Pre-Open Data
Key Data for the Week
- Monday – AUS – ANZ Job Advertisements
- Tuesday – AUS – NAB Business Conditions and Confidence
- Tuesday – US – Trade Balance
- Thursday – AUS – Consumer Inflation Expectations
- Thursday – US – Consumer Price Index
- Friday – UK – Gross Domestic Product
- Friday – UK – Industrial Production
Australian Market
The Australian sharemarket advanced on Friday, up 0.6%. The Industrials sector led the gains, up 1.2%, followed by the Information Technology and Energy sectors, which both lifted 1.1%. The Reserve Bank of Australia released their statement on monetary policy on Friday, which indicated that over the next six months core inflation is expected to exceed the target of 2-3%, before dropping to 2.75%. The local ASX 200 finished higher for the week, up 1.9%.
Gains among most major banks lifted the Financials sector on Friday; Westpac was the strongest performer, up 2.1%, followed by Commonwealth Bank and ANZ, which added 0.7% and 0.1% respectively, while NAB finished the session flat. Fund managers were also higher; Australian Ethical Investment gained 2.7% and Challenger added 0.9%, while Magellan Financial Group rose 0.3%.
Mining heavyweights were mixed; Fortescue Metals added 1.0% and Rio Tinto lifted 0.4%, while BHP slipped 0.5%. Gold miners enjoyed gains; Northern Star Resources rose 0.4%, while Newcrest Mining and Evolution Mining closed up 0.6% and 0.8% respectively.
The Australian futures market points to a 0.59% fall today.
Overseas Markets
European sharemarkets eased on Friday. Banking stocks were weaker; Barclays Bank eased 3.0%, while Lloyds Bank and HSBC slipped 0.8% and 0.4% respectively, however, Deutsche Bank bucked the trend to gain 2.4%. By the close of trade, the UK FTSE 100 fell 0.2% and the STOXX Europe 600 shed 1.4%, while the German DAX gave up 1.8%. Over the week, the STOXX Europe 600 lost 0.7%.
US sharemarkets were mixed on Friday. The Consumer Discretionary sector was the top performer, up 3.7%, lifted by a 13.5% gain in Amazon following an earnings announcement. The Financials sector also closed higher; Bank of America added 4.0% and JP Morgan Chase rose 2.6%, while Citigroup closed up 2.1%. By the close of trade, the NASDAQ lifted 1.6% and the S&P 500 rose 0.5%, while the Dow Jones slipped 0.1%.
CNIS Perspective
Expectations for 2022 to be more volatile and difficult than 2021 from an equity investors perspective is certainly playing out. Inflation fears and impending tighter monetary policy are weighing on share prices, as are tensions between Russia and the Ukraine. Government bond yields that have been declining for 40 years are now indicating this trend is about to change, which challenges stocks for three main reasons.
Firstly, investors’ choice between stocks and bonds are in competition for allocation of their assets. If bonds are yielding higher, this will cause investors to switch out of equities. Secondly, higher bond yields increase the costs of corporates to raise finance, making it harder for companies and the economy to grow.
Thirdly, and making the greatest impact already are equity valuations. The future value of expected profits needs to be discounted by a certain rate to take into account the “time value of money”. I.e., A dollar in your hand today is worth more than in ten years’ time. The discount rate, also known as the “risk-free rate of return”, usually compares benchmark government bond yields to strip out the cost of what could be earned elsewhere. The lower the comparative bond yield, the lower the discount rate and the higher the company’s valuation. Of course, if those bond yields rise, then this increases the discount rate and company valuations drop.
In the US, the 10-year treasury yield has surged from the March 2020 low (0.52%) closing at ~1.92% on Friday, the highest yield since January 2020, after some very positive US employment data.
While Fed Fund rates were low and stable, high growth rates justified elevated valuations. However, higher interest rates expose company earnings to less forgiving markets. Meta/Facebook last week recorded the biggest one day drop in value in the history of the US stock market after a weaker than expected revenue forecast, providing a cautionary tale.
Should you wish to discuss this or any other investment related matter, please contact your Wealth Management Team on (02) 4928 8500.
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The material contained in this publication is the nature of the general comment only, and neither purports, nor is intended to be advice on any particular matter. Persons should not act nor rely upon any information contained in or implied by this publication without seeking appropriate professional advice which relates specifically to his/her particular circumstances. Cutcher & Neale Investment Services Pty Limited expressly disclaim all and any liability to any person, whether a client of Cutcher & Neale Investment Services Pty Limited or not, who acts or fails to act as a consequence of reliance upon the whole or any part of this publication.
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