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The Monday Report – 05 December 2022

Daily Market Reports | Dec 05 2022

This story features SANTOS LIMITED, and other companies. For more info SHARE ANALYSIS: STO

World Overnight
SPI Overnight 7334.00 + 19.00 0.26%
S&P ASX 200 7301.50 – 52.90 – 0.72%
S&P500 4071.70 – 4.87 – 0.12%
Nasdaq Comp 11461.50 – 20.95 – 0.18%
DJIA 34429.88 + 34.87 0.10%
S&P500 VIX 19.06 – 0.78 – 3.93%
US 10-year yield 3.51 – 0.02 – 0.65%
USD Index 104.55 – 0.25 – 0.24%
FTSE100 7556.23 – 2.26 – 0.03%
DAX30 14529.39 + 39.09 0.27%

By Greg Peel

Curiouser and Curiouser

The ASX200 gleefully rallied 90 points on Thursday, after the Fed chair signalled only a 50 point rate hike this month rather than 75, and then fell -50 points Friday because, well, why?

Was it because Wall Street's rally failed to kick on when the October PCE numbers also came in below expectation, focusing instead on weaker economic growth signals? Possibly, but it is the sectors that caused the damage on Friday that muddy the waters.

Energy fell -2.5%. That was straightforward given Santos ((STO)) dropped -3.8% after being knocked back on its Barossa gas project. And coal stocks were lower again.

The index top performers board was littered with gold miners, but materials fell -0.6% as iron ore miners eased.

Significant damage was done to interest rate-sensitive sectors. Real estate fell -2.6% (more about that below), discretionary -1.0%, industrial -1.0%, the banks -1.0% and utilities -0.4%, which can only be explained by a jump in bond yields.

Except that the Aussie ten-year fell -9 points to 3.39% and the two-year -6 points to 2.98%, following US yields. With the RBA cash rate at 2.85%, the two-year yield seen as a proxy for the terminal cash rate is closing in.

If the RBA hikes another 25 points tomorrow, which is the general expectation, then cash rate will be at 3.10%. Maybe investors were upset on Friday that economists still believe the RBA will hike again. Commonwealth Bank's team expressed that view on Friday when the October CPI data suggested a pause might be possible.

Or maybe there are more sector-specific reasons.

The total value of housing loans issued in October declined by a further -2.7%, to be down -14.6% year on year. REITs are a much bigger pool than just residential, but the big three property developers were all down -2% or more on Friday.

Charter Hall Group ((CHC)), which runs trusts covering office, retail, logistics and social infrastructure, fell -5.1%. Goodman Group ((GMG)), which thrives on distribution centres, fell -4.1%. As news spread about a Blackstone REIT in the US limiting redemptions, REITs in Australia felt the sell orders arriving.

For banks, it's becoming more clear the market has switched back from seeing the risk of debt defaults driven by rising rates exceeding the benefit of increased margins, to seeing the end of increased margins as being a greater drag than easing debt default risk.

The only sectors putting up a fight on Friday were healthcare (+1.1%) and communication services (+0.8%).

With Wall Street once again flattish on Friday night, our futures were up 19 points on Saturday morning, suggesting maybe Friday was a bit overdone.

Hot or Not?

The US added 263,000 jobs in November when 200,000 were forecast. The unemployment rate remained steady at 3.7%. Wages grew by 0.6% in the month when 0.3% was forecast, up 5.1% year on year when 4.6% was forecast.

Hot jobs number plus wage inflation equals more Fed tightening. Dow down -355 from the open.

But strong labour market, strong wages equals less chance of recession. Dow closed up 34.

That's a simple way of looking at Wall Street's response on Friday night. But digging down, individual commentary is more nuanced.

Just as the Fed has warned one good inflation read is not enough to be convinced inflation is on its way down, thus to upset the Fed's trajectory towards a peak rate, so does one hot jobs report not mean the Fed will reverse the indication it will slow the pace from here because of the lag effect.

A 50 point hike is still expected this month.

