March, 2022 - Macarthur Wealth Management

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Aussie dollar pushes higher on risk-on sentiment

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Local and global equity markets rose this week as equity investors ignored the threat of higher interest rates and instead focused on US central bank comments regarding the strength of the economy.
In local stock news, casino operator Star has been embroiled in scandal after revelations that the business disguised $900 million in transactions as hotel expenses to help guests dodge controls over using the money for gambling, putting their casino licence at risk.
Ramsay Health Care has received an offer from its Asian joint venture partner to buy the remainder of the shares, offering $1.82 billion.
Respiratory care provider Fisher & Paykel forecast full year revenue to be less than the previous one. The company said the omicron variant was requiring less respiratory intervention and a mild flu season had unfolded in the northern hemisphere.
National Australia Bank will follow its $2.5 billion on-market buyback with another of the same value as the bank seeks to improve its capital ratio and reduce shares.
JB Hi-Fi reported that 3rd quarter sales were well ahead of the same period last year, with sales up 11% in their JB Hi-Fi Australian division and up 5% in The Good Guys business.
The oil price rose again this week as US stockpiles dropped sharply last week and supply shortages continue given sanctions on Russia.
The Aussie dollar rose past the US75c mark this week, supported by high commodity prices and a positive change investor risk appetite which generally supports the Aussie. Less support for the Euro and the Yen is also resulting in additional support for the Aussie dollar.

CBA data is showing that growth in new lending for housing continues to ease, primarily driven by lending to owner occupiers. Higher fixed rates have seen a declining share of new fixed rates lending and shorter fixed rate terms. Consumer lending growth picked up, but business lending growth has slowed.
Data showed Australian manufacturing conditions strengthening in March, marking the 22nd successive month of improvement. New orders growth accelerated with employment levels and purchasing activity continuing to rise. However, input costs and output prices rose at faster rates due to shortages and rising costs.
The US central bank chair said the bank must move quickly to bring too high inflation under control and if needed will use bigger than usual interest rate hikes to do so. Talk and action are two different things but talking can bring about less action if they are successful at talking down demand.
A key US economic leading index rose by 0.3% in February, in line with expectations, but the print does not reflect the full impact of the Russia/Ukraine conflict which escalated thereafter.
US existing home sales fell 7.2% in February while February sales fell 2.4% from a year earlier. Higher mortgage rates hitting home, with the average 30-year fixed mortgage recently topping 4% for the first time since 2019.
The Bank of England hiked rates for a 3rd successive meeting with officials sounding less confident on the path for rates ahead. The Bank of Japan doubled down on its commitment to keep stimulating the economy even if inflation continues to accelerate.

The lack of progress in talks to amend the Brexit agreement on Northern Ireland has frustrated the UK which now appears to be stepping up preparations to suspend parts of the deal it struck with the European Union.
European Union leaders may hold off on endorsing intervention in the bloc’s wholesale energy market as member states are divided on the most effective emergency options to curb soaring power and gas prices. All options are on the table, but most aren’t easy or immediate solutions.
The Biden administration and European Union are close to a deal aimed at slashing Europe’s dependence on Russian energy sources, as the US and its allies seek to further isolate and punish Moscow. The deal would ensure supplies of American natural gas and hydrogen for Europe.
Australia, the world’s biggest export of alumina, announced a ban on shipments to Russia in a move that will add further pressure on Russia with Australia accounting for nearly 20% of Russia’s supply of alumina, a key ingredient for producing aluminium.
On the trade front, the Biden administration plans to reinstate exemptions from the Trump-era tariffs on 352 Chinese products that were previously granted waivers, most of which expired by the end of 2020. Elsewhere, the US and UK reached a deal to ease tariffs on British steel and aluminium, resolving a longstanding dispute.

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Investor confusion reigns

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MARKETS

Local and global equity markets were mixed this week with investors pummelled by an influx of extremely fluid news flow including conflict, inflation, central banks and rates, and floods.

