The Monday Report – 01 August 2022

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This story features GOODMAN GROUP, and other companies.
For more info SHARE ANALYSIS: GMG
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Onward ever upward

Wall Street’s big shrug at the “technical recession” implied by two quarters of negative growth had the ASX200 rallying along as well on Friday. The index opened up around where it would close and didn’t do a lot in between.

Wall Street was up again on Friday night and our futures closed up another 46 points on Saturday morning.

It wasn’t quite all green on screen, with healthcare deciding to sit this one out. Otherwise buying was market-wide, with a couple of standouts.

The comeback for REITs continued, with real estate up 3.0% — quite a move for a traditionally boring sector. Sector heavyweight Goodman Group ((GMG)) rose 4.6%, while following a result release, UR Westfield ((URW)) gained 2.6%.

Next best was utilities (+2.5%), which again is supposed to be boring. Origin Energy ((ORG)) jumped 4.2% on its quarterly report.

Materials are also making a comeback (+1.0%), with iron ore back on the move, while technology (+1.3%) followed the tech revival on Wall Street.

On the subject of materials, there were some mixed messages on Friday out of China regarding stimulus intentions.

China will use effective investment to help the economy recover and will not resort to flood-like stimulus, state media said on Friday, following a cabinet meeting chaired by Premier Li Keqiang. Beijing will not “force” the economy to reach its 5.5% 2022 growth target.

China’s GDP grew by 2.5% annualised in the first half.

To spur demand, Beijing urged local governments to speed up the use of special bonds for infrastructure. To spur consumption, Beijing will extend an exemption on the tax on "new energy" vehicles, following a cut to the car purchase tax.

All good news for Australian raw material exporters.

But there is no intention to shift from Xi’s so-called “dynamic zero-covid policy”, which the WHO has branded unsustainable. So widespread lockdowns remain a risk at any time.

On the subject of the technology sector, the 1.3% gain came despite a -25% fall for ZIP Co ((ZIP)). I did say it would all end in tears. No new news, just someone decided to take profits and then the rush was on.

Zip had rallied 225% from its low, measured as bottom-up, but top-down, Friday took a quarter of that back.

AA-Rated

More bad news on the US economic front – headline June PCE inflation came in at a higher than expected 6.8% annual, up from 6.3% in May, mostly driven by fuel prices. Without fuel or food prices, the core rate rose to 4.8% from 4.7%.

It is that latter figure the Fed wants to see back in the 2-3% range, so don’t worry about a 6.8% PCE or 9.1% CPI. Wall Street was ready for a PCE increase following the June CPI result.

Wall Street instead continued to focus on earnings results, particularly those of two of the world’s biggest companies.

Having reported in Thursday night’s aftermarket, Apple rose 3.3% on Friday and Amazon 10.4%. For Apple it was about growth in iPhone sales despite the hit from Chinese lockdowns, while for Amazon it was about better growth than expected in cloud services, and no signs of the inventory issues in retail that beset the likes of Walmart and Target.

Apple is in all three major indices and Amazon in the Nasdaq and S&P500, so their influence is widespread.

But there was more. Chevron (Dow) and Exxon both posted record profits, as might be expected given oil prices, but Chevron rose 8.9% and Exxon 4.6%. Neither company acknowledged the records in their releases, as there is a bit of a stigma around such numbers when Americans are suffering from high oil prices. But they have increased production as requested by the president, and they did suffer record losses in the 2020 covid lockdowns.

The run-rate for S&P500 is currently 7.6% growth in average earnings and 76% beats. Just about everyone moaned that heading into the season, earnings forecasts were too high.

So far that scenario does not appear to be playing out, and as for a recession, Wall Street had already priced one in anyway. So might as well buy.

The Dow closed up 6.7% for the month of July, the S&P500 9.1% and the Nasdaq 12.3%. But they’re all still well off their highs.

And so far the gains have not led to anyone suggesting this is clearly not just a bear market rally. There are those believing we have indeed seen the bottom, but even they won’t rule out the bear market rally possibility.

July inflation – that will be a biggie.

Commodities

Infrastructure stimulus from Beijing can’t be all bad.

Yesterday China reported a fall in its manufacturing PMI in July to 49.0 (contraction) from 50.2 when economists had forecast 50.4.

Gold appears to be gaining some momentum of its own, given Friday night saw US bonds yields tick back up a bit.

The Aussie is down -0.1% at US$0.6987.

The SPI Overnight closed up 46 points or 0.7% on Saturday morning.

The Week Ahead

It’s another big week of earnings on Wall Street before the daily numbers begin to wane the following week.

By contrast, Australia’s earnings season begins to ramp up this week, albeit it’s just a trickle to begin with.

Genex Power ((GNX)) reports today.

It’s jobs week in the US, and Wall Street would rather not see surging numbers that might rattle the Fed. Private sector numbers are out on Wednesday and non-farm payrolls on Friday.

The US will also see data for construction spending, factory orders and trade.

Manufacturing PMIs will be reported today from across the globe, followed by services PMIs on Wednesday.

Locally we’ll see job ads and house prices today, building approvals and housing finance tomorrow, and trade numbers on Thursday.

The RBA meets tomorrow. Economists have locked in 50 points. The RBA will release a Statement on Monetary Policy on Friday.

The Bank of England meets on Thursday.

The Australian share market over the past thirty days…

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