Here are the main factors driving the ASX this week according to portfolio manager PETE DAVIDSON. Reported by portfolio specialist Chris Adams

Banking sector concerns are receding and there is now greater confidence on the US interest rate outlook.

This has helped support equities.

The S&P/ASX 300 gained 3.2% last week. The S&P 500 was up 3.5% and the NASDAQ 3.4%.

We also seeing some merger and acquisition activity, notably in the small-cap resource sector.

A sense that rates may be near their peak — and growth is slowing — could support further corporate activity.

US banking

The Fed’s weekly balance sheet data showed a decline of about $US28 billion last week, compared to an expansion of about $US94 billion the week before. 

This suggests bank liquidity requirements have decreased, and pressure from deposit outflows may have eased.

At the height of the banking crisis, withdrawals from the Fed’s discount window reached GFC levels.

Last week’s withdrawal remains large in absolute terms. But the market is interpreting the fact that they have rolled over and are declining as a sign the banking crisis has peaked.

Inflows into US money market funds have also decelerated,

After spiking to about $US120 billion in each of the prior two weeks, last week saw about $US66 billion inflows.

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Concerns about deposit safety at smaller banks also appear to have eased.

Data shows the banking system as a whole is losing deposits. But last week’s outflows came from large and international banks, while small banks held steady and saw a marginal increase in deposits.

Right now small bank credit growth remains strong at around 8% per annum. Commercial real estate (CRE) loans remain a concern and an area to watch.

Small, regional banks dominate CRE lending. Weakness in office assets could be a potential risk, since physical occupancy in US office markets remains low as a result of work-from-home.

But underneath all this, US and European banks are well-regulated and capitalised and the response from policy makers so far has been decisive. 

Corporate credit

Corporate credit spreads widened in response to the banking crisis, but have now started narrowing again. This reflects improved confidence in US banks.

Australia’s corporate bond market was effectively closed to new issuance and secondary liquidity for two weeks due to concerns about the overseas banking sector.

But swift action by policy makers seems to have restored confidence and the local corporate bond market has re-opened.

Last week ANZ issued a large three-and-five-year deal.

Toyota Australia issued $625 million of debt. Volkswagen Australia and Worley (WOR) are also looking to issue new bonds. 

Secondary market liquidity has been somewhat challenged, but is improving by the day.

US macro data

Last week was largely uneventful on the data front.

The Fed’s preferred measure of inflation — the Core Personal Consumption Expenditure (PCE) index — came in at +0.3% month-on-month for February versus +0.4% expected and +0.6% in January.

A +0.3% monthly rate annualised is just a touch below 4%, which is probably not low enough for the Fed to feel comfortable in pausing rates.

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But it indicates inflation is moving in the right direction.

As of March 23, the market was implying a peak in rates of 4.9% in May 2023, with rates at 4.1% by the end of 2023.

This is down from a March 8 reading of a 5.7% peak in September and 5.5% at year-end.

Markets

The S&P/ASX 300 end up 3.3% for the first quarter of 2023, courtesy of a rebound in the last week.

The S&P 500 was up 7.5% and the NASDAQ 17.1% for the quarter.

Bond yields rose as confidence improved last week, with US two-year yields up 26bps. They end the quarter 40bps lower, while 10-year Treasuries are 41bps lower than they started, at 3.47%.

The Safeguard Mechanism legislation was passed last week, requiring most facilities directly producing more than 100,000 tonnes of annual CO2-equivalent emissions to reduce their pollution significantly by 2030.

This poses a challenge for the mining sector, given its heavy reliance on diesel and the potential for higher costs.

Last week resource companies led the market, on the back on stronger commodity prices and M&A activity. The lithium sector rebounded sharply following US giant Albemarle’s all-cash $A5.5 billion bid for local lithium miner Liontown (LTR, +73.2%).

About Pete Davidson and Pendal Focus Australian Share Fund

Pete is Pendal’s head of listed property and a portfolio manager in our Aussie equities team. For more than 35 years, he has held financial markets roles spanning portfolio management, advisory and treasury markets.

Pendal Focus Australian Share Fund is Crispin Murray’s . Find out more about Pendal Focus Australian Share Fund here.

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

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