After a cooler-than-expected US CPI reading, it was another week of gains for the ASX200, rising 3.85% to a 5-month high. The index is now down just 4 per cent year-to-date showing the resilience of the local market. In the US, the S&P500 rose 5.9%, and tech shares soared, with names such as Amazon and Alphabet gaining more than 10% for the week.
3 things that happened last week:
- US Inflation
Last week’s US inflation reading delivered what the market needed, a cooler-than-expected print. Inflation is beginning to move in the right direction, with the inflation for October at 7.7%, lower than the 7.9% the market expected. This is a positive step for inflation in the US, but we aren’t entirely out of the woods given that inflation is still much higher than the Fed would like, but we have to take the positives. This could be the sign that peak inflation has come and gone in the US, and the Fed’s rate hikes are beginning to have their desired effect. The market reaction was incredible as the Nasdaq posted its biggest two-day gain since 2008, climbing more than 9% on Thursday and Friday. Markets could be getting slightly ahead of themselves given that there is still a long way for inflation to come down, but investors feel this is the first step towards a slowdown in this jumbo rate hike cycle from the Federal Reserve.
- Xero earnings miss the mark as CEO steps down
Xero’s announcement last week that CEO Steve Vamos will be stepping down leaves a fair amount of uncertainty for Xero shareholders. In this latest release, revenues were up 30%, beating analyst estimates, but that’s the end of the good news, with top line growth not helping Xero’s bottom line. Xero’s net losses are widening – it also missed expectations on EBITDA, and the market isn’t liking this. Its net loss widened by over 170% to NZD$16.1 million from NZD$5.92 million last year. It’s been a challenging year for tech stocks, especially smaller disruptive tech stocks like Xero. Its share price is currently down 55% over a 12 month period, and this result has seen shares drop to a new 52-week low of AUD$66 a share on the ASX. With a new CEO coming in, there may be changes ahead for Xero and some uncertainty for shareholders. Xero has great potential as it continues its expansion (particularly into the UK market), with more global opportunities likely in the company’s future. However, given the current macroeconomic environment, the share price will likely remain under pressure in the short term.
- A winner and loser last week from the S&P/ASX200
Origin Energy soared 32% last week after receiving a revised $15.5bn takeover from a consortium led by Canadian asset manager Brookfield. The offer was for $9 a share cash offer, which would have been a 55 per cent premium at the time of the offer. Shares closed at $7.58 on Friday.
New Hope Corporation, one of the ASX top performers this year, fell 20% last week. Whitehaven Coal warned of higher costs and lower production due to flooding and bad weather, weighing on New Hope and broader coal stocks.
3 things to watch for the week ahead:
1. RBA Meeting Minutes
This week sees the release of the RBA’s minutes (Nov. 15) from their most recent monetary policy decision in early November. The meeting saw the Reserve Bank lift interest rates by another 25bps to bring the cash rate to 2.85%. The 25bps move would have likely been heavily discussed, with a 50bps move almost certainly considered after the red-hot inflation reading late in October. The RBA forecasts that headline inflation is set to peak around 8% at the end of 2022, and the board may take some relief from seeing US inflation that may be finally starting to ease. It seems that Australia can avoid a recession depending on how the RBA navigates this financial tightening cycle, and for now, it seems they are on the right track. The minutes will provide some insight to investors on why they opted for a 25bps move, and likely show a reiteration that it remained resolute in its commitment to bringing inflation to target levels and will do what is necessary to achieve that.
2. Unemployment Rate
Last month’s unemployment rate stayed at 3.5% after dropping to decade lows in July. This week’s reading (Nov. 17) will be closely watched to see how strong the economy is and whether the Reserve Bank’s interest rate increases are having the desired effect of cooling demand. Most would assume a low unemployment rate is a positive sign, which for consumers it is, but the impact of low unemployment aren’t as simple as they seem. The most significant impact is wages. Wage inflation is caused by rising labour demand as the unemployment rate falls. With fewer people available to work, employers are forced to raise wages to attract and retain talent. The RBA wants to see the unemployment rate rise but even if there is an increase in joblessness, we will likely continue to see the rate stay near these decade-low levels for some time.
3. A crazy week in crypto, but what’s next?
Last week saw bitcoin register a new low for the year, dropping below USD$16,000 amidst the fallout from FTX’s liquidity issues. The industry will learn from some of the significant missteps we have seen this year, including Luna and Celsius, which will almost certainly lead to more transparency across the space long-term, helping to bring more accountability and trust into the crypto market. Bitcoin and other cryptoassets will likely remain under pressure until we see more clarity around this issue. The easing of US inflation provided some relief to bitcoin and other crypto assets last week, with signs that inflation may be moving in the right direction. This data print couldn’t have come at a better time, and crypto investors will be breathing a sigh of relief. However, this is a short-term boost to markets and there is still a long way to go to bring inflation down to the Fed’s target rate. As inflation does begin to come down and we see clear signs of rate hikes having their desired effects, investors will slowly begin to add risk assets, such as crypto assets, back into their portfolios again.
*All data accurate as of 14/11/2022. Data Source: Bloomberg and eToro
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