Equity markets mixed as relief rally soured by US tech sell-off

Blog
Friday 4th February 2022

Equity markets mixed as relief rally soured by US tech sell-off

Blog
Friday 4th February 2022
Written by Chris Lioutas

Markets:

  • Equity markets were mixed this week as a strong rally earlier in the week was soured by US tech sell-off and more hawkish comments and action from both the European central bank and the Bank of England.
  • Reported 4th quarter US corporate earnings have continued to come through stronger than expected, with 78% of companies beating analyst estimates and more than 80% having met or beat expectations. Analysts are expecting that profits from companies in the S&P 500 rose 24% in the quarter from a year earlier.
  • Money markets are now expecting almost 5 interest rate increases from US Fed this year and 4 from the Bank of England. There’s also speculation that the US Fed might front-load hikes by increasing rates in larger increments, which Fed officials have poured cold water on. All will largely depend on inflation dynamics from here but will also be a function of what interest rate level the economy and markets can absorb and withstand.
  • In local stock news, Telstra has announced it will spend up to $1.6 billion on two projects over the next 5 years. The spending is projected to provide a $200 million earnings contribution by 2026.
  • Westpac has reported a net profit of $1.82 billion in the December quarter, up 80% on the quarterly average for the 2nd half of 2021. Cash earnings were up 1%, but the net interest margin declined 8 basis points to 1.91%. Total loans increased 0.7%.
  • Sydney Airport shareholders have voted for a $23.6 billion takeover bid from a consortium of investors, with shareholders to receive $8.75 per share.
  • Oil prices moved higher this week after OPEC+ stuck to planned moderate output increases (400,000 barrels per day) despite pressure from customers and consumers to raise output more quickly. The group has blamed rising prices on the failure of consuming nations to ensure adequate investment in fossil fuels, whilst Russia/US tensions also haven’t helped.
  • The Aussie dollar rose as the US dollar took a tumble after both the European and England central banks turned more hawkish in their rhetoric and actions.

Economics:

  • The Reserve Bank of Australia left rates unchanged at 0.10% but announced an early finish to their quantitative easing (money printing) program, giving the bank the green light to begin raising rates. The bank made it abundantly clear in their statement that they’re in no rush to raise rates, but markets are currently predicting a rate lift-off in either June or August. Inflation, particularly wage growth, will be key.
  • Australian private sector credit rose by 0.8% in December to take the annual rate to 7.2%, the strongest rate since November 2008. Both housing and business credit were strong, whilst personal credit fell in December and remains well below levels a year ago.
  • Australian retail trade fell by 4.4% in December affected by virus issues, falling more than consensus estimates, but remains at near record levels. Food retailing was the only positive, with large falls coming from department stores, clothing & footwear, and household goods.
  • Australia’s trade surplus narrowed in December as imports rose strongly in the month relative to exports. Exports were mixed, with iron ore rising strongly and reasonable growth from wool and meat, whilst coal fell sharply as did other rural exports. Imports were boosted by strong gains across all the goods categories.
  • Australian building approvals rose strongly in December, boosted by a surprising lift in multi-unit approvals. In contrast, private detached house approvals fell as momentum continues to slow. Over the past year, the number of approvals is lower by 7.5%, however, alterations & additions approvals remain elevated.
  • US data showed that the central bank’s preferred measure of inflation rose at 4.9% in December over the prior year, pushing well above the bank’s target.
  • A separate measure showed US employers spent 4% more on wages and benefits over the past year, an increase not seen since 2001, as a tight labour market encouraged workers to demand higher pay. However, employment costs didn’t rise as much as expected in the 4th quarter easing concerns that wages are advancing too quickly.
  • US consumer spending fell in December as rising prices and virus fears took their toll.
  • US manufacturing activity slowed in January, from December, but remained in expansionary territory. Supply chain impediments caused by virus health policies were among the issues that weighed on activity.
  • The Bank of England voted by a majority 5-4 to increase the cash rate by 0.25% to 0.50%. Members also voted unanimously for the bank to begin to reduce the stock of UK government bond purchases by ceasing to reinvest maturing assets – i.e., reduce the size of their balance sheet by taking the liquidity away they previously provided via money printing. They will also begin to unwind the stock of corporate bond purchases.
  • The European central bank maintained key interest rates at record low levels in February and pledged to steadily reduce its bond purchases (money printing) this year. Rate rises are unlikely in 2022.
  • China’s economy continued to slow at the start of the year with manufacturing output slipping and Covid-zero policies curbing consumer spending.

Politics:

  • Russia/US tensions continued to rise this week with Russia maintaining they have no plans to invade and Ukraine trying to calm tensions on all sides. US lawmakers are apparently close to finalising the language for a sanctions bill that could include some penalties even if Putin doesn’t invade. The US has also given the green light to move troops from the US to Europe and to move troops within Europe closer to the Russia/Ukraine border.
  • Some 300,000 Australian fossil fuel jobs could be wiped out through declining international demand for fossil fuels, new modelling predicts. There’s a widely held belief that those job losses will be easily absorbed, but that doesn’t appear to be apparent with renewable sources of energy largely developed using automation. The job losses will disproportionately impact regional centres. Job transitions and retraining are never easy.  


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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