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US PAYROLL data came in weaker than expected last week, putting paid to any residual risk of an earlier-than-expected tapering of Quantitative Easing (QE) purchases.
There probably wasn’t enough in the report to delay the expected commencement in December, however.
The US dollar weakened slightly, which helped commodities and resource stocks strengthen during the week. The S&P/ASX 300 was up 1.1% last week while the S&P 500 gained 0.62%.
Vaccination trends remain constructive.
NSW is on track to reach full vaccination for 70% of the population by the end of this month and 80% by mid- October.
The national vaccinate rate is running at about 1.1% of the population per day. NSW is at 1.4%. We expect NSW case numbers to deteriorate further from here, peaking in late September before the effects of vaccination start to take hold.
The key issue is hospital capacity. There are 845 ICU beds in NSW, of which 172 (20%) are occupied by Covid patients. There is some scope for surge capacity. But we are mindful that when Covid patients reached about 40% ICU occupancy in the US it started to cause issues.
Victoria has 426 ICU according to the Department of Health. Queensland has roughly 30% less capacity per capita than NSW, while Western Australia has about 50% less ICU capacity per capita. This is a material factor in caution towards re-opening in these states.
The effect of children returning to school in the northern hemisphere will soon become apparent. Scotland returned two weeks earlier than England and experienced a renewed surge in Covid cases. This is something to watch. The number of patients in Scottish hospitals is still below 30% of peak levels. It’s below 20% in England.
It is worth noting that NSW now has a higher percentage of Covid patients in hospital than the UK. This is despite cases per capita at about 40% of UK levels, highlighting the impact of vaccine penetration.
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In the US, cases and hospitalisations continue to plateau and the effective reproduction or R(eff) number is below 1 in the majority of states. R(eff) measures the average amount of people an infected person goes on to infect. The return to school is again likely delaying a roll-over in these numbers.
About 39% of the US population lives in areas with ICU occupancy greater than 85%. Breakthrough hospitalisations (hospitalisations of fully vaccinated patients) remains at 1.8% of all Covid admissions.
In the US, August payrolls came in much weaker than expected at the end of last week. There were 235,000 new jobs added, versus an expected 733,000. There were extensive upwards revisions for previous months, but not enough to compensate for a very soft result.
Leisure and hospitality provided the missing ingredients — where no new net jobs were added, versus 400,000 last month. Delta is playing a role here, but there is also a supply side effect of people taking time off after summer. This is likely to quash any further talk of an early tapering of QE.
We are mindful that wages continue to grow — up 0.6% month-on-month versus +0.3% expected and up 4.3% year-on-year. The unemployment rate also continues to drop — from 5.4% in July to 5.2% in August.
As a result, we think the expectation of a tapering announcement in November, to be commenced in December, remains reasonable.
The key point is this data takes some steam out of the service sector, limiting potential inflation from a large part of the economy, thereby extending the favourable environment for equities.
This, combined with Biden’s slumping popularity, may provide impetus for more fiscal stimulus.
There is scope for adjustments to the infrastructure bill currently under debate so benefits are more front-ended. As benefits end in 2022 this may mean the fiscal cliff is not so high.
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The European Central Bank (ECB) meets this week. Some members have been talking about economic improvements and a rise in inflationary pressures, signalling a potential tapering of their own QE program.
European bond yields rose in response. The market is expecting a shift in the target from EUR80 billion to EUR70 billion a month — but there is risk of a bigger reduction.
Markets were quiet last week. There was something of a bounce in resources and energy, but growth stocks remain well supported.
It will be important to watch any response in the US dollar to ECB action this week. Any weakness in the USD would help commodities. There has also been some speculation around further Chinese stimulus, which would likewise be helpful.
There were four key themes to highlight from the full-year reporting season.
1. Rising fears of a slowing global economy. This led to underperformance in the mining and energy sectors.
2. Elevated merger and acquisition (M&A) activity. 2021 has already broken through previous highs in terms of the dollar value of M&A activity with four months still left to run. This reflects strong confidence in board rooms.
3. Confidence in a demand rebound. Management teams pointed to a better-than-expected June quarter – before restrictions were imposed – as evidence of strong underlying demand when the economy does re-open.
4. ESG (Environmental, Social and Governance) was a major factor in corporate strategy. This was evident in BHP’s (BHP) shift out of oil and gas; moves by Woodside (WPL) and Santos (STO) to create scale to de-risk and become more cash-generative; more detail around Fortescue’s (FMG) FFI project; and BlueScope (BSL) flagging a need to invest in decarbonisation.
The equity market continued to grind higher in August despite the challenge posed by the Delta spread.
Paradoxically, we are in an environment where the constraint on growth from Delta supports markets, given that it means policy remains easier for longer.
The S&P/ASX 300 gained 2.61% for the month. The S&P/ASX Small Ordinaries was up 4.98% and S&P/ASX 300 A-REIT index gained 6.38%. Financials finished up 4.92%.
The S&P/ASX 300 Resources index dropped 8.37%. This was driven in part by falling commodity prices and was exacerbated by BHP’s proposal to collapse the company’s dual listing. Operationally, results were generally fine within the sector.
We saw a rotation to growth and some of the more richly-valued defensive stocks during the month. This was driven largely by the expectation that rates would remain lower for longer, supporting valuations in these parts of the market.
Technology (+16.2%) led the market on the back of the rotation to growth, though results in the sector were not as strong as the price action might imply.
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.
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