Investors fret on Fed’s next move

Blog
Friday 1st October 2021

Investors fret on Fed’s next move

Blog
Friday 1st October 2021
Written by Chris Lioutas

Markets:

  • Local and global equity markets took a breather this week as investors didn’t “buy the dip” and instead awaited more news from the US central bank regarding their policy plans.
  • Australian and US government bond yields have risen strongly of late, reversing some of the sharp falls we saw in June when the investors got increasingly concerned regarding the delta variant. The recent swift rise in bond yields (prices lower) is the result of selling pressure from investors in light of the increased likelihood of US central bank bond purchase tapering and potentially sooner than expected rate rises which may begin in the 3rd quarter of 2022.
  • In local stock news, the Wesfarmers approach for pharmacy operator Australian Pharmaceutical Industries seems to have been trumped by Amcal chemist operator Sigma Healthcare in a cash and shares deal.
  • In other M&A action, fleet management provider Smartgroup has received a $10.35 per share takeover offer from a group of investors, a 31% increase on the close price before the news broke, whilst energy infrastructure provider APA Group has extended the time for Victorian electricity provider AusNet to consider its takeover offer. AusNet’s other potential suitor, Brookfield, is still examining the financials of the company.
  • Rising oil and gas prices due to a contraction in supply and rising demand benefited local and global energy stocks, in a much-needed reprieve for the sector following a tumultuous 12-18 months which has included supply disagreements within OPEC+, rising and waning demand as covid restrictions eased and then increased, and lack of investment in light of the significant shift to renewables. Coal prices are also surging.

Economics:

  • Australia’s net federal debt came in at $592.2 billion, about 29% of the country’s economic output. The budget deficit in the 2021 financial year is $80 million better than expected, sitting at $134.2 billion, Treasurer Josh Frydenberg announced.
  • Australian retail trade fell by 1.7% in August, the 3rd consecutive monthly fall with retail trade now 6.1% lower than May 2021. NSW, VIC, ACT, and QLD fell over the month due to lockdowns, whilst SA and WA saw strong gains. September will be soft again.
  • The bosses of Australia’s largest banks are warning about emerging lending risks…when their core activity is lending…CBA CEO Matt Comyn urged regulators to act sooner rather than later to cool the property market whilst the ANZ CEO said borrowers were increasingly trying to overleverage themselves. Federal Treasurer Josh Frydenberg has apparently given the green light for regulators to crack down on high-debt home loans.
  • The US central bank chairman helped boost confidence when he said that the US economy has recovered sufficiently for the bank to potentially announce the start of bond-purchase tapering at its next meeting.
  • Data showed that US new home sales grew in August for the 2nd consecutive month, coming in slightly higher than economist forecasts.
  • Japan’s consumer prices stopped falling in August for the first time in 13 months, ending the country’s longest deflationary stretch since 2011.
  • China’s central bank continued to add short-term liquidity into the financial system as policy makers sought to ease concerns surrounding Evergrande’s debt issues.
  • Electricity shortages are getting worse in China with latest reports showing significant impacts to parts of the economy. A shortage of coal and strong demand from manufacturers has left electricity providers unable to keep up. 
  • Activity in China’s factory sector contracted in September for the first time since the pandemic began, in additional signs the world’s second largest economy continues to slow.

Politics:

  • The Australian federal government has begun signalling an end to their Covid emergency payments with the Treasurer saying that the disaster payments and business support will be scrapped at 80% vaccination, putting pressure on the states to converge towards the national reopening plan.
  • NSW Premier Gladys Berejiklian has resigned saying she had no other option after the NSW corruption watchdog announced it will investigate whether she breached public trust or encouraged the occurrence of corrupt conduct during her relationship with Daryl Maguire.
  • Germany’s election result appears to have made German politics even messier with the centre-left Social Democrats defeating Chancellor Angela Merkel’s conservatives in an extremely tight election. With no clear result, the Germans could be in for months of complex coalition talks to decide who will lead. 
  • British PM Boris Johnson is under increasing pressure to ease multiple supply chain crises as fuel and food shortages hit home causing a spike in inflation. The UK government will issue 5,000 short-term visas to lorry drivers and 5,500 to poultry workers in a significant about-face from Brexit. The government will also look to temporarily drop competition rules.
  • US lawmakers have reached an agreement to avoid a government shutdown, extending government spending until 3rd December. Pressure on Democrats to increase federal debt limit and avoid a default escalated after Senate Republicans had previously blocked a bill to keep the government operating past the end of the fiscal year. Treasury Secretary Janet Yellen then confirmed that her department will run out of money by October 18 without a deal. It will be tough from here for the Biden administration to get the debt ceiling permanently higher, push through higher taxes, and get the US$3.5 trillion stimulus bill to pass. Lots of lobbying still to come.


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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