The ASX200 started October with its best week in two years, climbing by 4.5% last week. The energy sector helped lead the charge, jumping more than 10% for the week. Despite a strong week last week, the ASX looks set to kick this week off in the red after Wall Street finished down 2.8% on Friday following the Non-Farm Payrolls data on Friday. Despite weakness on Friday, US stocks ended the week in the green, with the S&P500 climbing 1.5%.
3 things that happened last week:
- RBA Rate Decision – A surprise 25bps hike
Last week, the Reserve Bank of Australia (RBA) and Governor Phillip Lowe took the headlines by slowing the pace of interest rates, a decision that bucked the global trend and surprised markets. The Central Bank raised rates by 25bps, less than the 50bps the market had anticipated. The local sharemarket reacted very well to the news, climbing 3.8%, its best day since 2020, whilst the Australian Dollar fell on the news. It seems that it was a sensible decision by Governor Lowe, given that an aggressive tightening cycle similar to that of the Federal Reserve would likely force the Australian economy into a recession that isn’t inevitable. Governor Lowe is worried that the full effects of higher interest rates are yet to be felt by Australian households, hence the need to downsize this month’s rate rise.
- OPEC+ cuts supply and keeps prices elevated
Oil prices have been on a rollercoaster so far in 2022, which continued last week with OPEC+ (Organization of the Petroleum Exporting Countries) deciding to slash oil output by 2 million barrels per day, the biggest cut since the start of the pandemic. This shocked global markets, given that oil prices were already elevated, and the news pushed Crude Oil 16.5% higher for the week. The tight supply side of oil markets is as important as weakening demand. OPEC will aggressively defend high prices despite the wishes of squeezed consumers. High oil prices have contributed to soaring inflation globally, but it seems we can’t rely on lower oil prices to solve stubbornly high global inflation.
- A winner and loser last week from the S&P/ASX200
There were plenty of top performers on the ASX200 after its strong performance, but the standout was Whitehaven Coal (WHC). It climbed 21.64% for the week, adding to its tremendous start in 2022. It is the best-performing stock on the ASX200 this year, with shares rising 320% YTD.
Magellan Financial Group (MFG) was the worst performer on the ASX200 last week, falling by 5.2%. The fund manager saw shares tumble after an update showed that its total funds under management had nearly halved since the start of this year, primarily driven by market volatility.
3 things to watch for the week ahead:
1. US Inflation: Another tough pill to swallow for markets
Inflation is the most important number in markets right now, and US inflation (Oct. 13) is one of the most watched economic events. Prices have remained high for months, with last month’s reading up 8.3% on an annual basis, higher than the market had expected but lower on a monthly basis. This data print contributed to a new low for the S&P500 and a global market sell-off throughout September, given it meant the Federal Reserve would continue to raise interest rates aggressively. The hope is that inflation will start to ease so that the Fed can pivot and begin to ease on raising rates. However, this has yet to happen significantly, with CPI still at a 40-year high. If inflation once again comes in stubbornly high, it may prompt further action from the Fed, such as larger hikes in November and December or continued rate rises into 2023. Either would be a tough pill to swallow for markets. The worry for the local market is contagion from a further sell-off in US equities and the fear that a US recession could harm growth in Australia.
2. RBA Assistant Governor Speech: Pausing for breath
After last week’s 25bps hike from the Reserve Bank of Australia (RBA), we will hear from the assistant governor, Luci Ellis, on Wednesday (Oct. 12). Governor Lowe took the headlines last week by slowing the pace of interest rates, a decision that bucked the global trend and surprised markets. However, it seems that it was a sensible decision by Governor Lowe, given that an aggressive tightening cycle similar to that of the Federal Reserve would likely force the Australian economy into a recession that isn’t inevitable. Hearing from the assistant governor later in the week will likely give investors more insight into the dovish pivot from the RBA and may provide further clues on how much interest rates need to rise. The tone of the speech will likely be that the board felt it was time to pause for breath to allow the current tightening cycle to take effect, especially given the pressure rate hikes will cause to households across Australia.
3. Westpac Consumer Confidence: Will Australians keep opening their wallets?
Last month’s consumer confidence reading provided some positivity to markets as the reading improved for the first time in 2022. Ultimately, consumers are looking a little less fearful, but confidence is still weak. However, the worries have yet to stop Australians from opening their wallets, with retail spending still at record levels. Eventually, as interest rate rises take their toll on household budgets, the pace of consumption will start to slow, but this has yet to start for the time being. September was a difficult month for markets, and the RBA raised rates by another 50 bps, so it would be fair to say that Australian households may not be brimming with confidence. But, looking ahead, if Australians believe that the RBA won’t drive the Australian economy into recession, then it’s likely that their fears about the economic environment will start to ease. We are finding out on Oct. 12.
Bonus: US Earnings Season begins
Outside of a few days last week, it’s been a pretty dire few months for stocks. The Federal Reserve’s hawkish stance to squash inflation, recession fears, a slowdown in enterprise spending and the lingering issues from COVID-19 have all combined for a toxic mix that has battered stocks. We now enter into what will be a vital Q3 earnings season after Q2 earnings laid the foundation for the June/July bear market rally. Estimates from FactSet show S&P 500 companies will record annual earnings growth of 2.9%, down significantly from 10% two months ago. As usual, US banks kick us off with JP Morgan Chase (JPM), Citigroup (C), Morgan Stanley (MS) and Wells Fargo (WFC) all releasing earnings. Banks are one of the cheapest areas in the market right now, and soaring bond yields will make their massive balance sheets more profitable, especially given loan rates are rising further and faster than what they pay to depositors.
*All data accurate as of 9/10/2022. Data Source: Bloomberg and eToro
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