unloved stocks caught a bid: AMP (AMP) was up +8.3%, Sydney Airport (SYD) +6.5% and Transurban (TCL) +6.3%.
Finally, rumours of a potential bid from private equity behemoth Blackstone saw office REIT Dexus (DXS, +3.9%) among the market’s best.