The Overnight Report: The Fed Confirms

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This story features SUNCORP GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: SUN
The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Living in the Seventies

Back in the mists of time, being the September quarter last year, Australia’s economy contracted by -1.9% due to lockdowns in NSW and Victoria that prevented anyone from spending money. But by the December quarter, delta was under control, and the economy bounced back 3.4%.

That’s the biggest quarterly GDP gain since 1976. And it was all about consumer spending, which bounced back 6.3% across the country, including 11.4% in NSW and 7.5% in Victoria. The annual rate of GDP growth had stumbled but not fallen. It rose to 4.2% in December, up from 3.9%.

Perhaps the most significant number to come out of the data is the subsequent drop in household savings, to 13.6% from 19.8%. But the equilibrium level is 5%, so Australians have not finished spending yet. The only problem is that by Christmas, another variant had arrived.

But enough history. Yesterday the ASX200 opened lower, as Wall Street and our futures had decreed, to be down -55 points in the first half hour. With that out of the way, the buyers moved in, ahead of the later GDP release.

They only bought two sectors – energy closed up 4.9% on oil prices above US$100/bbl, and materials up 3.0% on increases in iron ore, coal, gold, lithium et al.

Numbers like that would typically have the ASX200 soaring, except for the natural enemy of the resource sectors – financials. Having risen 1.0% on Tuesday as Australian bond yields held firm against a US crunch, yesterday they succumbed to a fall in yields, with the two-year down -6 points to 1.01% as US yields again retreated sharply. The sector fell -1.4%.

What insurance company investors were doing on Tuesday is anyone’s guess, sending insurers slightly higher, as yesterday Suncorp ((SUN)) fell -1.6%, Insurance Australia Group ((IAG)) -4.4%, and QBE Insurance ((QBE)), which despite the ‘Q’ part is the least exposed to the floods, -4.1%, to help drag down financials.

Fund managers helped too. Janus Henderson ((JHG)) fell -7.3% and Magellan Financial ((MFG)) -6.4% amidst market turmoil.

Consumer discretionary and related REITs were the other major losers, down -1.1% and -1.2%. Perhaps investors saw December quarter consumption as representing the peak. UR Westfield ((URW)) fell -5.8%.

The big winners on the day were the two big oil majors Santos ((STO)), up 6.2% and Woodside Petroleum ((WPL)), up 6.1%, remembering that Santos now includes Oil Search. Whitehaven Coal ((WHC)) followed with 5.9% and diversified miner South32 ((S32)) 5.9%.

So thanks to holes in the ground (and sea), the local market managed to overcome negative sentiment in the US which, in its fickle way, turned positive again last night. Our futures are up 69 points this morning.

Hurray for 25

Last night the Fed chairman told Congress, effectively, the Fed funds rate would be raised by 25 basis points in two weeks. Three weeks ago, this would have been a big relief for Wall Street, as it is not 50 points.

Given recent events abroad, some on Wall Street had begun to wonder whether the Fed would hike in March at all. This is evident in the US ten-year bond yield bouncing back 16 points to 1.87% last night.

We recall that in January, surging bond yields, in the wake of the Fed’s policy pivot, sent Wall Street into correction. Last night, on surging bond yields, the S&P500 jumped 1.9%. The Nasdaq – the known victim of higher rates – rose 1.6%.

It’s a funny old world.

We could note, nonetheless, that the biggest enemy of stock markets is uncertainty, and what the Fed was going to do this month has been the prime source, until last night.

It’s not typical for Wall Street to cheer a rate rise, but last night it did. We also note Tuesday night’s fall took the S&P500 perilously close to the 4300 support level – the prior low – a breach of which would have opened up a technical black hole. But Wall Street has already been sold down hard – twice. Support held.

All this in the face of another 8% surge in oil prices.

OPEC-Russia confirmed last night it would not increase oil production beyond current quotas. The release of government-held global oil reserves has been steamrollered. One saving grace is that the northern hemisphere is heading into summer.

All hopes of some lower US inflation numbers from this month have been dashed. March last year saw the first big spike in US inflation, so it stood to reason this March could see some contraction by comparison. But not with oil at US$110/bbl.

In other news, 475,000 jobs were added in the US private sector in February against forecasts of 400,000. The real number is on Friday.

Commodities

Was it only yesterday I was wondering out loud why base metal prices appeared to have been left out of the commodity price surge?

Rusal is the biggest aluminium producer outside of China and Norilsk accounts for about 10% of refined nickel output globally. Global nickel stockpiles are at their lowest levels since 2019. Transport companies have moved to ban business with Russia.

Copper inventories held in the big exchanges of London, Shanghai and New York have fallen to just three days’ coverage. Chile produces a quarter of the world’s copper, and January saw the lowest copper output since 2011.

Gold has fallen back on the US bond-yield reversal.

Between the GDP and commodities, the Aussie is up 0.7% at US$0.7300.

Today

The SPI Overnight closed up 69 points or 1.0%.

Australia will see numbers today for building approvals and trade.

In the US its factory orders.

Global services PMIs are out today.

Coles ((COL)) is on what is the longest daily list of ex-dividend stocks so far this season.

Today's calendar: https://www.fnarena.com/index.php/2022/03/03/todays-financial-calendar-03-03-2022/

The Australian share market over the past thirty days…

For more detail go to FNArena's Australian Broker Call Report, which is updated each morning, Mon-Fri.

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