Equity markets fall on virus variant concerns

Blog
Friday 9th July 2021

Equity markets fall on virus variant concerns

Blog
Friday 9th July 2021
Written by Chris Lioutas

Markets:

  • Equity markets locally and globally fell this week on concerns regarding rising virus cases.
  • In local stock news, Sydney Airport’s shares rose strongly after they received a $22.3 billion takeover offer equating to $8.25 per share from a consortium of infrastructure investors mostly made up of Australian industry super funds. The offer will be hard for the company’s board to rebuff, but markets aren’t so sure given the stock price remains well south of the offer price.
  • Tabcorp will spin-off its lotteries and Keno arm as a separate ASX listed business, but has chosen not to sell its wagering and media arm despite several suitors offering to pay about $3.5 billion.
  • Seven Group has continued to lift their stake in Boral buying 60 million shares at $7.40 each with the company now owning almost 41% of Boral.
  • The upward trend in oil prices reversed course this week on expectations that some countries may break ranks from OPEC+ production targets. The moves come after the United Arab Emirates blocked an OPEC+ deal that cartel leaders Russia and Saudi Arabia had hashed out to increase output. The Saudis and Emiratis have historically had each other’s backs. Demand is likely to remain high as the global recovery continues, whilst US supply runs low due to President Biden’s green policy.
  • The Aussie dollar fell into the 74c range against the US dollar as investors sought out safe-haven currencies in light of rising Covid cases and weaker Chinese inflation data.

Economics:

  • The Reserve Bank of Australia held the cash rate at the record low of 0.1% as expected at their July meeting. The board also made 2 other policy announcements relating to their bond yield targeting program (ie. keeping government bond yields very low) and their bond buying program (ie. money printing) which will see them taper bond purchases from $5 to $4 billion per week until at least mid-November. They also changed their language slightly to indicate they don’t expect to lift rates until 2024 (previously “2024 at the earliest”).
  • New lending for Australian housing rose by 4.9% in May with a particularly large lift in investor lending in the month which was up 13%. Owner-occupier lending rose by 1.9% whilst lending to first home buyers continues to flatten out. New lending was strongest in NSW and VIC.
  • New personal lending rose by a very strong 11% in May, which continues the recent trend higher. Commonwealth Bank’s internal data shows lending for cars and household goods are trending higher whilst lending for holidays remains very soft.
  • The number of Australian residential building approvals posted a large 7.1% fall in May, likely impacted by the ending of the government’s Homebuilder grant scheme. VIC and TAS actually posted increases. Approvals for renovations remain elevated, whilst non-residential building approvals have lifted in recent months.
  • Australian retail trade rose by 0.4% in May, which was an upgrade on the preliminary estimate. Retail trade continues to run at an elevated level with all major categories running above pre-Covid levels. Spending on food and eating outdrove the increase in May. 
  • The US Labor Department’s employment report showed non-farm payrolls increased by 850,000 jobs last month but the total remains 6.8 million below its peak in February 2020, as the federal government’s over-generous and over-extended Covid unemployment program pays people to stay home until September causing massive labour shortages. The better than expected monthly number comes as some Republican states have started to remove/decline the federal unemployment programs ahead of time thus forcing people back to work.
  • European central bank policy makers have revamped their inflation target for the 1st time in almost 2 decades giving itself more room to keep monetary policy loose. The move gives the bank room to overshoot the target if needed which means they can apply even more stimulus for much longer.

Politics:

  • A deal on an international corporate tax system of sorts came a step closer as 130 countries and jurisdictions backed a plan that includes a minimum corporate rate and tax-sharing on multinational firms’ profits. However, 3 European Union countries have resisted the plan given they currently have corporate tax rates less than the minimum being proposed.
  • On the virus and vaccine front, the NSW lockdown was extended by a week impacting children’s first week back at school in Greater Sydney. The low percentage of people vaccinated seems to be the main focus of those in charge given their ill-guided elimination strategy, in contrast to the more critical areas of ICU bed availability and deaths. In other parts of the world, concerns continued regarding the Delta variant, which data shows is more contagious, is significantly less deadly than the original strain, and vaccines are more than effective. The US continues to reopen, the UK is nearing the date when all restrictions will be removed, whilst Japan declared another state of emergency as it tries to ready itself for the Olympics.
  • Chinese authorities are planning rules changes which would allow them to block companies from listing overseas, closing a two decade loophole which has allowed Chinese tech giants to attract foreign capital. The move continues Beijing’s tightening of controls over the country’s largest tech companies.
  • Former US President Trump announced that he will sue Twitter, Facebook, and Alphabet as well as their CEOs in a class action lawsuit for blocking him out of their social media platforms. Trump is banned from Twitter for life and Facebook for at least 2 years, pending another review. The case will likely be decided by the US Supreme Court with both sides effectively using the same argument that it’s their 1st amendment right to not be censored (in Trump’s case) and to censor (in the social media company’s case given they’re private companies).  


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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