Weekly market update - 6th of October 2020
Written and accurate as at: Oct 06, 2020 Current Stats & Facts
The COVID situation in Australia continues to improve but deteriorating case numbers and softer macro data overseas weighed on the local market last week where it fell by almost 3% for the week. The US equity market reflected growing concerns on a number of fronts but ended the week up 1.5% after a late rally.
Meanwhile, Trump’s falling popularity is reducing fears among Democrats that a package could harm their election chances, giving them more confidence to support it. Interestingly, the bookies continued to mark Trump down last week. An average betting indicator spiked from 55% to 61% in Biden’s favour after the first debate. At this point, the odds of a Republican versus Democrat-controlled Senate are line-ball.
COVID outlook
Australian case trends continue to do well in stark contrast to September. Community transmission has improved for 10 days in a row and remains the key number to watch. Optimism on this front is prompting outperformance among domestic re-opening plays such as travel stocks.
New daily cases in the US continue to trend sideways, though at a higher plateau than late August and early September. Hospitalisation rates are up slightly. The mortality rate continues to fall. Concern about the impact of colder weather – particularly the risk of a higher death rate – continues to weigh on market sentiment.
European trends remain concerning but are no worse than last week. The daily moving average of new cases in France has stabilised. However, the plateau is at a much higher level than previous waves – similar to the US. Trends in Spain are slightly better, while there is a view the UK is stabilising.
So far higher case numbers in France are not leading to the same crisis in healthcare – similar to the US. Activity data has remained resilient, suggesting it is not leading to a material economic impact thus far.
Macro outlook
New US data was on the softer side last week. Headline employment continues grew but at a declining rate. For example, another 784,000 service sector jobs were added in September, versus an average of 2.2 million in each of the previous three months. The unemployment rate fell to 7.9% but this number was helped by the participation rate falling to 61.4%. There are still 7.8 million fewer jobs in the non-government sector than pre-COVID. The number of permanent job losses continues to grow as some “temporary” losses are reclassified.
All this is likely to increase pressure on policymakers to act. The growth in permanent job losses – and the implied degradation in skills and impact on mental health – are areas of key concern. The case for further stimulus is reinforced by the fall in real personal income. This fell 2.7% in August as previous stimulus packages such as the Presidential program rolled off. The net effect of falling personal income and decelerating employment trends are starting to prompt concern of disappointing growth in Q4 2020. The savings rate will be a key swing factor here. The surge in stimulus payments saw it rise to 14% in recent months, up from the long-term trend of 8%. The extent to which households will draw down on accrued savings in coming months to offset lower payments remains to be seen.
While the data is softer, it is important to bear in mind that the US economy continues to recover. However, the pace of recovery is slowing. Recent data highlight the need for further stimulus to maintain recovery rates – and there appears ample scope to do so. The level of slack in the economy reduces the risk of stimulus-fuelled inflation, meaning little constraint on funding or funding costs. Previous Democrat reticence to support the Republican campaign with improved economic data also seems to be waning, along with Trump’s popularity.
Markets
Oil continued to weaken last week. Brent Crude was off 6.3% as markets tempered expectations of a rebound in demand. The impact of aircraft fuel is playing a role in this. However, diesel demand has also been weaker than many would have expected at this point. Other global demand proxies held up better. The copper price rose a little while the AUD appreciated 2.1% against the USD. Gold gained 2.3%.
Australian equities were led down by large caps. Energy (-6.8%) fared worst, but Banks (-4.6%) and Staples (-4.9%) were not far behind. Domestic cyclical stocks tended to outperform, driven by an expectation of further stimulus from this week’s federal budget and optimism about the easing of border restrictions. Boral (BLD, +6.8%) was the best performer in the ASX 100 after well-received changes to management.
Thematic effects tended to drive most stock moves, with little stock-specific news. Energy names such as Oil Search (OSH, -9.4%), Santos (STO, -8.8%) and Woodside (WPL, -8.3%) were among the ASX100’s worst performers. This clearly remains the worst-performing sector in the year to date, down 44% versus Resources (-9%) and the broader ASX 300 (-11%).
There was a downgrade from management at A2 Milk (A2M), which fell 18.5% and was the worst performer in the ASX 100. The key issue is an inventory overhang in key channels. This is dragging on sales in Q1 FY21 – a trend expected to continue into Q2. Earnings expectations were downgraded 15% but management is pointing to near-term factors such as the Victorian shut-down. A rebound is expected in the second half, however, signs of a shift in demand to domestic brands in China may mean this is a longer-term issue.
Travel stocks did well on the expectation of easing border restrictions. Qantas (QAN) gained 5.9% and is now trading 18% above the price at which it raised equity capital. Flight Centre(FLT) was also up 5.9%.