The Monday Report – 26 September 2022

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This story features NEW HOPE CORPORATION LIMITED, and other companies.
For more info SHARE ANALYSIS: NHC
The company is included in ASX200, ASX300 and ALL-ORDS

By Greg Peel

Wipeout

In the first chance to respond to Fed aggression, a subsequent jump in US rates and a fall on Wall Street, the standout in Australian markets on Friday were local bond yields. The ten-year rose 24 points to 3.90% and two-year 25 points to 3.35%.

The two-year is considered a proxy for the RBA cash rate and as such is now implying another 100 points in rate hikes to come, despite the RBA hinting at its last meeting it was worried about pushing rates too far, too fast. But that was before the Fed meeting.

So 50, 25, 25 looks plausible to take us to a frugal Christmas, then maybe a pause to survey the damage and bury the dead.

Rate-sensitive sectors were the hardest hit on Friday. Consumer discretionary and technology both led with -4.4% falls – in the former case in the mortgage cost hit on demand and in the latter, lower discounted future earnings.

Bond proxies real estate and utilities fell -3.6% and -3.1%, to continue the pain in REITs all week on increased borrowing costs.

Tech-connected communication services fell -2.6% and even the primary defensive of staples lost -1.9%, as consumers shift to cheaper food.

The standout “outperformer” was materials, down only -0.4%. Investors continue to buy into coal in search of super-dividends, with New Hope Corp ((NHC)) rising another 2.8% against the tide.

Otherwise I noted last week a lot of cash in form of dividends paid by the big miners and oil companies has fund managers needing to redeploy those funds, and also commodity prices had been holding on relatively well.

The top five ASX200 winners were all material stocks on Friday, with Rio Tinto ((RIO)), OZ Minerals ((OZL)), Fortescue Metals ((FMG)) and Nufarm ((NUF)) all posting gains of 1-2%.

With the exception of iron ore, commodity prices all tanked on Friday night, finally succumbing to a surging US dollar and global recession expectations.

Tech led the losers on Friday, with Block ((SQ2)) down -8.9% and Xero ((XRO)) -7.8%, while notable among the top five were Charter Hall Social Infrastructure REIT ((CQE)) and property fund manager Centuria Capital ((CNI)), both down -6.5%.

There will be no respite today. On another fall on Wall Street, and capitulation in commodities, our futures were down another -82 points on Saturday morning.

The only consolation, possibly, is that Wall Street did bounce off the low.

A Glimmer?

US bond yields had already responded to the Fed but on Friday night the two-year rose another 9 points to 4.21% while the ten-year fell -1 point to 3.69%. It looked very much like the long-awaited capitulation session had arrived when the Dow was down over -800 points heading into the last hour.

Many an observer has been noting for some time that a market cannot turn around until after there has been a full capitulation – when investors just give up and sell everything.

A case in point is gold. On Thursday night, gold rallied in the face of a stronger US dollar and higher bond yields, appearing to retake its mantle as a safe haven. On Friday night gold reversed, succumbing to a full 1.7% additional surge in the dollar and quite possibly margin-called stock traders needing to sell anything to cover their obligations.

Heading into the last hour, the S&P500 had traded through the June low of 3666 and down to 3647. Then it bounced, closing at 3693, as the Dow recovered to be down -486.

All those insisting during the July rally the S&P had to retest the low were vindicated. The question now is whether the subsequent bounce ensures the bottom this time.

Probably not. Were Wall Street to rally tonight you’d typically see the slow-movers taking the chance they’d missed to sell out of fear. The low may need to be retested again before a bottom could be called. But then there’s no guarantee a second breach of the low would again bring in the buyers.

Maybe we are yet to see the true capitulation session.

The 1.7% spike in the US dollar was underpinned by a collapse in the pound to a 37-year low after the new Truss government unveiled a policy of deficit-funded tax cuts. The expectation is that in order to counter this inflation-supporting move, the Bank of England will now have to hike rates higher than otherwise necessary.

Albo take notice.

To date only a couple of big US multinationals have warned of the currency impact on earnings – Microsoft one case in point – and have downgraded earnings guidance. The September quarter US earnings season begins in mid-October, and the expectation is there is going to be a lot more of that going on.

With the Fed’s intentions supposedly set in stone (despite claims of “data-dependence”), the next earnings season will likely be the next main catalyst, in the scary month of October.

But if October is scary, note that September is historically the worst performing month, and the historically worst week of that month is the last one.

Commodities

When pain is all around.

Finally a surging dollar and global recession talk became too much to handle.

Oil traders noted that while it’s easy to include oil in this mix, Friday night’s trade was all about no buyers, rather than desperate sellers. While a recession reduces demand for energy, the coming northern winter, and the expectation China will eventually shake off lockdowns one day, suggests there will be no lack of demand ahead.

The Aussie has matched the dollar’s surge with a -1.8% fall to US$0.6526, to be as low as it was in the 2020 global lockdowns. If it keeps going, toward “banana republic” levels (if you’re too young, Google it), then the RBA has another reason why it must keep raising rates.

The SPI Overnight closed down -82 points or -1.3% on Saturday morning.

The Week Ahead

Wall Street will be praying that the August PCE inflation data, due on Friday night, will show another drop in the core rate as it did in July. But given the August core CPI surprised by rising, it’s not a given. Is there any result that will change the Fed’s mind?

The US will see the Conference Board’s monthly consumer confidence measure tomorrow night, along with durable goods, new home sales and house prices. On Wednesday it’s pending home sales, and on Friday the PCE and Michigan Uni’s latest consumer sentiment survey.

China reports its September PMIs on Friday.

Locally we’ll see August retail sales on Wednesday and private sector credit on Friday.

The local ex-dividend season now slows to a trickle but more dividends will be paid this week, implying more cash to allocate at a time fund managers would probably rather not.

Sigma Healthcare ((SIG)) reports earnings today, and Liontown Resources ((LTR)) and Premier Investments ((PMV)) on Thursday.

Note Queensland and Victoria school holidays which began last week will run for another week while NSW and Western Australian holidays begin now for two weeks, followed by South Australia and Tasmania beginning in a week’s time.

So thin markets ahead.

The Australian share market over the past thirty days…

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