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Weekly market update - 28th of March 2021

Written and accurate as at: Jun 28, 2021 Current Stats & Facts

The market spent last week digesting the shift in Fed messaging. The S&P 500 rose 2.8%, while the S&P/ASX 300 fell 0.8% as sentiment wavered in the face of the Sydney lockdown. The US economy remains strong heading into its reporting season. We are also seeing economic, and earnings momentum build elsewhere in the world. Coupled with a stable bond market and receding fears of a policy mistake, this may bode well for markets grinding higher. 

Covid and the impact of the delta strain

The critical question is how the Sydney outbreak and the impact of the Delta variant will affect domestic economic re-opening. Cases are likely to spike in the next few days while the lockdown takes effect. The lockdown in the Northern Beaches outbreak last Christmas led to a deceleration in case growth within a week. The higher transmissibility works against containment. But on the positive side, improved track-and-trace capability means fewer unknown cases lead to unexpected outbreaks than in previous instances. Uncertainty remains elevated. The regularity of these outbreaks prevents any earnings momentum building in the re-opening related stocks. 

The big issue is whether the delta variant changes the outlook for growth in Australia and globally. Will there be more widespread outbreaks in Australia? Will this more contagious strain lead to a slowing of momentum in the US and Europe?  

The UK continues to experience only limited growth in hospitalisations despite a surge in new cases. This significant improvement reflects the impact of vaccinations, though it could still change. Recent cases in the US have plateaued. The delta strain is likely to become dominant there in the next few weeks. It is particularly prevalent in areas of the mid-west and north where there are low vaccination rates. We will need to watch the impact on hospitalisations in the next few weeks. The higher transmissibility of delta raises the threshold on herd immunity. In the US, it’s believed up to 20-25% of the population has already had Covid. With vaccinations at 53%, they may still be relatively close to herd immunity. 

Economics and policy   

US economic data remains strong. Companies are running low on inventory and struggling to replenish in the face of strong consumer demand.  There are signs people are spending their excess savings. Personal consumption has held up despite the end of fiscal aid. There is a shift in spending from goods to services as mobility increases, there seems to be scope for this to play out further.  All this could provide a good outcome in the upcoming earnings season in the US. Australia may differ due to the stop-start nature of our re-opening.  

The Australian labour market continues to do better than expected. Overall employment is back above pre-Covid levels. Surprisingly, Full-time jobs have rebounded better than casual labour. Regional areas are doing better than cities, reflecting the effect of lost tourism and a strong mining sector.  Measures of “excess” workers — those working few hours due to economic reasons — have returned to pre-Covid levels. The number of jobless looking for work has also fallen to eight-year lows.  

A strengthening labour market makes it difficult to see how the RBA will continue with its mantra of no rate rises for the next three years.   

Markets and stocks 

Markets remained largely benign last week. US bond yields rose a little following the decisive rally. Commodities were broadly positive, and growth sectors continued to lead US equities higher.    Last week we saw rotation to tech growth names and miners in the local market. Financials and health care were the weakest sectors.

CSL (CSL, -6.7%) declined the passing of a law in the US such that Mexicans crossing the border to give paid plasma donations will be considered illegal work. This ruling could have an impact on 5-8% of CSL’s total collections. Plasma collection recovery has been a critical factor in the CSL’s bounce, which sets back the company.  

Oil Search (OSH, -5.5%) fell despite oil price strength as the Abu Dhabi sovereign wealth fund divested part of its stake. 

Banks underperformed, led by Bendigo Bank (BEN, -5.1%) and Commonwealth Bank (CBA, -4.3%), reflected weakness in the US financial sector the previous week, in response to the Fed’s more hawkish tone. 

Insurers were also weaker, with QBE (QBE - 3.8%) and IAG (IAG -3.4%) down. The sell-off was partly in response to Victorian floods and news that the High Court had rejected the insurance sector’s appeal against having to pay out on Covid-related business continuity claims. 

Afterpay (APT, +12.8%) continued its run. The share price rally was partly due to its high leverage with the growth narrative. It also announced the launch of a “shop anywhere” option, allowing some customers to pay in instalments at non-affiliated merchants in the US. The option opens their market as it is initially limited to 11 retailers, including Amazon and Nike, with Afterpay benefiting from referral fees. The market also liked Paypal’s decision to increase prices by 25% for their buy-now-pay-later service in the US. The increase only applies to a small percentage of their gross merchandise value (GMV) — mainly small businesses that do not have a negotiated price. The actual impact is debatable, but it does reduce one of the competitive risks for APT.  

Boral (BLD, +8.3%) announced the sale of much of its North American business at a higher price than most expected. We also saw the next act of the Seven Group (SVW, -5.8%) takeover offer play out. SVW raised its offer price for BLD stock (to $7.30 or $7.40 depending on the take-up) and extended the offer period.   

Mining stocks bounced back as commodity prices rebounded. Independence Group (IGO, +5.6%) did best, followed by South32 (S32, +5.4%). Other deep cyclical companies such as BlueScope Steel (BSL, +5.0%) did well on this trend.  

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