Cutcher | Insights and News

Cutcher's Investment Lens | 30 September-4 October 2024

Written by Cutcher & Neale Wealth Management | 7 October 2024 11:25:39 PM

Weekly recap

What happened in markets

The Australian sharemarket finished in the red by the end of the week, despite mostly higher commodity prices. Heightened geopolitical tension in the Middle East, along with new expansionary policy support from China, led to a surge in the price of iron ore (+17.1%) and oil (+8.2%). These moves buoyed local producers like Woodside Energy (+9.4%), Santos (+6.7%) and Mineral Resources (+3.8%). Retail Sales data for the month of August came in stronger-than-expected, up 0.7%, though this failed to translate to better stock prices in the Consumer Discretionary (-2.7%) sector. Notable stock specific detractors in the week included the major banks, with losses led by Westpac (-5.2%), followed by ANZ (-2.6%), NAB (-1.4%) and Commonwealth Bank (-1.1%). This weakness was partly driven by lower interest rate expectations and the likely pressure it will place on bank net interest margins over the next 12 months.  

US sharemarkets managed to edge higher last week, maintaining recent momentum as the S&P 500 and NASDAQ both made their fourth consecutive week of gains. A strong September jobs report was the key contributor to improved investor sentiment and helped reverse losses made early in the week. The US unemployment rate inched down from 4.2% to 4.1% in the month of September, as 254,000 jobs were added the economy, well above the 142,500 expected. The unexpected strength in the labour market, coupled with lower inflation and the recent interest rate cut from the US Federal Reserve, supported optimism in the US. Notable corporate news included weaker third quarter sales and deliveries from a number of US automakers, particularly Tesla (-4.0%). Meanwhile, Nike (-8.0%) withdrew its FY25 guidance amid its CEO transition, causing some shareholders to lose confidence. 

European sharemarkets were weaker last week, as the escalated conflict in the Middle East dominated the rhetoric and dampened investor sentiment. Unsurprisingly, heightened geopolitical risk weighed on the Travel & Leisure (-4.1%) sector in particular. Meanwhile, new tariffs on Chinese electric vehicles from the European Union caused automakers (-6.2%) to decline and led to speculation around the impact of China’s potential retaliation. On the other hand, oil and gas related companies had their best week in around six months, broadly up 5.1%, after increased concern around geopolitical conflict caused a spike in the price of oil. 

Stock & sector movements

What caught our eye

Last week in Australia, Treasurer Jim Chalmers announced the Albanese Government had recorded a $15.8 billion Budget surplus in FY2024. This marked the second consecutive financial year the Budget has been in the green. Indeed, the recovery of Australia’s budget since COVID-19 has been impressive, though it’s hard to really tell how much of this is from good policymaking, timing, favourable market conditions or just sheer luck. Unsurprisingly, politicians like Chalmers claim the former, while we believe many economists would side with the latter. 

For some context, budget surpluses are a useful tool for governments, though the US Government clearly doesn’t seem to think so, in that they can help smoothen out economic cycles. If the government saves more than it spends (surplus) when times are good, think the post-COVID boom, then it can spend more than they save (deficit) when conditions worsen (think peak COVID-19 lockdowns). 

During the pandemic, former Prime Minister Scott Morrison and Treasurer Josh Frydenberg were forced to implement extreme expansionary fiscal policy to safeguard the economy. This included policies like JobKeeper, which accounted for $90 billion of the $429 billion in stimulus introduced in 2020 and 2021. Case in point, these bad times led to a budget deficit to help smoothen out the economy. Then, as the worst of COVID-19 was behind us and lockdowns were lifted, we experienced a surge in economic activity. These conditions partly explain why inflation became a problem, but also why Chalmer’s budget surpluses were needed as a pressure release valve. 

A natural budget surplus was clearly destined for our economy. Favourable conditions like increased business activity, wages, global commodity prices, population growth via migration and pent-up household savings to be spent, all pointed to more tax receipts. Such conditions also meant less government transfers and spending outflows were necessary. All that was needed was appropriate restraint from policymakers, though the ones in charge had changed and were keen to make their mark. This was topical at the time, as many wanted to see what level of surplus the newly formed Labor Government would facilitate. We now know that Labor did not spend less, though they certainly could have spent more. Admittedly, the emergence of higher inflation and the ‘cost of living crisis’ made things harder and more politically risky for them.  

Last week’s figures show our Federal Government net debt to GDP reached a seven-year low of 18.4%, which would be the envy of most developed countries. How much of this was due to good policymaking, or just the cycle of the political economy and a bit of luck, we can’t be sure. One of Australia’s best-known economists from Deloitte, Chris Richardson, suggests, “Australia’s budget improvement has been extraordinary. But it happened despite our politicians rather than because of them, and the days of surplus look increasingly numbered.” 

 

The week ahead

In Australia, we will hear speeches from a number of RBA members, including Deputy Governor Andrew Hauser, Assistant Governor (Financial Market) Christopher Kent and Assistant Governor (Economic) Sarah Hunter. Outside of these, important economic news will include the Westpac-Melbourne Institute’s Consumer Confidence Index, alongside the NAB Business Survey.

Internationally, we will get all-important September inflation data from the US, in addition to the US Federal Reserve’s latest monetary policy meeting minutes. These minutes will be interesting to see, as they will provide insight into the central bank’s somewhat surprising decision to start with an outsized 0.5% cut to its cash rate.