Weekly market update - 20th of September 2021
Written and accurate as at: Sep 20, 2021 Current Stats & Facts
Global equity markets remained soft last week. The S&P500 fell 0.5%, bringing month-to-date performance to -1.9%. In Australia, the S&P/ASX 300 was flat, though there was some significant sector divergence. Metals and Mining came off 4.4% while Energy was up 3.5%.
There were two key drivers of this performance:
- Concerns about Chinese growth in the wake of a potential default of Chinese property giant Evergrande, which led to a slump in bulk commodities
- Worries that central bank policy tightening may come through sooner than expected due to building inflation pressures
Covid and vaccines
Domestic news has been generally positive.
NSW Covid cases peaked at a lower level than feared, and vaccine penetration has continued to grow solidly.
The Take-up rate for the first dose has risen to 82.2% — up 3.7% compared to last week. This rate has been holding up well. That’s important since a higher rate will help relieve potential strain on hospital systems in future outbreaks and reduce the likelihood of future lockdowns.
The seven-day moving average for second-dose vaccinations is close to 61,000 this week — up from about 50,000 last week.
If this trend continues, we might get to 80% full vaccinated — and further relief from lockdowns — before October 18.
Globally, case numbers continue to improve, albeit marginally in the UK and the US.
Hospitalisation numbers have been slowly improving in both counties, leading to improved sentiment in the US.
Economics and policy
Tension has been building for weeks around Evergrande, China’s (and the world’s) most indebted property developer.
Evergrande’s bond interest payments are due on September 23. The question is whether the market will see bankruptcy or some form of debt restructuring.
More importantly, people are contemplating whether this will have a cascading effect on China’s other property developers and the economy more broadly.
Weakened sentiment contributed to the steep drop in iron ore over the week.
Inflation fears in the US have come mainly from a combination of labour shortages and unemployment insurance (UI) payments coming to an end. The next few weeks will be an important test of the durability of labour tightness.
Recent pricing power surveys indicate that US companies are pushing through pricing increases in several sectors, reflecting input price pressures, constrained availability of products and higher labour costs.
Also, gas prices remain far higher than we have seen for years in the US and Europe.
Inventories are low heading into winter. There is a 70% probability of a La Nina weather event leading to a colder winter. There are concerns that elevated gas prices will persist, leading to higher electricity prices in the US and UK.
All eyes are on the Fed’s September meeting this week.
The market will closely watch how they signal the pacing of tapering and their quarterly update on the dot plots. The dots are expected to have shifted forward again towards the median rate rise around the turn of 2023. The other focus will be on the number of rate rises through to the end of 2024.
Similarly, there was media attention on unpublished forecasts by the ECB, which could see inflation rising 2% by 2025, suggesting rates rising in 2023.
All this has added to the market’s wariness on the inflation impact on central bank policies.
Markets
The market saw a continued drop in iron ore prices. The seaborne benchmark fell 22% last week and is now down 37% for the calendar year-to-date. In contrast, the oil price was up by 3% and 45% in the same periods.
The main reason for this disconnect was iron ore’s reliance on Chinse demand, compared to oil’s link to global demand.
Several factors have driven the fall in iron ore.
It had an over-extended starting point, driven by surging steel production in China in 1H21.
The production surge was then met by a dramatic slowdown starting from 2H21: steel production was down 18% in July and a further 10% in August.
The Chinese government has aggressive rhetoric around holding down steel production through 2H21 for environmental reasons and keeping production growth flat for the whole year.
These restrictions are expected to continue limiting steel production to the end of the winter Olympics in late February next year.
At the same time, the Chinese government has introduced policies to maintain controls of the property sector, which is a crucial driver of steel demand.
The Evergrande situation has exacerbated fears for the overall sector.
Also weighing on demand, the Chinese economy has been generally softer recently due to rolling COVID lockdowns. More stimulatory policies on local government bond issuance that funds infrastructure spend are unlikely to kick in until 2022.
Lastly, the deteriorating relationship between China and Australia may have led to other measures impacting the commodity price.
Where to from here? The debate is not so much whether iron ore bounces much, but instead whether it can hold in the US$100s or if it continues to move towards a longer-term price of US$70.
The Evergrande final resolution may mark a sentiment low in China and its property sector.
Consequently, some measures to support the economy may be introduced, such as the RRR cut.
We should still expect relatively subdued demand from China, but the real-time indicators on the economy look to be near their lows.
Global demand for steel remains strong, as evident from the very high global steel spreads, suggesting there are still cyclical tailwinds.
Supply disruption also continues to emerge, with Vale announcing that it's iron ore production next year will be lower than expected.
Overall, this week could be the crescendo in negative sentiment before investors start to rebuilding confidence slowly.
Against this backdrop, equity markets overall are re-testing support levels.
Early evidence could support that the US economy is experiencing a re-acceleration as Covid cases start to stabilise and fall. And liquidity from Central Banks remains abundant.
Lastly, we note fund flows have mirrored the rotation of value to growth. Inflows to tech and outflows from cyclicals look to be at extremes.
As such, we continue to see cyclicals holding better from here.
Australian company news
The main stock moves in our market last week related to the rout in iron ore. Fortescue (FMG) was down 16.4%, Mineral Resources (MIN) lost 9.2%, Rio Tinto (RIO) dropped 7% and BHP (BHP) fell 5.1%.
Some other moves looked tied to major transitions rather than company-specific news.
For example, Worley (WOR, -6.8%) was weak as Jacobs sold down its stake from the 2019 transaction.
On the other hand, Altium (ALU, +14.4%) bounced back from its recent sell-off. The company put on a concerted effort to talk up longer-term prospects, potentially signalling a desire to do a deal or shore up defences.
Telstra’s (TLS, +1.0%) strategy day was supportive of the stock. A renewed cost-out target through to 2025 and a change in dividend policy to focus on cash flows that should signal rising dividends gained traction among investors in the next few years.
A strategy day from one of our preferred growth names Pushpay (PPH, +6%), indicated the potential for more cross-sell from its recent Resi Media acquisition and was very well received.