The Monday Report – 07 November 2022

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This story features WESTPAC BANKING CORPORATION, and other companies.
For more info SHARE ANALYSIS: WBC
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Zero to Hero?

After reeling from further underscoring of Fed hawkishness on Thursday, Friday saw the ASX200 looking in a different direction, which resulted in a grinding rally to the close.

There is strong speculation China is reassessing its zero-covid policy. This was fired up on Friday when a state-run newspaper reported that local officials are being warned against excessively harsh measures to control covid. The Shanghai index rose 2.5% and the Hang Seng 5.4%.

Earlier in the week it was revealed Beijing had formed a “reopening committee” to look at scenarios for relaxing its approach, assessing the success of other nations in “living with covid”. But this rumour was unsubstantiated, and a Chinese foreign ministry spokesperson said he was unaware of any such moves.

That same report from state-run media above also noted China was still “unswervingly adhering to the dynamic zero-covid strategy by preventing the import of cases and internal rebounds”.

As far as commodity markets were concerned on Friday, it’s true. China just won’t admit it as that would be to lose face. Some slight easing of restrictions with regard international travellers has indeed begun.

The local materials sector jumped 1.8% on Friday and energy 3.4%, backed up by utilities on 1.5%.

The only other sector to make a dent either way was technology (+1.1%) after Block ((SQ2)) had reported earnings in the US and rose 10.9% locally. Thereafter, the ASX200 top five winners comprised of the three big pure-play coal miners plus a lithium miner, and the ASX300 table was again dominated by miners and energy companies.

Healthcare (-0.8%) was the worst performer among modest moves on other sectors. The banks fell -0.2%.

Aside from the influence of the China speculation, investors would otherwise have been reluctant on Friday to take on too much risk ahead of the US jobs report on Friday night.

The same China speculation was a driver on Wall Street on Friday night, and as for jobs, the response was at best confused.

The net result is positive, and hence our futures were up 91 points on Saturday morning.

Arthur or Martha?

The US added 261,000 jobs in October against 205,000 expectation. The unemployment rate rose to 3.7% from 3.5%. Wages grew 0.4% month on month to be up 4.7% year on year, down from 5.0% in September. The participation rate dipped to 62.2% from 62.3%.

Bad, good, good, bad, when it comes to the Fed.

So how to respond? The Dow was up 600 points mid-morning, right back to square at midday, and closed up 400. Go figure that one.

All agree there was nothing in the report that would alter the Fed’s trajectory. But what is it Wall Street is actually afraid of as the Fed pushes rates ever higher? Recession. Even after 300 basis points of rate hikes in five consecutive meetings, the US economy remains strong, if the labour market is the indicator.

If the Fed keeps going but the recession is short and shallow at worst, then there’s not as much to fear, particularly if inflation is beginning to recede.

Of course, even the Fed admits it takes a while for the impact of rate hikes to hit the economy, so perhaps all we’re witnessing is that lag.

Wall Street was further boosted on Friday night by the same China speculation. The S&P500 materials sector rose a standout 3.4%, and energy rose 1.0%, although all sectors were higher.

Another prevailing factor is seasonality. Historically, Wall Street rallies into year-end on average, after weakness in September-October. So far, that seems to be coming to pass, although it doesn’t always work – Christmas Eve 2018 – and thanks to the Fed the Dow closed down -1.4% for the week, the S&P -3.3% and the Nasdaq -5.6%.

It was the Nasdaq’s biggest weekly percentage drop since January.

Aside from persistent labour market strength, analysts also point to the resilience of the US consumer to date, and the excess household savings from the pandemic still supporting spending. Starbucks reported on Friday night and jumped 8.5%.

But it doesn’t always work – sports betting and gaming company DraftKings reported and fell -28%.

Tomorrow night are the midterms and the latest polls have the Republicans romping it in the House, but with the Senate still a close call. A win in the House would keep Wall Street happy, as it would prevent any left-leaning legislation, such as increased taxes.

The next biggie is the CPI on Friday night.

Commodities

I think we have that covered.

A huge -1.9% plunge for the US dollar was akin to the rally on Wall Street in response to the jobs report.

It was thus a double-whammy for commodity prices – China and the lower greenback.

The Aussie is subsequently up 1.8% at US$0.6407.

The SPI Overnight closed up 91 points or 1.3%.

The Week Ahead

Locally we’ll see job ads today and the NAB business and Westpac consumer confidence surveys tomorrow.

China will report trade numbers today and inflation on Wednesday.

The US midterms are tomorrow night but there’s nothing major on the US economic calendar until Friday, when it's consumer sentiment and the biggie – the October CPI.

There are a number of AGMs to get through this week, with quite a long list on Thursday.

Westpac ((WBC)) reports earnings today and National Bank ((NAB)) on Wednesday.

James Hardie ((JHX)) reports earnings tomorrow, Orica ((ORI)) on Wednesday, Xero ((XRO)) on Thursday and Eclipx Group ((ECX)) on Friday.

ANZ Bank ((ANZ)) and Macquarie Group ((MQG)) both go ex today.

Tomorrow the NYSE will close at 8am Sydney time, as will the SPI Overnight.

The Australian share market over the past thirty days…

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