In local stock news, CSL announced it would waive its original 80% acceptance rate condition and declare its $16 billion takeover of Vifor Pharma a success, after gaining more than 74% in the takeover target. Swiss government approval is still required.

Insurers have been informing the market of their claims from the floods and storms that battered parts of the NSW and Queensland since late February. IAG has revised its total claims expense estimate for the event to $74 million, down from $95 million, due to work on earlier claims.

Oil prices had an extremely volatile week, soaring to $130 a barrel amid supply shortage fears as the US and allies looked to cut off Russian oil and gas. The oil price then fell sharply on peace hopes, before rising again with the UAE stating it will call on its fellow OPEC+ members to boost oil output faster. But the oil price finished the week lower as the UAE call was tempered hours later by their energy minister and high US inflation data set off fears of economic contraction.

ECONOMIC

New Australian labour market data showed demand for workers spiked after the most recent virus wave receded, with the ANZ job advertisement series jumping 8.4% in February to be 31.5% higher than a year earlier.

Australian consumer sentiment fell again in March, with the reading below 100, indicating that pessimists outweigh optimists. Rising inflationary pressures are weighing on sentiment, along with recent floods, Russia/Ukraine conflict, and the prospect of higher mortgage rates.

The February NAB business survey showed a strengthening in business conditions and confidence as new virus cases declined from their early January peaks.

Reserve Bank governor Philip Lowe said surging oil prices would produce annual inflation of 4% in Australia this year, above the Bank’s 2-3% target.

The US central bank chairman has confirmed plans to back a 0.25% rate increase at the March meeting, with the Russia/Ukraine conflict impacting how hard they can go on rate rises in contrast to unrelenting inflationary pressures. The chairman did indicate that he was prepared to raise rates by more than 0.25% in a meeting or meetings if inflation doesn’t subside later this year as expected.

US jobs rose by 678,000 in February, coming in well above expectations. The unemployment rate fell from 4% to 3.8%, the lowest in 2 years. Average hourly earnings were flat in the month with the annual rate falling from 5.5% to 5.1%.

US inflation reached a new 4-decade high in February, with the consumer price index up 7.9% from a year earlier. Markets concerned that sustained inflation and lower economic growth could see a period of stagflation.

The European central bank kept their interest rates unchanged but surprisingly sped up their reduced asset purchasing schedule for the coming months, stating that the program could end in the 3rd quarter if the medium-term inflation outlook will not weaken.

China announced an economic growth goal of about 5.5% for 2022, it’s lowest target since 1990, but still at the higher end of many economists’ estimates. The higher than expected number, if achieved, could provide a boost to the global economy.

POLITICS

Sanctions and corporate boycotts on Russia have continued this week as part of a broader retreat by global corporate giants. In response, Russia has threatened to cut natural gas supplies to Europe. The US secretary of state said the US and its allies were looking at a coordinated embargo on Russian oil and gas, whilst ensuring appropriate global supply. Problem is where to get the additional supply from…. Venezuela or Iran….

China will continue its crackdown on monopolies to ensure fair competition according to their Premier. He also singled out integrated circuits and A.I. industries as priority areas for the government to build up domestic capabilities. President Xi said China could not rely on international markets for food security and should focus on domestic production and farmland protection.

The US House passed a long-delayed US $1.5 trillion spending bill that would fund the government through the rest of the fiscal year, with emergency coronavirus funding stricken from the bill. The bill also approved US$13.6 billion in emergency spending for the US response to the war in Ukraine.

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Oil price surges as Ukraine conflict continues

Need advice? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide on (02) 9683 2869. www.macarthurwealth.com.au

MARKETS

Local and global equity markets were mixed this week with investor sentiment stuck between valuation support (positive), inflation (negative), and the ongoing conflict in Ukraine (negative).

In local stock news, Australian insurers declared an insurance catastrophe as the number of claims for flood assistance on the east coast soared, with Suncorp already flagging $75 million of additional costs.

