Mixed closed around the major global indexes as rising bond yields spook investors. Big day on local bourse with a raft of economic data due today ahead of the RBA to meet on Melbourne Cup day.
The Australian sharemarket is looking to start the day of the first week of a new month on a very strong start. The SPI futures are pointing to a gain of 0.9 per cent.
US stocks notch best month at record highs
Record closes on Wall St, with the indexes notching its best month for this year, and on a wider lens, its best performance since November 2020. Shares rallied shrugging off disappointing tech results, which were offset by better-than-expected results from Exxon Mobil and Chevron, your energy giants.
Microsoft has surpassed Apple becoming the world’s most valuable company. This is from a market capitalization perspective, after Apple reported underwhelming fourth quarter results.
Sales in Apple missed expectations, sending the shares down 1.8 per cent. The overall revenue was up 29 per cent over the year. However, the tech giant said that supply chain disruptions and the chip shortage cost the company US$6.0 billion, limiting production across their iPhones, iPads and Macs. Now these numbers don’t include sales from the new iPhone model that was released, so we will wait and see what it looks like next quarter amid these challenges.
Shares in Amazon fell 2.2 per cent after citing that supply constraints and labour shortages would weigh on next quarter earnings. This is a company that needs to hire more than 100,000 people and it’s not getting any cheaper to operate. The eCommerce giant is set to face higher shipping costs and wage pressures. The eCommerce giant’s fourth quarter guidance also came in lower-than-expected.
Combining both Apple and Amazon, these companies make up nearly 10 per cent of the S&P 500. As Exxon Mobil and Chevron had profitable quarterly earnings since before the pandemic started, this did help the S&P 500 close higher.
Fed’s favourite inflation gauge stays at 30-yr highs
Elsewhere, the Fed’s favorite inflation gauge, the personal consumption expenditures price index, continues to stay at 30-year highs of 3.6 per cent as per the Commerce Department. Consumer spending grew at a slower pace in September, but was partly offset by higher prices amid continued concerns around the spread of delta.
Wall St wrap
Looking at October’s performance, it was a reverse from September after stocks fell due to inflation fears and China’s property market. Though earnings season has propped up optimism despite
many companies flagging concerns about the supply-chain and labour issues. We have seen the major indexes nudge to record highs as earnings results continue to impress. Let’s see how markets will move this week when the Fed meets amid this.
Wall St gains, bond yields
At the closing bell, the Dow Jones added 0.3 per cent to 35,820, the S&P 500 gained 0.2 per cent to 4,605 while the Nasdaq closed 0.3 per cent higher at 15,498.
Over the week, the Dow rose 0.4 per cent, the S&P 500 added 1.3 per cent while the Nasdaq spiked 2.7 per cent higher. In October the Dow added 5.8 per cent, the S&P 500 rose 6.9 per cent and the Nasdaq surged 7.3 per cent.
Across the S&P 500 sectors, there were four winners to seven losers. Healthcare fared well, up 1.0 per cent followed by communication services, technology, and industrials. Real estate was the worst performer, down 1.2 per cent followed by energy, and utilities.
The yield on the 10-year treasury note dipped 3.0 basis points to 1.55 per cent, while gold falls on a firmer greenback.
European markets mixed on rising bond yields
Across the Atlantic, European markets closed mixed on rising bond yields and weak commodity prices. Investors were concerned that the European Central Bank would tighten monetary policy as soon as June next year with inflation at 13-year highs.
Paris added 0.4 per cent, Frankfurt fell 0.1 per cent and London’s FTSE closed 0.2 per cent lower.
The miners and oil giants closed in the red. BHP fell 1.1 per cent, Rio Tinto fell 0.8 per cent, BP declined 0.5 per cent, Shell dropped 1.3 per cent.
Asian markets mixed as real estate had its worst week
Asian markets closed mixed/ Tokyo’s Nikkei added 0.3 per cent ahead of the election. The liberal democratic party won the majority of the votes on hope of further stimulus.
Hong Kong’s Hang Seng fell 0.7 per cent pressured lower by tech, while China’s Shanghai Composite closed 0.8 per cent higher thanks to consumer staples, technology and healthcare. Meanwhile, the real estate sector had its worst week since February 2018 on a planned tax scheme.
ASX 200 tumbles ahead of RBA meeting
Yesterday, the Australian sharemarket tumbled 1.4 per cent at 7,324 amid growing fears that the Reserve Bank could look to tighten monetary policy. The local bourse fell 1.2 per cent over the week but is 1.9 per cent higher for October.
The RBA has kept its benchmark cash rate at 0.1 per cent since November 2020 and previously intervened in the market to maintain its three-year bond yield curve control target at 0.1 per cent.
At the end of last week, the central bank didn’t step in even as the three-year bond yield surged almost 48 basis points to 1.2 per cent. Speculation grew that the cancellation of the yield curve control program is likely on the cards tomorrow. Governor Phillip Lowe has reiterated that the central bank does not see the rise in official rates till 2024, which has been challenged frequently. However, it appears that markets seem to know what’s happening.
All sectors closed lower with declines as deep as 2.6 per cent from the real estate sector while healthcare shed the least, at 0.10 per cent.
Financials did weigh on the index, given that it’s the largest sector with National Australia Bank (ASX:NAB) falling 2.6 per cent, while ANZ (ASX:ANZ) lost the least, down 1.6 per cent. Usually, banks like a rising yield so it’s interesting to not see green on the board for this session.
