Financial Insights: S&P500 and ASX200 pressured. But Travel, Logistics & Car dealerships see stronger earnings ahead

What’s happening in markets?

The Nasdaq 100 (NAS100.I) and S&P 500 (US500.I) fall for the second session with bond yields remaining at three-month highs 

US equity markets remain pressured as the US 10-year yields trades in the neighborhood of three-month highs at ~3.92% with the FOMC meeting minutes showing more tightening is on the horizon. The Nasdaq 100 fell for the second day, closing at its lowest level since February 1. The S&P500 also fell the second session - moving under the key 4,000 level, at 3,991, bringing the 200-day moving average just ~1% away - at the 3,941 mark - which will quickly be tested. 

Intel shares were a laggard down 2.2% after the computer processor giant cut its dividend 66% - declaring a quarterly payout of 12.5 cents a share. This followed on from Intel reporting one of its weakest quarterly earnings forecasts in its history. All in all, this highlights that companies are trying to preserve capital amid margin compression – and that’s been a major theme of earnings seasons and we think it will continue to play out in Q1 earnings reports.  

Australian equities (ASXSP200.I) fall for third day -  but reopening stocks in logistics and car dealing seem supported on stronger earnings

The Australian share market is being pressured by Australian bond yields rising, with the 10-year yield at its highest levels since January 4 - after the RBA affirmed it will continue to hike rates in the months ahead. The ASX200 fell briefly under its 50-day moving average with mining giants BHP and Rio trading lower after Rio reported weaker than expected numbers after the market close yesterday – but guided for a stronger 2023. 

Travel stocks are continuing to gain attention on the revival of the travel sector – with a lack of fleet becoming an issue to keep up with strong demand. Qantas posted a record profit of A$1 billion in the six months to Dec 31, and announced A$500 million share buy back – as its sees relentless flight demand in 2023 - underscoring the surge in travel, post the pandemic. In fact, Qantas’ flagged higher than expected spending being needed to buy an extra aircraft, including nine Airbus A220s to keep up with surging passenger demand. Capital expenditure in the financial year ending June will rise by as much as A$400 million to between A$2.6-A$2.7 billion and will get as high as A$3.2 billion in the following 12 months. Despite guiding for strong demand, shareholders didn’t like hearing costs will need to rise – which send Qantas shares down 6% to $6.02, below its 100-day moving average. Qantas’ outlook underscores the pace and intensify of the travel industry’s recovery.

Logistics giant, Qube is trading up 10% after its half year profit rose 41% to $125 million and it also noted it sees stronger growth ahead in 2023 – supported by China’s reopening. Car dealership giant, APE is up by about 7% after its results beat expectations, and it guides for a stronger year ahead with demand for new vehicles continuing to outstrip supply. Today’s earnings highlight the reopening trade is gaining pace and also growing beyond market expectations – this could be a driver of the Australian equity market in the half year, while commodity companies continue to guide for a stronger year ahead – backing our bullish commodity outlook.

FX: A stronger US dollar – pressures the Australian dollar lower 

With ‘a few’ FOMC members supporting a larger hike to curb inflation - with James Bullard still favouring hiking rates to 5.375% as fast of possible, the US dollar gained the upper hand, pressuring most G10 currencies lower including the Aussie dollar. The AUD/USD pair closed below trend support, which opens up for a move lower to 0.6629, being the December low.

The AUD/NZD pair however made a cleaner break down lower - with the Aussie against the Kiwi falling below its 50-day moving average. Weight on the pair also came after Australian wage growth data and construction work done were softer than expected, meaning the path of RBA hikes could slow after the RBA makes its tabled hikes in the ‘months’ ahead, versus the RNBZ, that just hiked by 50bps yesterday but gave a hawkish guidance.  

What to consider with Rio Tinto's results? 

Rio Tinto’s profits and dividend slide in 2022, but Rio guides for a stronger 2023 - underpinned by ‘climate change scenarios’ 

Shares of Rio Tinto in NY fell 3.3% overnight and are down 3% on the ASX today after the world’s second largest miner reported underlying profit fell 38% to $13.28 billion in 2022 - vs the expected $13.96 billion consensus forecast. Rio’s profit fell after realised commodity prices fell from their records in the second half of 2022 – while earnings were also impacted by higher energy, raw materials prices and wages. Rio’s free cash flows fell 49% Y/Y in 2022 to $9.01 billion, resulting in Rio cutting its final (HY) dividend to $2.25 a share (down from $4.17), taking its total 2022 dividend to $4.92 - that’s a 60% pay-out ratio.

Similar to BHP, Rio’s output looks stronger in 2023 with Rio guiding for higher copper, alumina, aluminium and iron ore production (but lower diamond production). It sees commodity prices being underpinned by ‘climate change scenarios’ which drive demand. Also note - in recent weeks - signs of a recovery in China have fuelled iron ore and copper prices up -with iron ore prices up 15% year to date. Rio is expanding its copper-gold presence, with the purchase of Turquoise Hill Resources- that will see Rio double its stake in the Oyu Tolgoi copper-gold project in Mongolia. Rio is also progressing the Rincon Lithium Project in Argentina – cementing itself in lithium. And despite the Serbian Government quashing its lithium mine Rio is ‘continuing to explore possibilities