Weekly market update - 15th of November 2021
Written and accurate as at: Nov 15, 2021 Current Stats & Facts
THE market continues to question the notion of “transitory” price pressures. But it’s remarkable how quickly equity markets have rebounded from recent shocks around inflation. Stronger-than-anticipated US inflation data last week drove market volatility and a rare down-week for US equities. The S&P/ASX 300 lost 0.04% and the S&P 500 was off 0.27%.
There was also some movement in China. Beijing may be looking to ease pressure on the property sector, which prompted a rebound in the iron ore space. The market remains focused on the risk of China over-tightening monetary, fiscal and regulatory policy settings, so signals that may mitigate this risk have been well received. The Chinese Communist Party’s sixth plenum last week appears to have paved the way for indefinite leadership by Xi Jinping.
Covid and vaccines
We are seeing a sharp rise in case numbers in Germany. But as in other similar waves, hospitalisations so far remain under control.
Other European counties are also seeing an increase in cases. Denmark, Austria and the Netherlands are looking at reintroducing some mobility restrictions in response.
Otherwise there was little new to note last week.
Macro and policy
USA
However you want to slice and dice the inflation data, the key takeaway is that we are looking at 30-year highs. US CPI grew 0.9% month-on-month — versus 0.6% consensus expectations — and is running at 6.2% year-on-year. The core data (ex food and energy) rose 0.6% month-on-month versus 0.4% expected. It is running at 4.6% year-on-year.
A rebound in Covid-affected sectors such as auto and hotel prices helped lift both the headline and core readings, but the breadth of excess inflation pressures continued to increase. Services inflation will be keenly watched as the US economy re-opens. So far it remains in its 10-year band, but has experienced strong recent momentum.
Core CPI will peak at 6.9% in March 2022 according to consensus expectation at this point. This leaves plenty of scope for the market to continue testing the Fed’s “transitory” line in coming months.
Australia
In Australia, employment declined 46.3k in October while the unemployment rate rose 60bp to 5.2%. This was weaker than expected, but the outcome largely reflected measurement issues related to recent lockdowns.
Elsewhere a strong rebound in company forward orders augers well for growth as we emerge from lockdowns.
China
The slowdown in credit may have bottomed in China. October is showing credit growth, potentially improving confidence for the rest of the year and into 2022.
After recent sharpening of concerns over property there are reports that the People's Bank of China may introduce several measures to ease pressure on the sector. These include:
- Excluding merger and acquisition loans from the “Three Red Lines” that govern leverage in the property sector, allowing companies to acquire assets from stressed firms such as Evergrande
- Easing restrictions on development loans, which should reduce cash flow pressure on developers
- Extending existing bank loans
Elsewhere, approval of Xi’s doctrine on Chinese Communist Party history — the first in 40 years — at the sixth plenum seems to set the stage for Xi to retain power indefinitely.
Markets
Australian ten-year government bond yields largely held on their 30bp rally from the previous week.
The US equivalent yields rose 11bps to 1.56% on the inflation data, but remain well below recent highs.
The inflation print saw the gold price gain 2.8%.
News of potentially looser policy in China prompted good gains among commodity stocks, though the prices of iron ore (-4.9%) and copper (+2.4%) remained more subdued.
Xero (XRO, -7.9%) was the worst performer in the ASX 100. The cloud-based accounting software maker delivered a half-yearly result that missed consensus expectation by 0.8% — but beat EBITDA by 6%. An EBITDA margin of 19.4% was at the top end of management guidance. There was some disappointment in international subscriber growth, though this was offset by stronger-than-expected numbers in Australia and New Zealand. All in all it was a solid result, but the stock seems to have been largely driven by a rotation away from growth during the week.
Ramsay Health Care (RHC, -6.70%) updated its earnings outlook, resulting in consensus downgrades. The company has only just emerged from restricted elective surgery in key regions, hence earnings remain highly unpredictable in the very near term.
Gold miners Evolution (EVN, +12.63%) and Northern Star (NST, +10.52%) were the best performers for the ASX 100, followed closely by other miners Fortescue (FMG, +10.37%), Lynas (LYC, +10.27%), IGO(IGO, +8%) and Oz Minerals (OZL, +6.9%).
Nine (NEC, +5.82%) upgraded guidance at its AGM to about 10% EBITDA growth for 1H22, on improved revenue in TV advertising and better cost control. The update was well received even though it disappointed those looking for a stock buy-back.
James Hardie (JHX, +2.97%) delivered quarterly results that showed EBIT growth of 26% year-on-year, 2% ahead of consensus expectations. There was some softness in the North American division, which was more than offset by strength in Asia Pacific and Europe, as well as lower corporate costs. Management upgraded full-year guidance but consensus is already at the top of the new range.
National Australia Bank’s (NAB, +3.25%) result completes the round-up for three of the major banks.
All-in-all it was a disappointing season for the banks in the sense that all missed consensus pre-provision profit expectations.
ANZ (ANZ) slightly missed due to costs and NAB missed by 2% given weak markets. Westpac (WBC) missed by 17% given a sharp hit to net interest margins (NIMs) and higher costs. Key themes across the results included:
Mortgage NIMs remain under pressure from competition and changes in product mix, as highlighted by WBC. A focus on price-driven strategies via third-party distribution has led to profitless growth. Business banking NIMs appear to have held up better. The tailwind from lower deposits and funding appears to have largely played out.
Credit growth is strengthening. All banks (ex ANZ) are enjoying the housing boom, though this should peak in coming months. NAB and CBA are starting to see a recovery in business lending which is a very encouraging sign. Institutional activity is increasing, while NZ credit keeps expanding. Growth is becoming broader based.
The markets and trading-based divisions have been weaker, outside of Australian and New Zealand.
All banks recommitted to their cost-out programs, however the market remains very sceptical on success here. Asset quality was very benign with every bank reporting negative credit charges.
All banks beat expectations in terms of capital positions, reporting strong balance sheets.