Daily Dose of financial insights for investors and traders; Fed signals likely downshift, China eases some restrictions. Santa rally?
Summary: Jerome Powell signals downshift likely next month; stocks surge. Dow Jones enters bull market. ASX200 is a sneeze off its record all time high. Focus is on commodity companies with China easing some restrictions and retailers ahead of potential festive season rally. We cover the three key areas of equities to be across and the stocks you might like to watch, with some already up 80% from their fresh lows
What’s happening in markets?
The US; Fed Chair Jerome Powell signaled the Fed will likely not be as aggressive next month, and only hike by 50 bps (0.5%), however he suggested the hiking cycle is far from over to slow inflation. He said the Fed will need "substantially more evidence" to ensure prices are moderating, with the path ahead for inflation remaining highly uncertain. However, amid the somewhat dovish pivot, Bond traders coiled back their peak rate expectations to below 5%, and that resulted in treasury yields falling; the 10-year yield fell 11 bps to 3.63%, pushing the dollar down against the entire G-10 basket. As a result, the S&P 500 rose 3.1% to a two-month high, while it notched its longest monthly winning streak since August 2021. The Dow Jones 30, rose 2.2% and entered a bull market, after collectively rising 20% from its September low. Gold spiked more than 1%, with most commodities rallying up supported by the US dollar falling. Crude oil rose 2.9% to $80.44 - getting an extra boost on forward looking optimism that China is encouraging vaccinations, while at the same time the International Energy Agency (IEA) said it expects Russian crude production to fall by some 2 million barrels of oil per day by the end of the first quarter next year. However gains were capped in oil as OPEC+ is due to hold its December 4 meeting and reports swirled that OPEC is not really likely to shift its policy.
In Australia, the ASX200 (ASXSP200.1) is 3% away from its record highThe Aussie market is up 12% from its October low, with commodities back in focus and rallying after the Fed signals a possibly smaller pace of rate hikes ahead while one key province in China has eased restrictions. The Fed’s somewhat pivot has pressured the US dollar (with the US dollar index down 5.4% from its peak). This is also supporting commodity prices higher, as well as the forward looking optimism on China. Locally, equites also appear supported as monthly inflation data came out weaker than expected yesterday - which supports the RBA remaining dovish and likely only hiking by 25bps (0.25%) next week. However, the important inflation read (quarterly CPI) is due early next year, which will be a more accurate reflection of price rises, and will likely show inflation in Australia is more sticky than monthly inflation read alluded to.(remember the RBA previously mentioned food and energy prices would rise – we didn’t see that reflected in yesterday’s data, but it will likely be reflected in the quarterly CPI read due out next year).
Three considerations and investment areas to watch
Firstly, consider if the best performers of late (who are all commodity companies) can continue to build momentum if stimulus continues in China’s property sector
- In November, copper-gold company Sandfire (SFR) rose 45%, energy business Origin Energy gained 41% while Australia’s fourth biggest iron ore company, Champion Iron (CIA) rose 35%, with Nickel company Nickel Industries (NIC) following up 33%.
- So, it’s clear to say we are watching commodity companies closely as we believe the world will still struggle with the lack of tangible supply.
Secondly, watch those companies that could benefit from rate hikes not being as aggressive, and from the festive season spending
- It’s the world’s first festive season not in lockdown (excluding China), so we are watching retailer shares given they will likely benefit from retail shopping. As we’ve also been reporting, it’s worth watching retailers like perhaps JBH, HVN, Premier Investments (PMV), given they will likely benefit from Xmas shopping revenue rising.
- Also, travel and tourism companies will be on watch with travel-services spending likely to continue to gain momentum.
- Carnival shares are up 44% from October with the company seeing some of its strongest sales since pre-covid, Royal Caribbean shares are up 83% from July.
- We are also watching other travel affiliated companies do well, like Boeing, which is up 48% from September, as well as airlines, such as Singapore Airlines, Qantas, Air New Zealand. However we think although the travel and tourism sector, especially airlines, will likely see a pick up in sales amid the seasonality, we wonder if airlines will be able to extend their share price rally into 2023 as fuel costs are not expected offer respite into 2023. This means, those larger companies or those with a wide moat, might be more in focus, as they will be more likely able to sustain the costs pressures.
And thirdly, as well, keep an eye on companies making the news
- Australia’s biggest oil companies will be a focus with the oil price likely to pick up next year. Woodside (WDS) today announced it sees operating cashflow at around $7-9 billion in the next five years.
- BHP (BHP) is also in a focus with its CEO saying steel demand from China will grow next year. Mike Henry sees China’s economy only experience a short-term slowdown before returning to a long-term growth.
- Lastly, other companies to watch include those lockdown stalwarts that aren’t doing so well, like Domino’s Pizza (DMP) with the company planning to raise $165 million in capital. Domino’s operates in Australia, NZ, France, Belgium and Asia. Domino’s Pizza shares are down 56% from their covid high. But the market thinks the business could see a turn around in revenue growth next year and the year after. So if you are a long-term investor, that’s food for thought.
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Outrageous Predictions 2023: The War Economy
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French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.
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