Equity markets move higher as central banks reassure

Blog
Friday 12th March 2021

Equity markets move higher as central banks reassure

Blog
Friday 12th March 2021
Written by Chris Lioutas

Markets:

  • Local and global equity markets rose this week as central banks calmed fears and US inflation came in lower than expected. European shares were the standout.
  • In local stock news, IAG shares fell sharply after investors became worried it could suffer losses from the collapse of supply chain finance provider Greensill Capital. IAG called a halt to trading of its shares before it told the market it had no insurance exposure to Greensill companies.
  • Vocus shares rose after board members recommended shareholders accept a takeover offer from a division of Macquarie Group and Aware Super.
  • Iron ore stocks fell as the Chinese economic growth target for this year came in below expectations. The expected composition of the growth may have also disappointed with more “new” economy spending than “old” economy.
  • The oil price rose early in the week, before settling back down, after a key Saudi oil site came under attack from Iranian-backed Houthi rebels out of Yemen. This together with continued production cuts from OPEC+ means oil prices will remain elevated.
  • The Aussie dollar rose as the US dollar took a breather following comments from the US central bank chair and a lower-than-expected reading on US inflation.

Economics:

  • The RBA Governor spoke at a business summit where he discussed the recent rise in longer term bond yields and reminded the audience that a lift in the cash rate was a long way off. He also mentioned that they were watching lending standards closely given the recent strong lift in lending. He mentioned that non-mining business investment remained soft and that stronger business investment would help to drive an improvement in productivity and stronger wages growth.
  • Australian consumer sentiment lifted by 2.5% in March whilst business confidence in February rose to its highest level in 11 years. A decline in job security fears and a rise in the “time to buy a major household item” question helped boost consumer sentiment. Business conditions also improved in February.
  • The Australian federal government revealed a $1.2 billion stimulus package for the tourism industry in a direct sign that JobKeeper won’t be extended beyond the end of this month. The funding includes 800,000 discounted airline tickets as well as loans for struggling tourism operators. Without foreigners, the tourism industry will remain in a world of pain. What would help is boosting confidence for local tourism by decreeing that state borders will not close again and that interstate travellers won’t be required to quarantine again.
  • Inflation fears eased in the US after a key measure of consumer prices rose less than expected in February.
  • US jobs growth came in significantly better than expected, with leisure and hospitality jobs rebounding strongly on re-opening. Unemployment fell to 6.2% whilst average hourly earnings increased slightly as expected.
  • The US central bank chair Jerome Powell said the recent spike in government bond yields did not warrant intervention by the bank. He also suggested that inflation is likely to rise in the coming months but won’t be enough for the bank to change rate policies.
  • The European central bank said it would use its 1.85 trillion euro pandemic emergency program more generously over the coming months to stop any unwarranted rise in debt financing costs. The bank’s president also warned against any premature policy tightening.
  • Data showed orders for German-made goods rose by twice as much as expected in January as robust foreign demand more than offset domestic weakness.
  • The Chinese government set their annual growth target at more than 6%, which may have disappointed some market participants who were expecting a number closer to 10%. This likely means more restrained monetary and fiscal stimulus this year. However, they are pledging to boost spending on microchips and artificial intelligence, and defence spending will see its largest gain since 2019. Hardly surprising given heightened tensions with the US.
  • The Organisation for Economic Co-operation and Development (OECD) forecasts suggest the global economy will rise above pre-virus levels by the middle of this year, but the recovery will be uneven. They expect the expansion to be the fastest in the US, whereas European growth will be slower. The organisation also warned that accommodative policies should not be tightened too quickly.

Politics:

  • The US Senate passed the mammoth (and somewhat wasteful) US$1.9 trillion “Covid relief” bill with President Biden signing it into existence. The bill includes one-off $1,400 payments to adults, an increase and extension to unemployment benefits until September, bail-out funds for mis-managed states and local governments, funds for “school reopening” (kids have missed almost 1 year of education), and funds for Covid testing/research and vaccine distribution. In contrast, re-opening the economy faster and support for small businesses would’ve only cost around a 1/3rd of the planned US$1.9 trillion, with the same sort of outcome.
  • The politics of vaccine distribution and availability rose this week with the Europeans accusing the UK of stifling supply whilst the US doubled their order of Johnson & Johnson’s single-shot treatment as they push America first. Moderna’s supply is entirely for US domestic use whilst Pfizer and Johnson & Johnson have declined to say whether they’ve exported any US produced doses.

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.