The Monday Report – 19 September 2022

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This story features ATLAS ARTERIA, and other companies.
For more info SHARE ANALYSIS: ALX
The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Death and Taxes

The ASX200 was always going to open lower on Friday, given weakness on Wall Street and the fact the US rail strike that had the energy sector surging on Thursday was averted.

Ultimately energy fell -3.0% to be largely back where it was, but the initial fall for the index of around -50 points actually held for the first hour. Only then did the selling resume, feeding on itself.

The materials sector closed down -2.8% on lower commodity prices, with selling in gold miners prevalent.

Industrials closed down -2.5% due to a -17.4% fall for Atlas Arteria ((ALX)), after the toll road operator raised capital at a -19% discount to fund a stake in a Chicago asset.

These moves were largely exogenous to wider weakness on the day, which was as much to do with domestic monetary and fiscal policy as global macro influences.

RBA governor Philip Lowe told a parliamentary committee rates would have to continue to be increased. While this is not a surprise, it is disappointing for those believing the board would soon have to pause to allow the lagged impact of higher rates to catch up.

Lowe also said the government needs to do its part, and revenues should be increased by raising taxes. Like that’s all we need right now. It is interesting that to date, the government is sticking with the legacy (pre-covid) Coalition policy of planned tax cuts for higher income earners, given it supported the policy at the time.

Perhaps Lowe was making a point. And while it might be a policy backflip to abandon the cuts, the goal posts have since moved and it would not be at all unpopular with the wider electorate.

But it would not be popular in the stock market, as evidenced by an ultimate -1.5% fall.

It was enough for the market to ignore what was actually some better data out of China, albeit cycling mass lockdowns from a year ago. Retail sales rose 5.4% year on year in August when 3.5% was forecast. Industrial production rose 4.2% when 3.8% was forecast. Fixed asset investment rose 5.8% year to date when 5.5% was forecast.

That last number included a -7.4% decline in real estate investment year on year compared to -6.4% in July. Chinese house prices fell for the twelfth month in a row.

The real estate sector in Australia was again badly hit on Friday (-1.3%) to end a shocker of a week. All sectors closed in the red, with utilities (-0.4%), healthcare (-0.6%) and strangely enough technology (-0.6%) among the better performers.

Staples lost more ground as preferred defensive (-1.1%) and the banks had been finding some support before falling -0.8% on Friday.

The Aussie ten-year bond rate rose 4 points to 3.72% and the two-year rose 7 points to 3.16%.

Late Delivery

It was only in July that global parcel delivery service FedEx increased its dividend by 50%, implying confidence in the economic outlook. But on Friday night the company warned of a global recession and a hard landing in the US, withdrew its prior outlook and issued a profit warning.

Parcel delivery is seen as a bellwether for the economy as a whole. FedEx fell -21% to post its worst day ever. The Dow fell -400 points.

As the session wore on, a deeper dive into the Fedex warning had analysts wondering just how much was due to macro conditions out of the company’s control, and how much was actually poor execution. FedEx will cut capacity as a result, but had been building capacity recently to cover what management expected would be a permanent step-jump in online shopping post-covid.

What management may have failed to realise is that while this may indeed be true, everyone bought what they wanted in the last couple of years and is now shifting spending to services they had been shut out of, such as travel and entertainment. The US “holiday season” (Thanksgiving and Christmas) is not going to bring as big a spend on “stuff” as first thought.

Rival UPS only fell -5%, which rather supports the company-specific view. But all transport companies took a hit on the FedEx warning, and the Dow Transports fell over -5%.

While Wall Street recovered a lot of lost ground to the close, the S&P500 closed below the critical technical level of 3900, implying to the believers the market has further to fall. The S&P fell -4.8% for the week and the Nasdaq -5.5%.

There are signs some of the more beaten-down tech names are starting to find buyers. Stocks such as Netflix, Nvidia and Tesla had been bucking the trend during the week.

Michigan Uni’s consumer confidence index posted a third gain in a row, to 59.5 from 58.2 at end-August, to mark a five-month high, largely attributed to lower gasoline prices.

The five-year inflation expectation measure within dropped to 2.8% from 2.9%.

Wednesday night brings the Fed rate decision, which is expected to be another 75 point hike. The question will be where to from here, hence Powell’s press conference will be more critical than the hike itself (unless it’s 100).

While Powell’s rhetoric remains aggressive, there’s still a large cohort of market participants who believe the Fed must soon pause, or at least slow down, to let the economy catch up.

Seems to be a global issue.

Commodities

Speaking of critical technical levels, China’s August data was not enough to prevent the renminbi slipping through 7 to the US dollar on Friday, on general recession fears. This was a trigger to sell metals.

Gold at least fought back.

The Aussie is 0.3% higher at US$0.6721.

The SPI Overnight closed down -2 points on Saturday morning.

The Week Ahead

UK markets are closed tonight – someone died apparently – and the Australian and New Zealand markets are closed on Thursday. Note the London Metals Exchange has decided to remain open tonight.

For other reasons, Japanese markets are closed today and Friday.

The Fed decision on Wednesday night will be primarily the focus this week but it will be followed by policy meetings for the Bank of Japan and Bank of England on Thursday.

The minutes of the September RBA meeting are out tomorrow, but I think Lowe’s made his case fairly clear.

The US will see numbers for housing sentiment and starts and existing home sales over the week.

Core Lithium ((CXO)), De Grey Mining ((DEG)), New Hope Corp ((NHC)), Chalice Mining ((CHN)), Brickworks ((BKW)) and WH Soul Pattinson ((SOL)) all report earnings this week.

The ex-dividends are now winding down, but there is a late cluster on Friday (including those moved from Thursday).

Dividend payable dates are now coming into focus (when the cash actually hits accounts), and Friday’ payouts happen to include all of BHP Group ((BHP)), Insurance Australia Group ((IAG)), Rio Tinto ((RIO)), ResMed ((RMD)), Santos ((STO)) and Telstra ((TLS)).

The Australian share market over the past thirty days…

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