The Monday Report – 22 May 2023

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This story features INSURANCE AUSTRALIA GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: IAG
The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Don’t bank on it

On Friday the local market echoed Wall Street’s excitement overnight on talk a debt ceiling resolution was close, and maybe would be reached by this week. Seemed a bit ambitious at the time, and sure enough on Friday night the Republicans called a halt to proceedings.

Biden was heading off to Japan for the G7, so a halt is likely not too sinister, but suffice to say any debt ceiling expectations on Friday are now watered down.

Financials were nevertheless the main driver on Friday (+1.5%), helping the ASX200 to open higher and trade up 56 points to lunchtime, before easing off in the afternoon. Insurers also helped, with Insurance Australia Group ((IAG)) rising 4.7%.

Bank buying comes in the wake of a result season following which analysts cut their margin and earnings forecasts.

More AI talk fired up the Nasdaq on Thursday night, so it only stood to reason our tech sector would rise 2.2% on Friday.

Communication services was another star, up 1.2%, with all other sectors rising bar materials (-0.2%) and utilities (-0.5%). Lower iron ore and gold prices dragged on materials, while lower coal prices kept energy (+0.1%) at bay.

Insurance broker AUB Group ((AUB)) came back on line after deciding not to enter a JV to acquire UK’s Tysers but rather raise capital and go it alone. This was a popular move – AUB topped the index with a 5.9% gain.

Outside of the index, shipbuilder Austal ((ASB)) jumped 26% after announcing a large contract win with the US Navy, to build ships in the US using US labour.

Xero ((XRO)) kicked on (+5.4%) after reporting its result on Thursday, helping tech along.

Embattled Syrah Resources ((SYR)) must have said something soothing at its AGM, as it rose 4.8%. It’s a long way back.

The losers’ board was dominated by coal and gold miners.

With the S&P500 having reached 4200 resistance on Thursday night, the debt ceiling issue was one reason enough to pull back on Friday night, but not materially.

Our futures were down -11 points on Saturday.

A Cause for Pause

Hitting the top of the range was cause enough for Wall Street to ease back on risk positions on Friday night, thus while the debt ceiling halt provided an excuse, there was clearly no panic.

Wall Street expects nothing more than posturing and bluster form here until June 1 when a last-minute deal will be reached. Biden was flat out in Japan all weekend anyway, meeting G7 leaders who were obviously told to bring a friend, as the likes of Brazil, India and Australia also attended, allowing for a hastily organised Quad meeting to make up for cancelling Sydney this week.

Zelensky also turned up to pass the hat around.

But the ceiling will clearly now have Biden’s full attention.

More concerning for investors on Friday night were remarks from Fed chair Jerome Powell and Treasury Secretary Janet Yellen.

Powell said “Our policy rate may not need to rise as much as it would have otherwise to achieve our goals,” in relation to credit tightening resulting from the regional bank crisis. While a pause is good news for Wall Street, the reason for it is not so comforting.

Mind you, Powell said the same thing at the press conference following the May Fed meeting.

Janet Yellen told CNN more bank mergers may be necessary, referring to JP Morgan taking over First Republic. Again this signals to Wall Street the crisis is not yet done and dusted.

Regional bank stocks fell on the comments but not in any dramatic way, as they have done recently.

Meanwhile, US bonds yield continue to tick higher, with the two-year back at 4.30% on Friday night having traded under 4% not so long ago. Yields fell on the assumption the Fed’s rate hikes would drive the US economy into recession, forcing rate cuts by as early as July, but that assumption is now waning following both ongoing hawkish Fedspeak and some solid economic data, such as jobs.

A pause in June is now considered about a 50/50 bet. Former Fed vice chair Richard Clarida, speaking to CNBC on Friday night, is expecting a pause in both June and July.

While Wall Street was pointing to another decent retail sales growth number last week, not all retailers are created equal. Foot Locker reported earnings on Friday night and fell -27%.

The footwear retailer cited its core customer base of low-middle income earners as the problem, as they are the hardest hit by the cost of living. The result, and downbeat guidance, had Nike (Dow) down -3.5%.

Commodities

The gold price jumped back rather smartly despite increased US bond yields, likely on a mix of debt ceiling halt and concern around regional banks.

The US dollar was lower nonetheless, sending the Aussie up 0.4% to US$0.6651.

The SPI Overnight closed down -11 points on Saturday morning.

The Week Ahead

The minutes of the May Fed meeting are out on Wednesday night but further clues beyond what Powell has said might be hard to find.

Friday brings US April PCE inflation – another significant data point. The US will also see new home sales, durable goods orders and consumer sentiment this week, along with the first revision of the March quarter GDP result.

The world will see flash estimates of May PMIs tomorrow.

The RBNZ meets on Wednesday.

The major economic release locally will be retail sales on Friday.

TechnologyOne ((TNE)) reports earnings tomorrow, followed by Webjet ((WEB)) on Wednesday, Champion Iron ((CIA)) on Thursday and Fisher & Paykel Healthcare ((FPH)) on Friday.

Brainchip Holdings ((BRN)), Viva Energy ((VEA)), Eagers Automotive ((APE)), Telix Pharmaceuticals ((TLX)), Costa Group ((CGC)), Coronado Resources ((CRN)), South32 ((S32)) and InvoCare ((IVC)) hold AGMs across the week.

The Australian share market over the past thirty days…

For more detail go to FNArena's Australian Broker Call Report, which is updated each morning, Mon-Fri.

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