The Monday Report – 19 December 2022

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This story features AURIZON HOLDINGS LIMITED.
For more info SHARE ANALYSIS: AZJ
The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Not So Bad

The ASX200 predictably fell -87 points in the first ten minutes on Friday as the computers reacted to Wall Street’s plunge, matching the futures’ prediction. But immediately the buyers stepped in and by mid-afternoon, the index was down only -20-odd points.

It is not that Australia won’t be caught up in a global recession, but Australia’s economy does not specifically match that of the US or other developed world economies, with perhaps the exception of Canada.

On Friday morning it was the resource sectors leading the fightback, with at one point the energy and materials sectors the only two to be in the green, although a not unusual Friday afternoon sell-off did put paid to the rally for materials and it ended down -0.8%, with energy up 0.4%.

It was largely a case of coal versus the rest.

Industrials was the only other sector to ultimately close in the green (+0.4%) after Aurizon Holdings ((AZJ)) announced it had sold its OneRail coal haulage business and the stock rose 4.0%.

Technology was unsurprisingly the worst performer (-2.0%) as it followed the Nasdaq but the real damage was done by the banks (-0.9%), which don’t much like economic slowdowns, along with healthcare (-1.8%) and discretionary (-1.1%).

Retailers assure us it’s going to be a bumper Christmas. We’ll see.

Utilities was the other poor performer (-2.1%) as the energy retailers continue to be sold down in the face of possible further regulatory intervention.

Australian bond yields were little moved on Friday, saving real estate (flat) for once.

The selling on Wall Street continued on Friday night although there was some fightback from the lows before the close.

As we move into the holiday season locally, and schools break up, this week will likely be lively on thin volumes and investors may be looking to pare back positions before hitting the beach, in case things get uglier offshore.

Or, as Friday would suggest, there could be some bargain-hunting. To fall only -0.8% against an S&P500 fall of -2.5% is not a bad effort.

If you are hitting the beach and you’re in the east, be sure to take a jumper.

Fed Versus Market

The thing about Christmas in the US is it’s not actually a national holiday (being a secular society) but markets will be closed on the Monday in lieu of Christmas falling on the weekend. Then it’s back to business.

“We are far away from our price stability goal,” said San Francisco Fed President Mary Daly on Friday. That sums up the Fed’s new year’s resolution.

Wall Street posted its first back-to-back down-week last week since September. That’s where the market stands.

On Friday a flash estimate of the US manufacturing PMI for December suggested 44.4, down from 46.2 in November, which is well into contraction. The services estimate was 46.2, down from 47.7.

Goldman Sachs announced it plans to lay-off -4000 employees.

The US ten-year yield might have been up 3 points on Friday but at 3.48% it’s well off its highs, despite Fed hawkishness. The market is pricing in a recession that will be of the Fed’s making. The Fed will go too far, and hold on for too long, as it has a track record of such.

So believes the market. Who will be right?

Well, that’s the story for 2023. The Dow closed down -1.7% last week, the S&P500 -2.1% and the Nasdaq -2.7%. It all went sour from Wednesday, when the Fed eased off the pace but not the goal.

The good news is the Dow was down -400 heading into the last hour and managed to pull back to -200 before some late selling. There are bargain-hunters out there, and while Wall Street is expected to come under more pressure in the near term – particularly from anticipated earnings revisions – there is plenty of talk of what one should be looking to start buying for the longer term.

Recessions are a great time to buy, if you time it right.

Critical will be December quarter earnings results, which will flow from mid-January. Otherwise economic data appear now to be trending down, although the labour market remains stubborn.

The low unemployment rate, solid household balance sheets and solid corporate balance sheets, particularly among the banks, are reasons continually cited why the recession will not be too bad.

Commodities

The US dollar was slightly higher again on Friday night and there’s no real joy for certain commodities at present, outside of gold. And thermal coal.

The Aussie is steady at US$0.6701.

The SPI Overnight closed down -27 points or -0.4%, with the S&P down -1.1%.

The Week Ahead

The minutes of the December RBA meeting might be one for the Christmas stocking this year, but the meeting did pre-date a few global developments. They’re out tomorrow.

The Bank of Japan meets tomorrow.

The US housing market is under pressure, which is somewhat familiar, and this week brings data for housing sentiment and starts and new and existing home sales.

The monthly Conference Board index of consumer confidence is out, as is the Michigan Uni version, which will wrap up the week on Friday along with durable goods orders and PCE inflation.

Nothing scheduled on the local corporate calendar this week apart from a couple of ex-divs.

The ASX will close early on Friday.

The Australian share market over the past thirty days…

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