The Monday Report – 17 October 2022

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This story features HARVEY NORMAN HOLDINGS LIMITED, and other companies.
For more info SHARE ANALYSIS: HVN
The company is included in ASX200, ASX300 and ALL-ORDS

By Greg Peel

Swings & Roundabouts I

Wall Street’s stunning turnaround rally following another hot CPI result on Thursday night had the ASX200 up 116 points on Friday. Wall Street lost a chunk of that rally on Friday night, and our futures were down -102 points on Saturday morning.

The ASX200 had closed the week up a net four points.

But anyway…

It was a simple Buy Everything session on Friday. The outperforming sectors were energy (3.8%) and utilities (3.6%) on higher oil prices. Oil prices fell -3-4% on Friday night.

Staples also performed well (2.0%) after being sold down during the week, otherwise market-wide buying had every other sector up by around 1.5%.

The top stock performers were a mixed bag, representing lithium, energy, tech, insurance and funds management, while the bottom performers represented lithium and gold miners, with Harvey Norman ((HVN)) down -3.9% after going ex-dividend.

There was no clear reprieve from bond yields, although the Aussie ten-year rose only 1 point to 4.0% which is probably relief in itself. Yields were up again in the US on Friday night.

It was not a strong volume session.

And there’s not much point in delving further.

Swings & Roundabouts II

Wall Street’s big bounce on Thursday night was part technical but was also predicated on speculation (a) the UK government would dump its ill-fated fiscal policy and (b) the Bank of England would extend its emergency bond buying program.

Regarding (a), Truss did dump her planned corporate tax cuts on Friday night, having previously dumped tax cuts for the rich. That was all, but it is assumed the new Chancellor of the Exchequer will likely look to remodel the government’s budget plans, given Truss has sacked the old one.

Old by 38 days. Thanks for playing.

Regarding (b), the Bank of England did not extend its bond buying program. It remains to be seen whether UK pensions funds have managed to offset their risk to higher yields, given UK yields are now back to where they were when the BoE stepped in. Another intervention would not be a surprise.

The US ten-year bond yield rose 5 points to 4.01% and the two-year 5 points to 4.50% — two numbers that make Wall Street nervous.

US retail sales rose by 0.0% in September, when 0.3% was forecast. Take out autos and they did rise 0.3%, but it is clear consumer spending is on the wane.

Consumer confidence is not, as Michigan Uni’s latest index showed a gain to 59.8 from 58.6, but given this is a 100-neutral index, it is still extremely low.

More disturbing within the report were inflation expectations, which rose to 5.1% a year ahead from 4.7%, and 2.9% five years ahead from 2.7%. Inflation expectations tend to be self-fulfilling – if you think prices will go up you buy now, forcing prices up. It makes life hard for the Fed.

Kansas City Fed president and voting member Esther George said on Friday night “We may have to keep at this for a while. You may see the terminal fed funds rate higher and have to stay there longer, given the persistence of inflation”.

But “I’m more cautious maybe than most about how quickly we do that and how aggressively we do that,” she added.

She’s not the only one who’s cautious in the market.

The good news is the pullback on Friday night wiped out only around half of the gains on Thursday night. But this week sees earnings season ramp up.

Friday night’s US bank results were mixed. JP Morgan, Wells Fargo and Citi all beat expectations. JP Morgan and Wells each rose over 2%, with Citi less than 1%. Morgan Stanley, which is less exposed to commercial banking than the others and more exposed to investment banking, missed forecasts and fell -5%.

Peer Goldman Sachs (Dow) reports tonight, along with mostly commercial bank Bank of America. Then the Big Tech names begin to report.

Big Tech took the brunt of the selling on Friday night, with Apple down -3%, Amazon -5% and Tesla -7.5%.

Commodities

The LME may still be undecided on banning Russian metals trading but global copper buyers are reportedly making their own decisions not to buy from Russia.

It appears expectations of a global recession have begun to outweigh the impact of OPEC production cuts on oil markets. Last week saw the IMF downgrade its global growth forecast and the IEA downgrade its oil demand forecast. Analysts are also forecasting growth last week in US crude inventories while the US rig count is now back on the way up.

Throw in a US dollar which bounced back up 0.7% on Friday night and commodity prices in general are under pressure, particularly gold, which also copped higher yields.

The Aussie is down -1.4% at US$0.6208.

The SPI Overnight closed down -102 points or -1.5% on Saturday morning.

The Week Ahead

US earnings results begin to come thick and fast this week.

The US will see numbers for industrial production, housing sentiment and starts and existing home sales, along with the Empire State and Philly Fed indices and the Fed Beige Book.

New Zealand, the UK, eurozone and Japan all report CPI data this week.

China reports industrial production, retail sales and fixed asset investment numbers tomorrow along with September quarter GDP.

In Australia we’ll see jobs numbers on Thursday.

The local AGM season notably picks up pace this week and quarterly updates begin to roll in.

Endeavour Group ((EDV)) provides a quarterly today, Stockland ((SGP)) holds its AGM and Metcash ((MTS)) hosts an investor day. CSL ((CSL)) has organised an investor briefing for the recently acquired Vifor.

The Australian share market over the past thirty days…

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