Wall St inched higher on Friday following the release of the March labour report, bond market reacted with the 2 – 10 year yield inversion. Deep dive on resource stocks on the ASX, what it means to refill the stockpile after tapping the SPR.
Good morning. Daylight savings end. I’m Melissa Darmawan for Finance News. This is your market outlook.
The Australian sharemarket is set to rise after posting its third weekly winning streak.
Wall Street kicked off a new month and quarter last Friday after posting their first losing quarter in two years. US oil prices fell below US$100 a barrel as other countries followed suit after the US is set to tap into emergency oil reserves in the bid to suppress high prices.
Late arvo spree after lacklustre start
The major indexes edged higher after a last minute surge, the Dow Jones rose 0.4 per cent to 34,818, the S&P 500 gained 0.3 per cent to 4,546 and the Nasdaq rose 0.3 per cent to 14,262.
Last week investors digested two reports that the data-dependent Federal Reserve follows closely.
Fed’s favourites unveil, PCE & jobs
Firstly, the personal consumption expenditure index which measures the prices consumers pay for goods and services, excluding volatile items like food and energy. The February headline figure came in at its highest level since 1982, while the other report was the non-farm payroll jobs figures which showed solid growth in a tight labour market.
The number of people looking for jobs increased while the unemployment slipped to a new pandemic low of 3.6 per cent with 431,000 jobs added into the economy in March which did come at a miss to economist’s expectations as per the US Labor of Statistics. Year-on-year, average hourly earnings rose by 5.6 per cent, the most since May of 2020 and that came in above expectations. This particular data point is closely watched not only in the US but here too in Australia.
The leisure and hospitality sector led the gains as companies look to meet soaring demand for entertainment and travel now that Covid-19 cases have been on the decline and as the weather starts to warm up.
Reinforcing this narrative was the ISM manufacturing report which showed that inflationary pressures continued on persistent supply chain issues while factories boosted hiring to help clear the backlog.
The Institute for Supply Management fell to a reading of 57.1 last month from 58.6 in February, with a reading above 50 indicating expansion. Prices paid surged to 87.1 from 75.6 and new orders fell from 61.7 to 53.8. Employment jumped to 56.3 from 52.9.
The bond market reacted with the US 2-year treasury yield settling at 2.46 per cent, while the 10-year settled at 2.38 per cent as prices fell, so yes, an inversion of the yield curve for the second time last week, spooking traders as this has historically signalled an economic slowdown in 2 years time, a recession.
All this bodes well for the Fed to maintain its hawkish pivot as it looks to tighten financial conditions. However, concerns weigh among analysts on how far behind the curve the centrl bank is. What I mean by that is that analysts are concerned that the central bank is not raising interest rates fast enough as inflation continues to climb. For now, equities rose for its third straight week with bond traders taking a more pessimistic view to equity traders.
Real estate wins the week
If we look under the hood of the S&P 500, it was a mixed market, more green than red led by real estate, up 2 per cent on the day but up 4.4 per cent for the week, a stellar performance, its best run for the year amid the economic news that was unveiled. Utilities rose 1.5 per cent, followed by consumer staples and materials. Industrials were the worst performer, down 0.7 per cent followed by financials and info tech, both down 0.2 per cent each. The rest closed higher.
Cost to refill stockpile after tapping SPR
The Russian war in Ukraine is now six weeks ago and commodity prices have been on the rise, exacerbating the high inflationary environment we are in. The rally in prices for oil, grains and metals have tempered with expectations after years of easy monetary policy that sent stocks higher.
The White House’s plans to release around 180 million barrels of oil from the Strategic Petroleum Reserve (SPR) over 6 months is under debate from market participants as to whether this would cool the price at the pump amid this hot inflationary backdrop. Not only would this be the largest release from stockpile since it was created in 1975, but concerns weigh if the move is followed by higher prices after oil prices pull back. What that means is that it will cost more to refill the stockpile. Something to keep an eye on.
ASX resource stocks on a tear
This has helped our local market with resource stocks on a tear. Since BHP (ASX:BHP) collapsed its dual listing, the market cap of the index’s largest stock has moved from 10 to 12 per cent, and it’s set to keep growing, according to Bloomberg.
In an environment where inflationary pressures are evident, cyclical sectors such as materials perform well in this economic cycle. Valuations tend to be attractive, and their commodity exposure provides a hedge against inflation.
With the war in Ukraine, the squeeze on base metals tightened. We saw this with nickel and the saga with the Chinese tycoon’s short position, which could mean that other metals like aluminium, zinc and copper are also at high risk of short inventory against demand.
Along with ESG as a hot topic, investing into companies that extract clean-energy minerals appears to be in focus.
The best performing stocks of the week were lithium miners Novonix (ASX:NVX), followed by AVZ Minerals (ASX:AVZ), and Allkem (ASX:AKE), traded up in the order of 13 to 16 per cent.
