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Crispin Murray: What’s driving the ASX this week

Here are the main factors driving the ASX this week according to our head of equities Crispin Murray. Reported by portfolio specialist Chris Adams.

THE late northern summer repose and the domestic focus on earnings season was dramatically disrupted by Jerome Powell’s short-but-direct speech at the Jackson Hole central bank conference last week.

Powell reminded the market of his singular focus on bringing down inflation, even if it brought “some pain to households and businesses”.

The S&P 500 slumped in response, ending down 4% for the week.

We’ve previously flagged that the market rally was running up against technical resistance and losing steam as the position covering played out.

The S&P is now down 5.5% and the NASDAQ off 7.5% from their Aug 16 highs.

Powell’s message was not so much the need for rates to go higher than markets expect. Rather, rates would need to be sustained at restrictive levels for some time to bring inflation under control.

This is at odds with recent optimism that rates would fall in 2023. This saw US two-year yields rise 17bps and 10-year yields up 7bps to 3.04%. 

The Fed’s stance emphasises the importance of the total financial conditions index as a signal. It will not allow this to rise too far.

This means bond yields are underpinned and equities are capped while inflation remains an issue.

Three other developments also weighed on sentiment:

  1. Oil back above US$100 
    A week ago the Iran deal looked likely and the market expected oil to drop sub-US$90 on the incremental supply. But on Tuesday we got the “Saudi put” under the oil price. Riyadh’s minister of energy effectively indicated that OPEC+ supply agreements would continue in 2023 and flagged the prospect of supply cuts in response to higher volumes from Iran. He also highlighted a view that there was a disconnection between the physical and paper oil markets. This can be interpreted as a belief that the US is manipulating the oil price down and OPEC will act in response. 
  2. European power prices surge higher
    We are now at levels where huge swathes of German industry is unviable. This is driven by the inexorable rise of gas prices. Storage levels in Germany are approaching 80% — but this level is required in winter even when flows from Russia are normal. Moscow is now allowing only 20-40% of normal flows. If this continues, no amount of storage will suffice.
  3. US dollar index (DXY) breaks back to 20-year highs
    This creates liquidity pressures in many other countries. A return to the trifecta of higher bond yields, oil and US dollar is typically bad for equities. That said, the outlook for oil is still challenged by the potential for weaker demand as the global economy slows.

The petrol price remains a key signal for US inflation expectations — and therefore yields and hawkishness from the Fed.

So there is potential for inflation to resolve itself faster — requiring less policy pain if it comes down.

But for the moment the market is back in a nervous holding pattern with 4000 on the S&P 500 viewed as a key support level.

Australia

Australia enjoyed a short respite from global macro factors. On balance, the busiest week of reporting season delivered a neutral outcome.

Consensus expects FY23 earnings to rise 4%, up from +18% in FY22.

Revisions to earnings expectations are flat for FY22 and -2% for FY23 compared to four weeks ago.

In FY23 resources earnings expectations are now 4% lower and 1% higher for banks, with the rest of the market revised down 2%.

In terms of results, consumer staples disappointed as supermarkets proved less defensive than hoped. Companies delivering capital management — such as Qantas (QAN) and Nine (NEC) — performed better.

Economics and policy

Fed Chair Powell kept his Jackson Hole speech short and narrowly focused for deliberate effect, sending a strong message on inflation.

The odds of a 75bp move higher in September have jumped to about 60 per cent.

The curve of implied hikes is moving back towards its June highs and is a long way above the end of July lows.

The market is divided into two broad camps:

  1. The Fed will drive the economy into recession as it looks too literally at current data and over-tightens. This triggers a recession and earnings downdraft that takes the market back to the lows.
  2. The Fed is bluffing. It wants to send a hawkish message to restore credibility, but knows the economy is already slowing rapidly and inflation data will improve. This gives it scope not to push rates too hard. This scenario leads to bond yields falling and is more positive for equities.

The next Federal Open Market Committee meeting concludes on September 21 — so with more employment and inflation data to come the outcome is yet to be determined.

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In terms of inflation, the Core PCE price index rose 0.1% month-on-month — less than expected — and continues a run of incrementally more-positive data.

This may be an unwind following the June spike in core PCE.

Averaging across the two brings it back in line with the run-rate from January to May.

The Core Services PCE price index came in at 4.2% year-on-year. This was also lower than expected and is the lowest print since December 2021. 

The Cleveland Fed’s ‘nowcast’ measure of inflation also continues to track lower, as do the Evercore surveys of wage pressure and retail pricing power.

Australian equities

The S&P/ASX 300 finished down 0.6% last week, not capturing Friday night’s slump in US equities.

It held up on the back of reasonable results and better performance from the resource and energy sectors.

Consumer staples underperformed on the back of disappointing results from Coles (COL) and Woolworths (WOW).

Small caps also underperformed, which is a sign that the rally driven by defensive positioning has run out of steam.

Key observations on ASX results so far:
  1. Pricing power is a key point of differentiation. Disappointing results mostly reflect insufficient moves to offset cost pressure, particularly in the building-related sector and companies with European exposure (eg Dominos Pizza, DMP). Meanwhile companies such as Wisetech (WTC) and Qantas (QAN) showed the value of pricing power.
  2. Costs are a headwind to some of the defensive stocks, leading to less defensiveness than expected. We saw this in Endeavour (EDC), Coles (COL), Woolworths (WOW) and Ramsay Health Care (RHC).
  3. Some cyclicals are not experiencing the weakness many feared, eg Nine Entertainment (NEC) and some advertising-related names.
  4. Companies with cyclical tail winds are performing well. For example the lithium sector remains strong, as does oil refining.
  5. The market is liking capital return. New buy-backs from NEC and QAN were well received

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About Crispin Murray and Pendal Focus Australian Share Fund

Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and leads one of the largest equities teams in Australia. Crispin’s Pendal Focus Australian Share Fund has beaten the benchmark in 12 years of its 16-year history (after fees), across a range of market conditions.

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management. 

Find out more about Pendal Focus Australian Share Fund  

Contact a Pendal key account manager


This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at August 15, 2022. PFSL is the responsible entity and issuer of units in the Pendal Focus Australian Share Fund (Fund) ARSN: 113 232 812. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com

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