Coiled cobra | BetaShares

Coiled cobra

BY David Bassanese | 25 October 2021

Global markets

Global equities continued their impressive rebound last week, with strength in the Q3 U.S. corporate earnings season offsetting concerns with regard to supply chain bottlenecks, inflation and interest rates. According to FactSet, an above-average 84% of the 23% of  U.S. S&P 500 companies that have reported so far beat expectations.

One takeaway from the high level of earnings ‘beats’ is that companies appear to have been able to pass on cost pressures – hence the lift in both wholesale and retail prices over recent months. And the earnings season heats up with the tech darlings – Amazon, Apple, Alphabet and Google – reporting this week.

That said, interest rates still edged higher last week and both the Fed’s Beige Book and U.S. manufacturing reports indicated persistent supply and cost pressures. Indeed, Fed chair Powell was forced to concede on Friday that inflation pressures may last a bit longer than anticipated, which he indicated affirmed the need to start tapering bond purchases (but not, it seems, actually lift official interest rates any time soon).

As noted above, earnings will remain centre stage in the U.S. this week, though key inflation and wage indicators are also released on Friday which could dampen sentiment if one of both surprise on the upside. Annual growth in the core personal consumption expenditure (PCE) deflator is expected to edge up to 3.7% from 3.6%, while annual growth in the Q3 wage cost index is expected to lift to 3.3% from 2.8%.

Like many, I still suspect what we’re seeing is persistent cost pressures arising from a stimulus and pandemic-induced surge in goods demand running ahead of supply capacity, coupled with million of U.S. workers – for various reasons – still reluctant to re-enter the workforce. While these distortions should ease over the coming year, it remains a question whether the Fed and/or markets will lose patience in the meantime – bringing forward rate hike talk and a then likely renewed equity pullback. Once the current U.S. earnings euphoria has passed, U.S. bonds yields seem a bit like a cobra – coiled up and potentially ready to bite!

Equity themes

Growth just edged out value again last week, with the U.S. market handily outperforming other markets. That means the U.S. relative performance trend is still up, with value and emerging markets (and Australia) not yet convincingly displaying an outperforming bias.

Australian market

The main local point of interest last week was a further lift in bond yields, this time on the back of a higher than expected New Zealand inflation report. If inflation is up across the Tasman, it must be hot here also – or so the market thinks! One difference, however, is that the NZ economy is already a bit hotter than in Australia, with firmer wage growth and stronger housing costs (though our housing costs are also being held down to an extent by the home builder grant).

Indeed, annual growth in NZ’s trimmed mean measure of CPI inflation leapt from 1.7% to 3% in the June quarter, whereas local trimmed mean inflation is only expected to rise from 1.6% to 1.8% when it’s released this Wednesday (of course, as in NZ, it could surprise on the high side). Should trimmed mean inflation break above 2%, chatter about local rate hikes would likely intensify – as it is, the market is already now pricing in rate hikes late next year, despite recent RBA protestations.

Within the local equity market, the weakness in iron-ore prices (despite the recent bounce) has weighed on resource stocks relative to financial and technology stocks. Although Chinese Q2 GDP was a bit weaker than expected last week, there’s been some relief that China’s Evergrande appears to be quietly still trying to stave off insolvency. The bounce in iron-ore has also helped the $A in recent weeks, though I still see more downside than upside currency risk from current levels.

Have a great week!





Leave a Reply