Weekly market update - 6th of September 2021
Written and accurate as at: Sep 06, 2021 Current Stats & Facts
US payroll data came in weaker than expected last week, paying any residual risk of an earlier-than-expected tapering of Quantitative Easing (QE) purchases. There probably wasn’t enough in the report to delay the expected commencement in December, however.
The US dollar weakened slightly, which helped commodities and resource stocks strengthen during the week. The S&P/ASX 300 was up 1.1% last week, while the S&P 500 gained 0.62%.
COVID and vaccines
Vaccination trends remain constructive.
NSW is on track to reach full vaccination for 70% of the population by the end of this month and 80% by mid-October.
The national vaccination rate is running at about 1.1% of the population per day. NSW is at 1.4%. We expect NSW case numbers to deteriorate further from here, peaking in late September before the effects of vaccination start to take hold.
The key issue is hospital capacity. There are 845 ICU beds in NSW, of which 172 (20%) are occupied by Covid patients. There is some scope for surge capacity. But we are mindful that when Covid patients reached about 40% ICU occupancy in the US, it started to cause issues.
Victoria has 426 ICU, according to the Department of Health. Queensland has roughly 30% less capacity per capita than NSW, while Western Australia has about 50% less ICU capacity per capita. This is a material factor in caution towards re-opening in these states.
The effect of children returning to school in the northern hemisphere will soon become apparent. Scotland returned two weeks earlier than England and experienced a renewed surge in Covid cases. This is something to watch. The number of patients in Scottish hospitals is still below 30% of peak levels. It’s below 20% in England.
It is worth noting that NSW now has a higher percentage of Covid patients in hospitals than in the UK. Despite cases per capita at about 40% of UK levels, this highlights the impact of vaccine penetration.
In the US, cases and hospitalisations continue to plateau, and the effective reproduction or R(eff) number is below 1 in most states. R(eff) measures the average amount of people an infected person goes on to infect. The return to school is again likely delaying a roll-over in these numbers.
About 39% of the US population lives in areas with ICU occupancy greater than 85%. Breakthrough hospitalisations (hospitalisations of fully vaccinated patients) remains at 1.8% of all Covid admissions.
Economics
In the US, August payrolls came in much weaker than expected at the end of last week. There were 235,000 new jobs added, versus an expected 733,000. There were extensive upwards revisions for previous months, but not enough to compensate for a very soft result.
Leisure and hospitality provided the missing ingredients — where no new net jobs were added, versus 400,000 last month. Delta plays a role here, but there is also a supply-side effect of people taking time off after summer. This is likely to quash any further talk of an early tapering of QE.
We are mindful that wages continue to grow — up 0.6% month-on-month versus +0.3% expected and up 4.3% year-on-year. The unemployment rate also continues to drop — from 5.4% in July to 5.2% in August.
The key point is this data takes some steam out of the service sector, possibly limiting potential inflation from a large part of the economy.
This, combined with Biden’s slumping popularity, may provide the impetus for more fiscal stimulus.
There is scope for adjustments to the infrastructure bill currently under debate, so benefits are more front-ended. As benefits end in 2022, this may mean the fiscal cliff is not so high.
The European Central Bank (ECB) meets this week. Some members have been talking about economic improvements and rising inflation pressures, signalling a potential tapering of their own QE program.
European bond yields rose in response. The market is expecting a shift in the target from EUR80 billion to EUR70 billion a month — the risk of a larger reduction remains.
Markets
Markets were quiet last week. There was something of a bounce in resources and energy, but growth stocks remain well supported.
It will be important to watch any response in the US dollar to ECB action this week. Any weakness in the USD would help commodities. There has also been some speculation around further Chinese stimulus, which would likewise be helpful.
Alumina (AWC, +19.1%) was the best performer in the ASX 100, as supply concerns emerged in the alumina/aluminium complex. This also helped South32 (S32, +13.1%).
Fortescue (FMG, +4.3%) delivered a solid operational result with a dividend payout at the top end of the guided range. Management made a concerted effort to provide more detail and reassurance around Fortescue Future Industries (FFI) but so far have no proof points to demonstrate the investment is adding value.
Altium (ALU, -7.8%) was the weakest performer in the ASX 100. The market became less comfortable with the result the more they dug into it.
As is often the case QBE (QBE, -2.7%) fell in response to natural catastrophe — in this case, Hurricane Ida. Historically this reaction has often unwound as the market realises that costs incurred are likely to flow through to higher premiums.
Wesfarmers (WES, -5.7%) has been weak in the wake of results which, while solid, did not have perhaps enough good news to justify the company’s valuation multiple.
August reporting season review
There were four key themes to highlight from the full-year reporting season.
- Rising fears of a slowing global economy. This led to underperformance in the mining and energy sectors.
- Elevated merger and acquisition (M&A) activity. 2021 has already broken through previous highs regarding the dollar value of the M&A activity, with four months still left to run. This reflects strong confidence in board rooms.
- Confidence in a demand rebound. Management teams pointed to a better-than-expected June quarter – before restrictions were imposed – as evidence of strong underlying demand when the economy does re-open.
- ESG (Environmental, Social and Governance issues) were major factors in corporate strategy. This was evident in BHP’s (BHP) shift out of oil and gas; moves by Woodside (WPL) and Santos (STO) to create scale to de-risk and become more cash-generative; more detail around Fortescue’s (FMG) FFI project; and BlueScope (BSL) flagging a need to invest in decarbonisation.
The equity market continued to grind higher in August despite the challenge posed by the Delta spread. Paradoxically, we are in an environment where the constraint on growth from Delta supports markets, given that it likely means policy remains easier for longer.
The S&P/ASX 300 gained 2.61% for the month. The S&P/ASX Small Ordinaries was up 4.98%, and S&P/ASX 300 A-REIT index gained 6.38%. Financials finished up 4.92%.
The S&P/ASX 300 Resources index dropped 8.37%. This was partly driven by falling commodity prices and was exacerbated by BHP’s proposal to collapse the company’s dual listing. Operationally, results were generally fine within the sector.
We saw a rotation to growth and some of the more richly-valued defensive stocks during the month. This was driven largely by the expectation that rates would remain lower for longer, supporting valuations in these parts of the market.
Technology (+16.2%) led the market on the back of the rotation to growth. Results in the sector were not as strong as the price action might imply. Wisetech (WTC, +57.0%) was the best performing stock in the ASX 100 for the month. Unsurprisingly, however, there are questions around the sustainability of its recent margin uplift.
Afterpay’s (APT, +39.2%) result also reflected the pressure of an increasingly competitive industry. Still, Square’s takeover offer rendered this result moot until the deal completes APT trades as a geared play on Square’s roll-out of alternative payment platforms rather than a pure buy-now-pay-later exposure.
We saw a recovery in some of the stocks hardest hit by the lockdown, such as Qantas (QAN, +10.9%), Scentre Group (SCG, +12.6%) and Seek (SEK, +11.2%).
Management outlook statements helped the market to start dimensioning near-term risks. In several instances, management was also able to demonstrate that activity in 4Q FY21 — which was largely Covid-unaffected — was better than most expected.
This underpins confidence in the strength of a demand rebound as restrictions are rolled back. An accelerated vaccination rate in NSW also played a role.
Star Entertainment (SGR, +19.3%) fell into this camp, though its rebound was also helped by a proposal to spin out its property assets into a REIT.
We saw some good results from portfolio companies such as Downer (DOW, +25.5%) and James Hardie(JHX, +16.0%), which deliver on strategy changes.