On Friday, the best performer was Allkem (ASX:AKE) adding 8.5 per cent at $12.40 alone of the day. It was followed by shares in Pilbara Minerals (ASX:PLS) and De Grey Mining (ASX:DEG).
Other than these stocks, BHP (ASX:BHP), Rio Tinto (ASX:RIO), IGO (ASX:IGO), Lynas Rare Earths (ASX:LYR), Nickel Mines (ASX:NIC), Mineral Resources (ASX:MIN), OZ Minerals (ASX:OZL), Sandfire Resources (ASX:SFR), and South32 (ASX:S32) also rallied.
Amid peak tightness on rising demand, supported by capex, resource stocks could be the flavour for some time according to Goldman Sachs.
Outlook ahead for Q2
Interestingly, March was the first positive month of 2022 while at the same time, stocks posted their worst quarter since the pandemic of 2020. So the question lies, what serves as a better indicator of how this second quarter will go? The month of March or the quarter gone?
The first quarter was underpinned by a lot of volatility around how the Fed will adjust its policy. Keep in mind that in just a few weeks, first quarter earnings guidance for many companies is on the horizon. They don’t have a lot of incentive to say that they are likely to shoot the lights out given the pressures on inflation as we saw in the eco figures. It could look like a noisy second quarter ahead.
Figures around the world
European markets closed higher amid Russia clarifying its threat to cut off European gas supplies is set for mid April, not immediately. Eurozone inflation surged to 7.5 per cent year over year in March – let’s see what the ECB says about this.
Paris added 0.4 per cent, Frankfurt gained 0.2 per cent while London’s FTSE closed 0.3 per cent higher, pulled higher by Rio rose 2.4 per cent, BP gained almost 1 per cent while Shell 0.5 per cent higher.
Asian markets closed mixed despite disappointing Chinese manufacturing data. Tokyo’s Nikkei fell 0.6 per cent, Hong Kong’s Hang Seng added 0.2 per cent as 33 Hong Kong listed firms went into a trading halt after they failed to report annual results while China’s Shanghai Composite rose 0.9 per cent.
On Friday, the Australian sharemarket closed 0.1 per cent lower at 7,494, over the week it rose 1.1 per cent and is up 0.7 per cent for the year to date.
Taking all of this into the equation, the SPI futures are pointing to a 0.3 per cent gain.
What to keep an eye out for today
Continuing on the theme of inflation and the labour market, ANZ is set to release the February March advertisements report while the Melbourne Institute has scheduled its inflation figures for the same month too.
We will also receive the detailed retail sales figures from February from the Australian Bureau of Statistics which will give us more colour as to where Aussies are spending their money.
Banks and iron ore miners are set to outperform today amid a strong lead from the treasuries’ performance. The iron ore futures have settled close to 8-month highs on hopes of increase additional economic stimulus
After being in a trading halt, Domain Holdings (ASX:DHG) is one to watch. Goldman Sachs has rated the company as a neutral with a price target of $5.10, following the news of its acquisition of Realbase.
Mineral sands major Iluka Resources (ASX:ILL) is set to go all into the rare earth sector after the board signed off on a $1.2 billion refinery build in WA.
A couple of things to note, China is closed today and tomorrow and Hong Kong will join them. Wall St will close at 6am for now as daylight savings ends, eastern time.
There are 7 companies set to trade without its right to its dividend.
Beacon Minerals (ASX:BCN) is paying 0.125 cents fully franked
Cyclopharm (ASX:CYC) is paying 0.5 cents unfranked
Sigma Health (ASX:SIG) is paying 1 cent fully franked
WAM Strategic Value (ASX:WAR) is paying 1 cent fully franked
WAM Research (ASX:WAX) is paying 5 cents fully franked
WAM Alternative (ASX:WMA) is paying 2 cents fully franked
WAM Microcap (ASX:WMI) is paying 5 cents fully franked
There are 5 companies set to pay eligible shareholders today
AUB Group (ASX:AUB)
Integral Diagnostics (ASX:IDX)
Mayfield Childcare (ASX:MFD)
Monash IVF Group (ASX:MVF)
nib Holdings (ASX:NHF)
Iron ore has gained 1 per cent to US$159.85. Its futures point to a 3.5 per cent gain.
Gold has dropped $30.30 or 1.6 per cent to US$1,924 an ounce. Silver is down $0.48 or 1.9 per cent to US$24.65 an ounce.
Oil has lost $1.01 or over 1 per cent to US$99.27 a barrel.
One Australian Dollar at 7:45 AM has strengthened from Friday, buying 74.93 US cents (Fri: 74.84 US cents), 57.17 Pence Sterling, 91.87 Yen and 67.86 Euro cents.
That’s all for the outlook. I’m Melissa Darmawan for Finance News. Have a great day and stay safe.
Source: Bloomberg, IRESS, TradingView, UBS, Bourse Data, Trading Economics