Investor sentiment mixed on virus fears and Fed comments

Blog
Friday 3rd December 2021

Investor sentiment mixed on virus fears and Fed comments

Blog
Friday 3rd December 2021
Written by Chris Lioutas

Markets:

  • Local and global equity markets were mixed this week with concerns regarding a new virus variant early in the week then drowned out by more hawkish than expected comments from the US central bank chair.
  • Bond markets remain volatile in relation to how they price the timing of central bank rate rises with this week alone first seeing traders pushing out their expectations for a US rate increase given the spectre of increased virus restrictions, before more hawkish than expected comments from the US central bank chair saw expectations of a rate rise brought forward.
  • Residential auction listings are at almost double where they were this time last year as vendors and agents look to take advantage of frothy conditions and clear out as much stock before year end given uncertainties regarding central bank policy path in 2022. Sydney, Canberra, and Adelaide recorded their highest volumes since 2008.
  • In local stock news, Woolworths has entered the race for Australian Pharmaceutical Industries lobbing a $1.75 per share takeover offer, besting Wesfarmers’ bid of $1.55 per share, whilst Crown Resorts has declined private equity group Blackstone’s takeover offer of $8.46 billion but has invited them to improve their bid.
  • In local stock news, Spark Infrastructure saw its last day of trading after the takeover offer for the company by a consortium of investors received court approval, which will see investors collect $2.77 per share plus a special distribution of 12c per security.
  • The oil price continues to see weakness as investors ditched riskier assets following concerns regarding the new virus variant. Increased restrictions would see a drop in demand at the same time as we’ve seen increased supply (via US allies releasing their strategic reserves and OPEC+ maintaining their planned January oil output rise of 400,000 barrels per day).
  • The Aussie dollar flirted with dropping below the US70c mark this week with investors seeking safe-haven currencies and the US dollar receiving support in light of potentially sooner than expected rate rises.

Economics:

  • Australian economic growth dropped by a large 1.9% in the 3rd quarter due to extended lockdowns across large parts of the country, with household consumption falling sharply whilst net exports, business investment, and public spending made positive contributions. The household saving ratio spiked to 19.8% given significantly less consumption and significant government support payments.
  • Retail trade rose by 4.9% in October, with NSW accounting for 80% of the monthly lift with a sharp 13.3% increase for the month. The result was ahead of market expectations. Looks like we will also see another strong lift in November.
  • Company profits rose by 4.6% in the 3rd quarter, with strong commodity prices and government support provided during the lockdowns driving the increase. Mining, construction, and manufacturing saw the strongest gains whilst accommodation & food services and transport & storage saw the biggest contractions.
  • Wages and salaries fell in the 3rd quarter, bucking the trend of rises in the past four quarters. The decline is a function of the sharp fall in hours worked and drop in employment due to lockdowns in NSW and VIC. Wages and salaries remain 4.1% above their pre-pandemic levels.
  • The Commonwealth Bank of Australia has lifted interest rates for 3rd time in six weeks in order to cover increasing funding costs for the bank. The more recent lift included an increase to its owner occupier fixed interest rates by up to 0.30%, along with investor fixed interest rates by up to 0.60%.
  • Dwelling prices rose by 1.1% across the 8 capital cities in November with annual growth now sitting at 21.3%. Brisbane and Adelaide saw the strongest growth. The overall pace of monthly gains has slowed, likely the result of higher mortgage rates, affordability, and buyer fatigue.
  • Australia’s current account surplus widened to $23.9 billion in the 3rd quarter, a new record high, but came in smaller than expected. The trade surplus widened strongly to $38.9 billion from $30.8 billion in the previous quarter, with the value of exports rising 7.6% whilst imports rose by 1.6%.
  • The number of dwelling approvals fell by almost 13% in October, which was considerably lower than consensus. The monthly fall was driven by a sharp fall in private apartment approvals. Approval levels remain considerably higher than before the HomeBuilder program, pre-pandemic, and 12% higher than 2 years ago.
  • Total private sector credit increase by 0.5% in October after rising by 0.6% in September. Credit lifted by 5.7% over the year. Credit growth looks to have been moderating a little more recently hitting a 9.1% peak pace back in August.
  • US central bank chair Jerome Powell provided a surprisingly hawkish and upbeat stance, stating that he could see their tapering process (ie. printing less new money each month) speeding up if the current variant fears prove ill-founded given risks of higher inflation. Now a race between how quickly higher inflation recedes versus a twitchy central bank.
  • European central bank president Christine Lagarde has said that the inflation seen so far is tied to temporary phenomenon’s and that these will disappear. Eurozone inflation has spiked to into multi-year highs, with core inflation finally breaching the bank’s 2% target.
  • China’s Covid-zero policies (an implicit edict from the government) continues to apply extreme pressure on the shipping industry and is prolonging a recovery as ports remain heavily congested and shelves empty worldwide. Supply bottlenecks to continue until manufacturers / producers diversify their production sources.
  • China’s factory activity fell back into contraction in November as weakening demand, shrinking employment and elevated prices weighed on manufacturers, a key business survey showed.

Politics:

  • China sent 27 warplanes close to Taiwan, the most since October, after a US lawmaker defied Beijing’s demand that she abandon a trip to the island. The aircrafts entered Taiwan’s defence zone.
  • Iran’s chief nuclear negotiator said world powers must ensure the complete and guaranteed removal of sanctions for Tehran if there is to be any chance of reviving a landmark 2015 deal and ending the standoff with the US. Foreign relations and the middle east power struggle nightmares also bears some weighting on the oil price, given current sanctions prevent Iran from exporting oil.
  • The US federal government is in danger of running out of money to pay for bills as soon as December 15 if lawmakers don’t reach an agreement. The House of Representatives passed a bill to fund the government through to mid-February, sending it to the Senate which faces a midnight deadline to pass it. Congress previously voted in 2019 to suspend the debt ceiling until 31 July of this year. The US has since added US$6.5 trillion to its debt total which now sees them owe US$28.5 trillion in federal debt.  


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 concern