Equities weaker as bond yields push higher

Blog
Friday 19th March 2021

Equities weaker as bond yields push higher

Blog
Friday 19th March 2021
Written by Chris Lioutas

Markets:

  • Local and global equity markets fell this week, with Europe the exception, as rising US government bond yields continued to spook investors.
  • In local stock news, the financial regulator APRA has closed its investigation into Westpac’s breaches of anti-money laundering and terror financing laws. The bank last year agreed to a $1.3 billion fine.
  • News Corp has reached a multi-year agreement to provide Facebook Inc users access to news in Australia. Interestingly lawmakers in the US have raised concerns regarding Facebook’s and the other tech giant’s behaviour noting both Facebook and Google’s recent threats to cut off Australian news.
  • The Commonwealth Bank of Australia said it will offer its own buy-now-pay-later service to customers from mid-year. Customers will be able to use debit and credit cards to access the service for purchases between $100 and $1,000 and pay in 4 fortnightly instalments. Interestingly, whilst providers like Afterpay charge retailers about 4% of the sale, CBA said businesses would pay no more than its standard fee (around 1%).
  • The oil price fell this week on concerns regarding the demand outlook, particularly from Europe, as investors realised that the “re-opening” trade of the last 4-6 weeks actually needs some level of re-opening…

Economics:

  • RBA governor Philip Lowe noted that whilst investors expected the official cash rate could be hiked next year and again in 2023, this was not an expectation the board shared.
  • The number of Australians employed surged by 88,000 in February, which along with no change to the participation rate, saw the unemployment rate fall to 5.8%. Hours worked has now also made a full recovery to be back to pre-Covid levels. JobKeeper ending this month may have some impact, but we won’t see that in the data until at least June.
  • Nearly 1 in 3 Australians say they are in financial distress according to a University of Melbourne survey. Some 31% of respondents now report difficulty in paying for everyday essentials, 43% said they felt financially comfortable, whilst 46% of respondents say they are satisfied with official measures to boost job security.
  • The RBA is closely monitoring Australia’s booming housing market as prices rise and lending soars to new records. For now, both the government and the RBA are happy with house prices rising given positive flow-on effects for the economy, however, the major banks are now forecasting double-digit house price growth over the next 2 years.
  • The US central bank will keep rates near zero and maintain their sizeable monthly asset purchase (ie. money printing). The bank expects the US economy to continue improving this year but plans to keep interest rates near zero until employment increases. Some members saw rate increases by the end of 2023, but the majority have no rate increases until 2024.
  • US consumer sentiment improved in early March to its strongest level in a year, a key survey showed. However, retail sales dropped more than expected in February due to bitterly cold weather across the country.
  • UK economic growth dropped by almost 3% in January which was smaller than widely expected in light of increased Covid restrictions. It was the largest drop since April 2020, with January’s reading 9% below the levels seen pre-Covid. January trade data showed a huge record fall in both exports and imports.
  • Official data showed French final inflation rose largely in line with estimates in February, whilst investor sentiment in Germany increased by more than expected in March. Germans are doing well because the Chinese are doing well.
  • In good news for exports, Chinese industrial output beat expectations for January/February, with output up 35% from a year earlier. Other data showed a surge in factory and retail sector activity in the first 2 months of the year, beating expectations.

Politics:

  • Europe’s struggle on the vaccine front looks set to continue with AstraZeneca likely to deliver less than half as many doses as planned in the 2nd quarter. This comes after several European countries suspended their use of the AstraZeneca vaccine following some adverse reactions. The number of adverse reactions were small, leading many to speculate that this was revenge for lack of supply from the Brits. Johnson & Johnson said it would aim to bring its vaccine to Europe in the 2nd half of April following recent approval.
  • The US stepped up their game against China tightening restrictions on selling 5G-related goods to Chinese telecom giant Huawei. The ban is effective this week and creates a more explicit prohibition on the export of semiconductors, antennas, and batteries for Huawei 5G devices.
  • Recent news flow in the USA seems to indicate that President Biden is planning the first major federal tax hike since 1993 to help pay for a “long-term economic program”. Among the moves proposed are raising the corporate tax rate to 28%, increasing income tax on “high earners”, and a possible hike in capital gains tax. Rather silly giving people cash-handouts one week to then take it back via tax later. Income hard earned by households and businesses is always best left in their hands/pockets. Raising taxes will simply discourage investment and/or encourage more investment offshore. Spend less, tax less.
  • The Chinese President has warned that China will go after so-called platform (tech / media / payments) companies that have amassed data and market power, a sign its crackdown on the internet sector is just beginning. The government wants Alibaba to sell media assets, concerned by the tech giant’s influence over public opinion. These moves come after they forced Alibaba to restructure their ownership of Ant Financial, which led to the pulling of the Ant IPO.

Author 

Chris Lioutas, Director, Insight Investment Consultants

Chris holds the position of asset consultant for Maxim Advisors and is a current sitting member of Maxim's investment committee. 

With permission of the author, this article is presented by Maxim Private Clients Pty Ltd ASFL No. 511972

Maxim Private Clients Pty Ltd ABN 47 611 614 398 AFSL No. 511972

Disclaimer: This material has been prepared without considering any potential investor's or clients objectives, financial situation or needs. This article is of a general nature and does not consider the individual circumstances of its recipients. Any information contained within this publication should not be misinterpreted as advice in any way. Please consult your financial advisor should you have any questions or concerns.