Happy New Year, everyone. The ASX started 2023 on the front foot, gaining 1% last week. The materials sector led the way, gaining 4.64%. Overseas in the US, all three major indexes posted gains above 1%. Non-Farm Payroll data was one of the catalysts for a Wall Street rally to end last week. The monthly jobs report showed employers added 223,000 jobs in December, the smallest gain in two years. This positivity across the pond will likely set the scene for a strong start on the ASX this week.
3 things that happened last week:
1. China reopens, material sector soars
Australia continues to benefit from the strong start to the year in Asia as China’s Covid Zero Policy slowly eases. The Hang Seng has gained more than 6% so far YTD on the back of China stepping up its efforts to support the distressed property market with credits and equity finances for developers. This helped broad-based gains across the ASX materials sector, with miners set to benefit from rising demand in China. On Friday, BHP jumped 3.2 per cent, Rio Tinto (RIO) advanced 2.4 per cent, and Fortescue Metals (FMG) jumped 3.7 per cent.
2. Tesla misses delivery estimates again.
Last week, Tesla (TSLA) missed its vehicle delivery estimates for a second straight quarter. The EV giant delivered 405,278 vehicles in Q4 compared to Wall Street estimates of 431,000, taking its 2022 vehicle deliveries to 1.31 million showing 40% growth year over year. However, this missed Elon Musk’s annual delivery target of 50%, disappointing investors. Shares initially fell to start the week before staging a comeback as US markets made gains. The easy ride is over for Tesla, and Musk now needs to navigate the company through a difficult period storm of focusing on his new golden child Twitter which remains a distraction and overhang for the Tesla stock.
3. A winner and loser last week from the S&P/ASX200
Core Lithium (CXO) started took its strong performance in 2022 straight into 2023, gaining 19.31% last week. The gains from the lithium miner come from China’s positivity as well as news of the company’s maiden lithium ship successfully sailing from Darwin to China.
AGL Energy (AGL) was one of the worst performers on the ASX last week, falling by 2.86%. After a strong 2022, with shares gaining more than 15%, its likely investors were taking some profits off the table.
3 things to watch for the week ahead:
1. Australian Monthly Inflation: Reaching a peak
This week (Jan.11th), Australia hands down another monthly update on inflation. The consensus is for inflation to rise in the month of November to 7.4%. We are moving closer to peak inflation, which will likely be seen in the Q4 figure released at the end of the month, where expectations are for 8% inflation. However, investors should take comfort in the thought that lower inflation is around the corner. Commodity prices have continued to fall in the last few months, with crude oil 11% in the last three months, and supply chain issues look to be normalising once again, with freight costs falling and global shortages easing. The million-dollar question, though, is how quickly inflation will fall. Inflation will be the fundamental key to market moves this year and will ultimately dictate when investors begin to take on more risk in markets.
2. Australian Retail Sales: Striking a balance
After a drop of 0.2% in October, data for November is likely to show a turnaround (expected Jan. 11th ). Black Friday, Cyber Monday and the lead-up to Christmas are likely to have seen shoppers disregard rising living costs with a huge bout of spending. Savvy shoppers may have brought forward their Christmas spending for Black Friday to try and find deals, downtrading to less expensive retailers, with a spending spree before tightening their belts in 2023. However, although we know retail spending is slowing down, the RBA (Reserve Bank of Australia) is uncertain of the timing and extent of this slowdown, which could cause some headaches for the board in early 2023. The RBA noted in their December minutes that they wouldn’t rule out returning to more significant rate increases if required, pointing towards the difficulties of lowering consumption without tipping the Australian economy into a recession.
3. US Inflation: The most important number in markets
Another decline in US inflation to start the year could set the market tone for markets in 2023. Inflation is the most important number in markets, and Australian investors will be looking across the pond on Jan. 12th to see if inflation is continuing to drop. Broad falls in US inflation pressures, from goods to services and the labour market, are all key to the Fed further slowing down its rate hike cycle to 25bps in February and setting the scene to pause in March. But, last week’s Fed’s minutes did show that it would take substantially more evidence for them to be confident inflation is on the sustained path down. So taking the view that inflation doesn’t come down at the pace that the Federal Reserve likes means the odds of a recession will rise. This may see investors look at the best-performing theme of 2022, dividends. A recession could see earnings fall, which may see investors take haven in income stocks which are likely to show resilience whilst also providing the potential for outperformance.
*All data accurate as of 08/01/2023. Data Source: Bloomberg and eToro
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