Wall St had a market meltdown as several retail giants posted margin pressure from rising fuel, freight costs, and soaring inflation. Westpac trades ex-dividend today.
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Good morning. I’m Melissa Darmawan for Finance News. This is your market outlook.
The Australian sharemarket is set to wipe three days of gains after a brutal day on Wall St.
Market meltdown, worst loss since 2020
US stocks had a reprieve since Friday after investors learned of inflation hitting big retail earnings, renewing concerns about the Fed navigating a soft landing. Investors continue to mull on Fed Chair Jerome Powell’s comments on the US central bank’s goal of suppressing hot inflation to see if the Fed will keep its word around hiking 50 basis points versus 75 at the next two meetings, amid several macro cross currents.
At the closing bell, the Dow Jones dropped 3.6 per cent to 31,490, its worst loss since 2020, the S&P 500 plunged over 4 per cent to 3,924 under the 4,000 level, and the Nasdaq dived 4.7 per cent to 11,418.
Across the S&P 500 sectors, as investors fret of the looming year ahead with higher borrowing costs, consumer discretionary and staples dived 6.6 and 6.4 per cent, respectively. Shares in information tech took it on the chin down 4.7 per cent, industrials down 3.8 per cent with utilities shedding the least by 1 per cent.
Investors bought into the greenback and bonds with the yield on the 10-year treasury dipped 9 basis points to note 2.88 per cent, while they dumped gold and Bitcoin.
What caused this meltdown?
There are two reasons.
Firstly, investors are questioning the strength of the consumer after reacting to Target’s missed earnings results. Secondly, the survey results of the Conference Board showed that 57 per cent of CEOs expect the economy to sustain a “very short, mild recession”, weighing on already strained consumer sentiment.
Retail earnings are important as it’s a proxy to consumer spending making up two thirds of the US GDP. All this ahead of the next US retail figures.
Investors saw the impact of the supply chain disruptions, soaring fuel costs and lower sales for another stay-at-home darling, Target, sending the share price 25 per cent lower for its worst day since 1987. The results are also a sign that inflation is starting to eat away at the back pocket of the everyday person as inflation sits at 40-year highs, so yes, a pullback in spending.
However, this has been indicative of what we’ve seen throughout this earnings season, including a 35 per cent drop from another stay-at-home darling Netflix in a single day. Target’s results echo a similar picture that we saw from the retail giant Walmart after the company reported that higher inventory and costs weighed on profit.
Meanwhile, retail giant Lowe’s maintained its full year guidance after falling short in the latest quarter. The company blamed cooler weather and inflation, hurting demand for supplies for outdoor and DIY projects. This is a mixed picture compared to its competitor Home Depot as they surpassed earnings estimates, sending their share price higher.
Either way, the overall message here is that the strength of the consumer is being questioned and if they can withstand the costs of goods and services rising, and how fast will surplus cash be used and if businesses are going to have to lay-off staff, leading to more people unemployed.
We are already starting to see a slowdown in growth amid high inflation. Therefore, to meet the technical definition of stagflation, we need to see high unemployment. Could this be the start of the economy moving that way? Will the Fed’s 2022 and 2023 outlook get tested? Remember, their target unemployment rate was steady for this year and next which we questioned when it was released.
Crude prices fell 2.8 per cent as China’s zero-Covid policy got rattled again after Beijing saw 69 new cases, locking down two buildings and the EIA crude oil inventory showed a small recovery of US production. The output is not moving in line with the increase in rig counts which means that the market remains tight. However, the headline draw number was also influenced by the 5 million release from the Strategic Petroleum Reserve.
Figures around the globe
Across the Atlantic, European markets closed lower. Paris lost 1.2 per cent, Frankfurt dropped 1.3 per cent while London’s FTSE fell 1.1 per cent.
On the London Stock Exchange, Rio lost 1.8 per cent, BP gained 0.3 per cent and Shell added 0.9 per cent.