In the resources space, Rio Tinto (ASX:RIO) fell 2.7 per cent while Fortescue Metals (ASX:FMG) fell 0.6 per cent. BHP (ASX:BHP) lost 1.2 per cent.
Adding to the fuel, business inflation rose more than expected with prices increasing by 1.1 per cent in the September quarter. The annual rise of 2.9 per cent is the strongest increase since December 2011. The news comes after the RBA’s preferred inflation gauge came in higher than expected mid last week. Click here for a recap.
Inflation & equities reaction
Given that concern on rate rises have been on the horizon for some time, equities tend to be primed to deal with inflationary periods compared to cash and fixed income.
The reason for this is that inflation generally indicates stronger economic conditions. Also, companies can hand down higher prices to consumers.
Amid hot inflation rates, stocks that tend to perform well in these conditions are your value and cyclical stocks. These stocks would be in the consumer discretionary, materials, energy and financials space.
On the other hand, stocks that underperform in these conditions tend to be your defensives like communication services, consumer staples, healthcare, utilities, and real estate. I will put technology in this bucket as we have seen this on Wall St, however our tech shares are different in that they are still in a growth phase.
The best-performing stocks in the S&P/ASX 200 were buoyed on the back of a number of broker upgrades. GUD Holdings (ASX:GUD) closed 6.9 per cent higher at $12.20 followed by shares in Reece (ASX:REH) and JB Hi-Fi (ASX:JBH).
The worst-performing stock in the S&P/ASX 200 was Unibail-Rodamco-Westfield (ASX:URW), closing 6.2 per cent lower at $4.82, followed by shares in PointsBet Holdings (ASX:PBH) and Megaport (ASX:MP1).
Local economic news
The central banks in the U.S. and back home are set to meet this week, so expect some volatility.
The Reserve Bank is to meet tomorrow so all eyes will be on the commentary around inflation, the jobs market, the bond program, and the economic outlook. Overseas, the Federal Reserve is set to meet and eyes will be on if they will make a formal announcement to taper their bond purchase program.
Looking at today, we have five economic reports on tap. CoreLogic home value index for October is expected to rise between 1.3 to 1.4 per cent.
We also have IHS set to release purchasing managers index on the manufacturing sector. As we have talked about, persistent supply constraints are of concern which could appear in these figures.
Australian Bureau of Statistics to release lending indicators for September, ANZ to publish job advertisements for October, and the Melbourne Institute slated to release its monthly inflation gauge for the same period.
Westpac posted a cash profit of $5.35 billion in the 2021 financial year and announced a $3.5 billion off-market buyback. The moves follow the lead from the other major banks.
Expectations of cash profit ranged from $5.2 to $5.4 billion, with cash profit doubling its cash earnings from a year ago. The company’s statutory net profit rose 138 per cent to $5.46 billion while cash earnings per share surged 102 per cent to $1.46. Keep an eye out for further updates.
Shares in Westpac (ASX:WBC) closed 2.1 per cent lower at $25.67 on Friday.
UBS rates GUD (ASX:GUD) as a buy with a price target of $12.90. The company unveiled its plans to acquire lighting specialist, Vision-X. UBS thinks the price paid of US$53 million plus an earn-out of US$8.8 million – US$18.6 million looks attractive. The broker also sees an avenue for the company to expand into the North America and European markets. UBS notes that market conditions remain robust for Australian auto parts company, with UBS retaining confidence that the company can handle cost inflation through a second round of price increases. Target price lifts to $12.90 from $12. Shares in GUD (ASX:GUD) closed 6.9 per cent higher at $12.20 on Friday as the best performer of the session.
Citi rates IOOF (ASX:IFL) as a buy with a price target of $5.20. The first quarter flows for IOOF Holdings were a little weaker than the broker expected. Management noted the possibility of upgrading synergies at the first half result. Citi notes that net inflows into the company’s Evolve-based platforms continue to be strong. The target price falls to $5.20 from $5.30 and the buy rating is retained. Shares in IOOF (ASX:IFL) closed 2.9 per cent lower at $4.08 on Friday.
There are two companies trading ex-dividend today.
Huon Aquaculture Group (ASX:HUO) is paying 12.5 cents fully franked
NB Global Corporate Income Trust (ASX:NBI) is paying 0.8049 cents unfranked
There are two companies set to meet with shareholders today, Waypoint REIT (ASX:WPR) and PSC Insurance Group (ASX:PSI).
Annual & quarterly reports
There are 19 companies set to deliver their annual report today while we have 36 companies publishing their quarterly report including CSR (ASX:CSR).
There are two companies set to make their debut on the ASX today.
Keep an eye out for Judo Capital Holdings (ASX:JDO). This holding company provides business loans, equipment loans and other financial services to small and medium-sized businesses through subsidiaries.
Step One Clothing (ASX:STP). They are an online retailer for men’s underwear.
Iron ore has lost 4.8 per cent to US$107.28. Its futures point to a 4.3 per cent fall.
Gold lost $18.70 or over 1.0 per cent to US$1784 an ounce, silver was down $0.17 or 0.7 per cent to US$23.95 an ounce.
Oil was up $0.76 or 0.9 per cent to US$83.57 a barrel.
One Australian Dollar at 7:30 AM has slipped from Friday, buying 75.14 US cents, 54.94 Pence Sterling, 85.68 Yen and 65.02 Euro cents.