Weekly market update 1st of November 2021
Written and accurate as at: Nov 01, 2021 Current Stats & Facts
At a headline level, the local market shed 1.13% last week, while the US was up 1.35%. Domestic inflation data prompted a large divergence between the US and Australian bond yields. US earnings season maintained a good trajectory, though supply chain issues are making themselves felt commodity prices took a hit on some policy announcements in China. The market is doing what it does best — testing the resolve and conviction of key constituents. The RBA’s response to recent moves will be important to watch in this context.
Covid and vaccines
There are indications Delta waves may be peaking in recent hot spots such as Romania and Singapore. This is consistent with the experience of other countries. The issue of vaccine availability in the world’s poorest countries is one to watch. While almost 60% of the world’s population have had two vaccine does, parts of Africa, Eastern Europe and emerging Asia are running well below that figure. News that Merck has agreed to license drug makers globally to produce its oral antiviral medicine Molnupiravir without royalties could be a material benefit to countries that are vaccine constrained.
Economics and policy
There was a couple of quarterly data points out of the US last week. US GDP grew 2% sequentially in the third quarter (seasonally adjusted), down from 6.7% growth in the previous quarter. As a result, annualised growth for 2021 is now running at 4.98% (down from 5.82%).
The more important point to watch in terms of questions over monetary policy was the Employment Cost Index, which measures total compensation to workers including salaries, wages and benefits. This grew at its fastest pace in more than 30 years, rising 1.3% quarter-on-quarter. It is up 3.7% from a year earlier. This headline increase was driven by a 1.5% spike in wage growth over the quarter, versus 0.9% growth in Q2.
The question is: does this start to slow in the current quarter as labour supply rebounds? If it doesn’t, the market is likely to lose faith in the “transitory” inflation narrative and the Fed will come under pressure to start hiking rates sooner.
European Central Bank president Christine Lagarde acknowledged that inflation will be higher for even longer than first thought. But she maintained the increase will be temporary, so a policy response would be premature. She identified higher energy prices, a global mismatch between recovering demand and supply and one-off effects of a German sales tax as three factors temporarily driving inflation.
There are reports that Chinese banks are starting to ease credit controls in response to government concerns about the potential effect of a slowing property sector on the broader economy. Banks in some areas have accelerated issuing home loans and lowered mortgage rates. The credit environment for property developers is also improving.
Australian bond yields
Australian 10-year government bond yields rose 29bps last week to 2.09% — versus an 8bp fall in the US equivalent.
Three factors drove the recent rise in yields:
- This shift began as New Zealand inflation data for the quarter came in at 2.2% versus 1.5% expected. This was treated as a lead indicator for Australia — and so it proved
- Australian headline CPI was in line with the expected 0.8% quarter on quarter and 3% year on year. But underlying CPI — the trimmed mean which is the RBA’s preferred indicator of inflation — rose 0.7% vs 0.5% expected. This was driven largely by housing construction and auto fuel prices. It is now sitting at 2.1% year on year versus 1.9% expected.
- The spike in bond yields is seen as a sign that the RBA is stepping back from yield-curve control given recent data — and may formally abandon it.
- The market is aggressively pricing in both the end of yield curve control and rate hikes prior to the RBA’s previous target of 2024.
The RBA meeting on Melbourne Cup Day will be keenly watched in this regard.
Markets outlook
US earnings season continues to play out well — 63% of companies have so far beat earnings estimates. That said, the market is not rushing to upgrade outlooks. Revisions to fourth-quarter and FY22 earnings and margins have been very modest. Supply chain issues are evident. Apple said supply chain issues cost it US$6 billion in sales for the quarter, with a bigger impact coming in the current quarter.
Iron ore fell 10.9% and copper lost 2% as Beijing stepped in to control the price of coal.
China’s National Development and Reform Commission set a target price and price ceiling for domestic coal at the pit-head until May 2022.
It is also looking for downstream sale prices to be controlled, but will let local governments set their prices.
The focus is alleviating pressure on coal prices for power production. The thermal coal price has almost halved from its highs, but is still up more than 100% since the start of year.
Australian equities had a flat start last week, but sold off on bond market volatility in the last two days.
A2 Milk (A2M, -9.29%) was the weakest on the ASX 100 as its strategy day laid bare margin pressure. The market expressed caution at longer-term targets provided.
Aurizon’s (AZJ, -7.67%) acquisition of a rail haulage business from Macquarie (MQG) was not well received by the market. In the near term it increases AZJ’s exposure to coal haulage.
Macquarie itself was down 0.62% after delivering a decent result. It also raised $1.5bn of capital to fund growth opportunities, though there is little visibility on how this will be deployed.
Woolworths (WOW, -5.49) came off as a sales update which was weaker than expected. Like-for-like sales growth has fallen back to 2.7% year-on-year, while Covid-related costs remain elevated and its valuation is high.
ANZ (ANZ, -0.25%) delivered a reasonable result. Pre-provision profits fell 5% half on half and were down 8% on the same half last year. This was in line with consensus, with higher costs and lower markets income well flagged. There was a strong focus on the positive outlook for the institutional bank as rates rise. The offset is that cost reduction targets were again pushed further out into the future.
Plumbing equipment maker Reliance (RWC, +11.18%) was the best performer on the ASX 100. It delivered a well- received trading update which showed cost pressures beginning to subside and good demand in all regions.
News that Crown’s (CWN, +3.43%) licence would not be revoked following the Victorian Royal Commission was well received. The company will be subject to oversight for two years. Star Entertainment (SGR, +4.87%) also rose on the news.
JB Hi-Fi (JBH, +5.56%) delivered a good sales update at its AGM. Sales were down 7.9% on the same quarter last year for JB Hi-Fi Australia, which was not as bad as many feared. The timing of the latest Apple iPhone launch may have helped alleviate some of the cyclical slowdown in sales.
ResMed’s (RMD, +4.82%) quarterly sales beat expectations by 5% and earnings per share by 9%. The company is in a sweet spot due to the recall of a competitor’s product. But supply chain issues are affecting market growth.
Telstra (TLS, +2.41%) announced the acquisition of Digicel Pacific in partnership with the Australian government. TLS stumps up a modest portion of the capital but enjoys what amounts to about 4% earnings accretion, as well as goodwill from the federal governmen