Market Insights Today: Oil over $85, Yields fall Equities charge on Peak Hawkishness past tense thinking– Oct 26, 2022
Summary: The US major indices, the Nasdaq 100 & S&P 500 lift for the 3rd day supported by bonds yields falling, with traders digesting weaker US economic news which could persuade the Fed to slow its pace of hikes, all while parsing through stronger than expected earnings. WTI and gold both gained, while Bitcoin broke above $20,000 for the first time in nearly three weeks. Asian equity futures are in the green. Downunder investors parse through the Australian Federal budget winners; green energy, infrastructure, healthcare and parents. While mulling over Government warnings that power bills will rise 50%.
What’s happening in markets?
The US major indices, the Nasdaq 100 (USNAS100.I) & S&P 500 (US500.I) lift for the 3rd dayThe major indices rallied 2.3% and 1.6% respectively, supported by bonds yields falling, with traders digesting weaker US economic news which could persuade the Fed to slow its pace of hikes, all while parsing through stronger than expected earnings. The 10-year Treasury yield plunged 15 bps to 4.10%, which helped the dollar fall against every G-10 peer, while the pound added 1.7%. It's worth noting so far this US earning seasons 146/S&P500 companies reported results, and 3% delivered earnings surprises to the upside, which has supported equites, with energy earnings growth up the most, averaging 164%. While total aggregate earnings have declined.
Crude oil (CLX2 & LCOZ2) rises over $85 on near supply tightness and some thinking the Fed will slow its pace of hikes
Three US economic data sets released over the last two days are pointing to the US economy souring, which could indicate the US Federal Reserve’s rate rises have been working and may perhaps persuade the Fed to slow its pace of hikes. This could be seen as a positive signal for fuel demand. Consumer Confidence fell, while the S&P Core Logic Case-Shiller 20-City House Price Index also released Tuesday showed home prices fell 1.3% in the 20 core cities studied month-on-month, but were still 13.1% higher than a year ago. The day prior we had S&P Global’s flash US Composite PMI Output Index, that tracks the manufacturing and services sectors, falling to 47.3 this month from a final reading of 49.5 in September
Australia’s ASX200 (ASXSP200.1) rises 0.3%, erasing earlier gains on hotter than expected CPI
Australian CPI rose more than expected to a 32 year high, with CPI up 7.3%, hotter than the consensus expectation that consumer prices would rise 7.1% YoY. The biggest moves were in Housing prices, up 10.5% YoY, followed by Transport costs up 9.2% (fueled by fuel prices ripping up), while Food price growth remained strong, up 9% YoY. Core inflation (or trimmed mean inflation) which the RBA looks at, which excludes large rises and falls rose to 6.1% YoY, which is the highest reading since the data was first published. Today's proof shows the RBA’s pace of hikes has done very little to slow price growth and serves as a wakeup call that perhaps the RBA will continue to hike rates to slow inflation, despite employment falling and some businesses being in financial hardship. Coincidently, the last time CPI was this high, was in 1990, when the RBA hiked so aggressively it tipped the economy into recession, so that’s something to consider. It's also worth looking at asset classes that typically do well in recessionary cycles (such as bonds, and in equities healthcare, utilities and consumer staples). The Australian share market is up 0.3% on Wednesday, up for the third day. The real estate sector is leading today, up 2.3% after the sector won in the Australian Federal budget handed down last night. As for stocks, Costa Group (CGC) is up the most, 11% with investors speculating the business might be taken over.
What to consider?
Australian Govt budget winners are green energy, infrastructure, healthcare and parents
A sector to watch is green transformation. With the AUD$20b to be put toward Australia’s transformation to net zero. The government outlined a large fund to mitigate climate change risk and support the transformation to net zero, with the funding going toward recently commenced projects on windfarms in VIC and the TAS Marinus Link project, while also delivering cheaper infrastructure loans for investment into renewable energy, in order to lower energy costs and achieve net zero over the coming years. Focus will be on lithium, rare earths, hydrogen, with companies like Pilbara Minerals, Allkem, Lynas and Iluka on watch.
Another sector to watch is building, construction, infrastructure and mining. With the introduction of the national Housing Accord between government and other industry bodies, there is a target of building one million new homes over 5yrs, starting mid-2024. The government will establish a AU$10bn housing Australia future fund, with an aim of providing 20k new social housing dwellings. AU$350m will be spent over 5yrs in delivering 10k affordable dwellings, with state governments to provide another 10k homes. The government also committed to its pre-election promise of a shared equity scheme, allowing eligible people to buy a house with a smaller deposit. Focus will be on stocks like Transurban, Abbri and eyes will also be on banks that could benefit from housing polices, so CBA, ANZ Bank, NAB, as well as Westpac as well as Suncorp and Bank of Queensland
Another sector to watch is health and aged care. The Government will spend AU$787.1m over four years on making a greater co-payment for prescription drugs, starting next year. Moreover, the government pledged to open 50 Medicare urgent care clinics, expand access in suburbs and regions. Overall, along with a rise in spending on hospitals, and extending various COVID-19 support measures, the government has pledged AU$6.1b. Elsewhere, the government is committing AU$2.5b to improving aged care to improving aged care facilities and staffing issues. Focus will be on health care businesses like Ramsay Health, Sonic Health Care, ResMed as well as Healius and Australian Clinical Labs.
And another big highlight was increasing child care subsidies and paid parental leave to drive female labour force participation. From July 2023, childcare subsidy rates will increase for all eligible families with annual incomes less than AU$530k, which would cover around 96% of families. The increase in paid-parental leave will cost AU$531.6mn over four years, starting in FY23. Each year from July 2024 to July 2026, the paid parental leave will increase by 2 weeks, with a total increase of 6 weeks to 26 weeks by FY27.
Australian Federal Budget 2022 warns power bills will rise 50%
The Australian Federal Budget handed down last night, estimated power prices will rise 50% over the next two years. It follows on from the Australian Energy Regulator warning electricity prices will rise by up to 50% just in 2023. Either way, it seems the Australian Government won’t be able to fulfill its election promise to cut power bills. Several bodies warned Australia will run out of energy next year including the Australian Consumer and Competition Commission, who says there is a significant risk the nation will be short supply in 2023 by 56PJ, which could further cause prices to rise, and result in some manufacturers closing their businesses, with market exists already occurring. This might be a catalyst for some to perhaps consider looking at large cap oil companies, and ETFs.
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