Weekly market update - 8th of June 2021
Written and accurate as at: Jun 08, 2021 Current Stats & Facts
Markets continued to grind higher on limited news flow last week. Improved sentiment on global growth pushed the energy sector ahead 8.5%, which led the S&P/ASX 300 to a 1.6% gain for the week. There were several factors at play, including a sense that the worst overseas Covid outbreaks are coming under control. There are indications that Europe will soon follow the US into a broader re-opening. OPEC’s meeting was concise, signalling that its stance of restricted supply remains firm. Brent Crude rose 2.8%.
Covid and vaccines
Global cases continue to trend in the right direction with the US, EU and some of the worst-hit countries such as India. Continued vaccine exports to under-supplied countries are boosting confidence. US mobility levels have now passed pre-COVID highs. The EU is trending higher, which is helping improve sentiment on oil.
Economics and policy
US non-farm payroll data showed an additional 559,000 new jobs in May. This data was better than April but was still well below the jobs growth expected with the recovery. Moreover, there are still 7.6 million fewer jobs than before the pandemic. There is a view that ongoing federal unemployment insurance top-up payments are discouraging people from job hunting. These payments are due to roll off in September.
A buffer of excess savings accumulated in the past year is also likely to be playing a role. The result is a falling workforce participation rate at a time of huge jobs supply. Leisure and hospitality account for about 40% of the gap in jobs compared to pre-Covid. Education and health make up another 15% or so.
Wages are a big focus given latent concerns on inflation and people’s reluctance to return to work. Wages grew faster than expected in the latest data. But the year-on-year rate is still subdued at 2% growth. Moreover, the composition of wage growth is distorting headline figures to a degree. We have seen a faster return in lower-paid jobs, which is depressing the headline figure.
Interestingly, leisure and hospitality are bucking this trend, with 8.8% wage growth highlighting labour supply issues in the sector. The debate is whether these labour supply issues will be resolved relatively quickly or seed broader spread inflation.
Another point to note is that productivity is high. The US has returned to pre-Covid GDP — with far fewer workers. This apparent gain in productivity reduces the importance of unit labour costs. These issues will play into the Fed’s policy deliberations. At this point, most expect the Fed to start talking about tapering in the June meeting without drawing any firm conclusions.
Instead, the focus is on explicit signalling to avoid a “taper tantrum” in markets. We won’t return to the trend of long-term job growth until mid-2023 based on the current jobs growth rate consistent with the Fed’s message of no rate tightening for two-to-three years as such bond markets have so far seemed comfortable with the Fed’s stance.
The US Composite Purchasing Manager’s Index (PMI) is well above its highest level in over a decade. The Global Composite PMI, while trending upward, is still below its highs. There is scope for the Global PMI to follow the US, emphasising that there are several legs to the global recovery.
Markets
Bonds remained largely unmoved last week, and the broad environment was reasonably benign. However, there was some movement in the commodity space. Brent crude rose 2.4%, passing a technical level that suggests it could head towards US$80. If that’s the case, it will be interesting to see what this means for bonds. Elsewhere iron ore rose 10.8%. Copper and gold consolidated.
Overseas we started seeing gains in the Real Estate Investment Trust (REIT) sector, which has long languished. The main explanation is that it is a later cycle play on the re-opening.
The Energy sector rose 8.5% in Australia, though it’s still up only 6.8% for 2021 so far. REITs rose 2.6% domestically but are also lagging for over the year (up just 6.4%). Financials remain remarkably consistent, up 1.6% for the week. There are some early signs of rotation from the banks (up 30.2% for the year to date) to the insurers. Utilities (+5.8%) gained some respite, reflecting the local issue of higher power prices following a recent explosion at the Queensland coal-fired Callide Power Station.
Six of last week’s eight top performers in the S&P/ASX 100 were energy stocks. Origin (ORG, +15.7%) led the pack, a beneficiary of higher oil and power prices. Santos (STO) was up 12.2%, and Oil Search (OSH) gained 11%. Worley (WOR, +15.6%) had a fortuitously-timed investor day, which played to the theme of a rising oil price driving a recovery in CAPEX in the sector. However, we are mindful that part of the reason oil is strengthening is a lack of new investment response.
The iron ore miners did not respond to the 10% gain in prices, reflecting some scepticism around the sustainability of price drivers, linking to the stimulus and economic recovery. In contrast, sentiment remains bullish on the copper miners despite a 4.5% drop in the price last week. Investors remain focused on a longer-term theme related to renewable energy and electric vehicles.
Tech was the week’s loser for no discernible reason. Appen (APX), falling -8.7%, was the worst performer. Altium (ALU, -3.5%) was also weak. Nevertheless, there are signs of a base building in tech stocks in the US, although we do not expect sustained market leadership given the broader macro backdrop.
Gold stocks reflected the yellow metal’s 1.6% fall. Evolution (EVN) fell 4.9%, and Northern Star (NST) was down 4.6%. So we see the gold price as well supported.