Oil prices surged due to the ongoing Russia/Ukraine conflict whilst reports US crude stockpiles fell more than expected didn’t help, putting more pressure on countries to release oil from their emergency stockpiles.

Both the Aussie dollar and the US dollar rose this week as currency investors sought out safety away from Europe whilst the US central bank chair also suggested a first rate hike was imminent.

ECONOMIC

The Reserve Bank of Australia left the cash rate unchanged as expected at their March meeting with their statement emphasising patience before their first rate hike and a focus on prevailing inflation data over the next two quarters along with labour market conditions, particularly wages. Australian economic growth bounced by 3.4% in the 4th quarter to be up by 4.2% on a year ago levels, with household consumption surging and inventories adding to growth. Dwelling investment, business investment, public demand, and net exports were all modest drags on growth. The household savings rate fell, but the level of savings remains significantly higher than pre-pandemic levels. A range of business indicators showed support for Australia’s economic growth outlook with inventories up in Q4, company profits rose 2.7% after adjusting for inventories, wages and salaries up 1.9%, retail trade up 1.8% in January, and private sector credit growth up 0.6% in January. Australian dwelling prices rose by 0.3% across the 8 capital cities in February with annual growth now sitting at 19.2%. Prices were mixed across the country, with Sydney and Melbourne flat whilst gains were recorded in Brisbane, Adelaide, and Perth. New lending for Australian housing rose by 2.6% in January, driven by a strong increase in lending to investors which was up a very strong 6.1%. Lending to first home buyers continued to fall. Personal lending also rose by a small 0.2% after falling by 3.6% in December. The Australian trade surplus widened in January driven by a sharp lift in exports, which rose 7.6%. Iron ore and coal exports provided the boost up by 15% and 16.7% respectively. Rural goods exports also remained strong. Goods imports fell by 2.5%, but still sit materially higher over the year. Australian building approvals fell sharply in January with a 27.9% record drop, coming in well below the modest fall expected by the market. It was a weak set of numbers across the board. US central bank officials appear to be sticking to their resolve to raise interest rates at this month’s meeting despite the uncertainty posed by the Russia/Ukraine conflict. Tough situation as speculation has continued to increase regarding a delay to their first rate rise. Fed chairman Powell, appearing before a government committee, said he would propose a 0.25% increase at their next meeting. French inflation accelerated more than expected, whilst the prices of basic goods in the UK are rising at the fastest pace in more than a decade, adding further pressure on the European central bank who would prefer to withdraw stimulus at a very slow and measured pace. The Chinese central bank moved to further support liquidity by injecting US$45.8 million into the financial system, the most since September 2020. China’s Politburo, of less relevance post Xi’s ascension to almost dictatorship, has vowed to strengthen macroeconomic policies to stabilise the economy this year, suggesting more support could be offered. China’s official manufacturing and non-manufacturing data for February outperformed expectations, alleviating fears of a China slowdown.

POLITICAL

Western nations proceeded with sanctions against Russia to limit their ability to do business by freezing bank assets and cutting off state owned enterprises, whilst also agreeing to disconnect some Russian banks from the SWIFT international banking system and limiting the ability of Russia’s central bank to support their currency. Putin responded by ordering Russia’s nuclear-deterrence forces to be put on alert. Interestingly, Russia’s oil and gas reserves have yet to be targeted and there’s still significant exemptions to many of the sanction lists. Also interesting has been Russia’s invasion/occupation strategy. Russia has barred airlines from 36 countries from its airspace and banned its residents from transferring currency abroad, whilst Turkey has closed the Dardanelles and Bosphorus to warships, only allowing ships to return to their bases. US President Biden has approved the release of an additional US$350 million worth of weapons from US stocks to Ukraine, which is their 3rd release in 6 months, amounting to more than US$1 billion in security assistance. Other nations have followed suit. US President Biden pledged action on inflation in his State of the Union speech but didn’t offer any realistic ways of reducing inflation which recently hit a 40-year high. He told businesses not to cut wages but to cut other costs….

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