While stronger wage inflation implies the CPI (or PCE) may not fall as fast as hoped, wage growth of 5.1% is still well below the last CPI print of 7.7%, suggesting (as is the case in Australia), real wages are still well short of the cost of living.

The US bond market did not swing from one view to another as did the stock market. The ten-year yield closed down -2 points to 3.50%. The two-year rose 2 points to 4.28%, steepening the inverted yield curve, pushing expectation further towards recession. But when the ten-year first ran up to 3.50% in June on swift Fed rate hikes, the stock market collapsed.

The peak was 4.22% in October.

Overlaying the immediate data-driven uncertainty is faith in a traditional Santa Rally to year-end. But the S&P500 is still yet to break above the top of the 2022 down-trend line, and the longer it fails to do so, the more risk we'll see the Grinch instead.

The Fed meeting is on December 14.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1797.30 – 4.50 – 0.25%
Silver (oz) 23.09 + 0.36 1.58%
Copper (lb) 3.71 – 0.02 – 0.63%
Aluminium (lb) 1.21 – 0.01 – 0.56%
Lead (lb) 0.97 – 0.00 – 0.46%
Nickel (lb) 12.66 + 0.39 3.21%
Zinc (lb) 1.38 + 0.00 0.13%
West Texas Crude 79.98 – 1.38 – 1.70%
Brent Crude 85.57 – 1.41 – 1.62%
Iron Ore (t) 106.79 + 4.60 4.50%

Markets remain convinced China is now on its way to easing covid restrictions, but Friday night saw mostly slight weakness in commodities.

One exception is iron ore. But the bulk of the seemingly large price jump is due to a rollover to the new front month futures contract. Yet, given that means another month of time value of money being added, nominally it's still a large gain, as Beijing continues to provide support to its ailing property market.

Last night OPEC-Plus elected not to cut production further.

As of today, the G7 will no longer import oil from Russia. A cap of US60/bbl has been placed by the G7 (and Australia) on Russian exports to anywhere else. Amazingly, Putin has scoffed at any notion of a price cap. While US$60/bbl is a lot lower than the current Brent price of US$85/bbl, it is still comfortably above Russia's cost of production, so Zelensky is upset as well.

The Aussie is down -0.4% at US$0.6788.

The SPI Overnight closed up 19 points or 0.3% on Saturday morning.

The Week Ahead

Today we'll see job ads, and on Thursday, trade numbers.

Today we'll see September quarter company profits and inventories, tomorrow the current account, and then the GDP on Wednesday.

The RBA meets tomorrow.

China reports trade and inflation numbers this week.

In the US it's trade, factory orders, consumer sentiment, and the November PPI (on Friday).

Metcash ((MTS)) reports earnings today, Incitec Pivot ((IPL)) goes ex, and Bank of Queensland ((BOQ)) holds its AGM tomorrow.

The Australian share market over the past thirty days

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
BUB Bubs Australia Downgrade to Neutral from Buy Citi
DMP Domino's Pizza Enterprises Downgrade to Underperform from Neutral Macquarie
IEL IDP Education Downgrade to Hold from Add Morgans
RIO Rio Tinto Downgrade to Neutral from Buy Citi

For more detail go to FNArena's Australian Broker CallReport, which is updated each morning, Mon-Fri.

Allovernight and intraday prices, average prices,currency conversions and charts for stock indices,currencies, commodities, bonds, VIX and more available on the FNArena website. Click here. (Subscribers can access prices on the website.)

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CHARTS

BOQ CHC GMG IPL MTS STO

For more info SHARE ANALYSIS: BOQ - BANK OF QUEENSLAND LIMITED

For more info SHARE ANALYSIS: CHC - CHARTER HALL GROUP

For more info SHARE ANALYSIS: GMG - GOODMAN GROUP

For more info SHARE ANALYSIS: IPL - INCITEC PIVOT LIMITED

For more info SHARE ANALYSIS: MTS - METCASH LIMITED

For more info SHARE ANALYSIS: STO - SANTOS LIMITED