Equity investors fret over US inflation fears

Blog
Friday 19th February 2021

Equity investors fret over US inflation fears

Blog
Friday 19th February 2021
Written by Chris Lioutas

Markets:

  • Both local and global equity markets were softer this week as investors fretted over potentially higher US inflation which could lead to missteps or reduced stimulus from the US central bank.
  • FOMO (fear of missing out) is clearly back in vogue, partnering its closest cousin TINA (there is no alternative), with some of the strongest flows into equities not seen since the GFC, not to mention the rarefied air that technology stocks, IPOs, and cryptocurrency currently find themselves in. The conditions are there for this to continue for a while longer, but what can go up can also come down.
  • In local stock news, BHP shares rose after the company reported its best 1st half profit in 7 years and declared a record interim dividend. The company expects strong Chinese demand to continue in 2021.
  • National Australia Bank enjoyed a 47% increase in cash earnings during its 1st quarter trading, helped by improving economic and health outcomes in Australia and New Zealand. Westpac’s cash earnings for the same period rose 54% due to higher margins, lower expenses, and less bad debts than previously provisioned for. ANZ’s cash profit was up 54% with costs flat and all major divisions performing well through the quarter.
  • Treasury Wine Estates will reorganise into 3 new divisions after its half-yearly profit plunged due to heavy Chinese tariffs on Australian wine imports. The world’s largest listed winemaker will operate under Penfolds, Treasury Premium Brands, and Treasury Americas divisions starting next financial year. The company remains confident it can reroute its luxury ranges to other markets.
  • Coles share price fell sharply in contrast to a stunning set of results with total sales surging 8.1% to over $20 billion, same-store sales in supermarkets up 7.2%, and net profit rising 14.5%. The CEO did his best to talk down future expectations as people resume eating out more and working back in the office. He also cited the lack of immigration as a big concern for the supermarket sector.
  • Energy prices rose sharply this week on concerns of a global supply shock as a deep freeze swept its way across the USA. This follows the cold snap Europe went through only a week or so ago. Texas experienced minus 18-degree temperatures, with minus 1-degree temperatures recorded inside people’s homes, as rolling blackouts to preserve the energy grid meant cities went without power for parts of the day.

Economics:

  • Australian employment rose by a solid 29,100 in January following a revised 50,000 increase in December. The result saw the unemployment rate dip to 6.4% and the underemployment rate move down to 8.1%.
  • US inflation data came in below rising inflation expectations, with consumer prices up 0.3% in January. The result was above December’s increase. The 12-month inflation rate has now ticked up to 1.4%, remaining well below the US central bank’s target.
  • US consumer confidence deteriorated for a 2nd consecutive month in February with consumer sentiment also falling and coming in below expectations. Consumers’ views of current conditions declined whilst their expectations regarding future conditions fell markedly. US federal government needs to figure out its priorities and states need to reopen.
  • The US central bank chair said that the jobs market remains a long way from a full recovery and that monetary policy would remain very accommodative until there was substantial progress on employment and inflation. Jobless claims have been rising of late.
  • 4th quarter UK economic data showed a 1% rise on last quarter, coming in above the 0.5% expected, but still down 7.8% on the year which is the weakest in the major economies.
  • The International Energy Agency has cut forecasts for world oil consumption in 2021 saying that the market for oil remains fragile as travel and the economy remains limited by virus policy response.

Politics:

  • The US senate voted not to impeach former US President Donald Trump with only 7 Republican senators crossing the floor to vote with the Democrats. The process ended up being a waste of time and money, and simply distracted the government from more important matters like vaccine rollout and the economic recovery effort. The government could still bring civil proceedings but it's unlikely to do so given the evidence produced during the impeachment hearing hurt both political parties. The 7 Republican senators who crossed the floor are already under pressure from their representatives.
  • The state of Victoria entered a snap 5-day stage 4 lockdown (shutdown) following only a handful of cases. The Australian Open got a hall-pass. The claims made by the Andrews’ government and resultant overreaction clearly shows that authorities have no faith in their contact tracing and quarantine protocols even after Andrew’s claims of their “gold standard” and a “model that other states want to adopt”. He actually said that.
  • The US has secured additional vaccine supply from both Moderna and Pfizer, with both companies accelerating their deliveries. The US is inoculating at an average of 1.62 million doses per day. At that rate, more than 75% of the US population will be inoculated within 9 months. However, on a global level, it would take more than 5 years to inoculate that percentage of the world’s population. Herd immunity can’t and shouldn’t be ignored, either should weighing up the risks for those under 50 years of age with little to no pre-existing conditions.
  • Following our recent standoff with Google, it was Facebook’s turn to try and bully the Australian government into not proceeding with changes to its media laws. Facebook carried through on its threats to remove Australian “news” items from its network. A pretty silly move during a pandemic. It also looks like Facebook restricted other government and government related Facebook pages in order to test how much revenue it would lose if it continued down this path. The moves saw a firm rebuke from Prime Minister Scott Morrison who is standing firm.


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

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