Asian markets closed mixed, Tokyo’s Nikkei gained 0.9 per cent, Hong Kong’s Hang Seng added 0.2 per cent and China’s Shanghai Composite lost 0.3 per cent.
Yesterday, the Australian sharemarket closed almost 1 per cent higher at 7,183 for its third day.
Taking all of this into the equation, the SPI futures are pointing to a 1.8 per cent fall.
What to look out for today
The Australian Bureau of Statistics is set to release the jobs number for April, after we saw that base wages rose 0.7 per cent over the March quarter and 2.4 per cent over the past year. Economists are expecting the jobless rate to fall to 3.9 per cent from 4 per cent, add 30,000 jobs in April, participation rate unchanged at 66.4 per cent, according to Bloomberg consensus.
In earnings, keep an eye out for Aristocrat Leisure’s (ASX:ALL) first half net income to come in at $484.8 million. Nufarm’s (ASX:NUF) first half underlying EBITDA to come in at $340 million, and Webjet’s (ASX:WEB) full year net income loss to come in at $51.8 million.
AGMs are on today, Woodside Petroleum (ASX:WPL), BHP Group (ASX:BHP), Gold Road Resources (ASX:GOR), and AdBri (ASX:ABC).
Broker moves, Boral (ASX:BLD) cut to underperform at Credit Suisse with a price target of $2.60, Eagers Automotive (ASX:APE) raised to hold from sell at Morningstar, Integral Diagnostics (ASX:IDX) raised to outperform at RBC with a price target of $4.95, and OFX (ASX:OFX) rated new underperform at Barclay Pearce Capital with a price target of $2.44.
Consumer staples and discretionary stocks could see some pain. Keep an eye out for Super Retail Group, Wesfarmers, the owner of Kmart, Target and Bunnings.
The $2.4 billion healthcare provider Healius (ASX:HLS) is believed to be rethinking its strategy, set to stage an exit from its day surgery business while it looks to consolidate the radiology space, according to The Australian.
ANZ Bank (ASX:ANZ) long term issuer debt has been affirmed as A+ by fitch with its outlook looking stable.
Westpac (ASX:WBC) is trading without the right to its dividend today, set to put downward pressure on the financial sector, however, this could be offset by news of a new car loan offer to help customers wanting to purchase a new or used hybrid or electric vehicle.
There are four companies set to trade without the right to its dividend.
Pendal Group (ASX:PDL) is paying 21 cents 10 per cent franked
US Student Housing REIT (ASX:USQ) is paying 0.6025 cents unfranked
Virgin Money UK CDI (ASX:VUK) is paying 4.3531 cents unfranked
Westpac Banking Corp (ASX:WBC) is paying 61 cents fully franked
Iron ore has lost 2.7 per cent to US$126.60. Its futures point to a 3 per cent fall.
Gold has lost $3.70 or 0.2 per cent to US$1815 an ounce. Silver was down $0.34 or 1.6 per cent to US$21.41 an ounce.
Oil has lost $3.15 or 2.8 per cent to US$109.25 a barrel.
One Australian Dollar at 7:10 AM has weakened since yesterday, buying 69.57 US cents (Wed: 70.29 US cents), 56.38 Pence Sterling, 89.23 Yen and 66.50 Euro cents.
The views, opinions or recommendations of the commentators in this presentation are solely those of the author and do not in any way reflect the views, opinions, recommendations, of Sequoia Financial Group Limited ABN 90 091 744 884 and its related bodies corporate (“SEQ”). SEQ makes no representation or warranty with respect to the accuracy, completeness or currency of the content. Commentators may hold positions in stocks mentioned. The content is for educational purposes only and does not constitute financial advice. Independent advice should be obtained from an Australian Financial Services Licensee before making investment decisions. To the extent permitted by law, SEQ excludes all liability for any loss or damage arising in any way including by way of negligence.
Sources: Bloomberg, FactSet, IRESS, TradingView, UBS, Bourse Data, Trading Economics