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Jim Taylor: What’s driving ASX stocks this week

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

THE market continues to question the notion of “transitory” price pressures.

But it’s remarkable how quickly equity markets have rebounded from recent shocks around inflation.

Stronger-than-anticipated US inflation data last week drove market volatility and a rare down-week for US equities. The S&P/ASX 300 lost 0.04% and the S&P 500 was off 0.27%.

There was also some movement in China. Beijing may be looking to ease pressure on the property sector, which prompted a rebound in the iron ore space.

The market remains focused on the risk of China over-tightening monetary, fiscal and regulatory policy settings, so signals that may mitigate this risk have been well received.

The Chinese Communist Party’s sixth plenum last week appears to have paved the way for indefinite leadership by Xi Jinping.

Covid and vaccines

We are seeing a sharp rise in case numbers in Germany. But as in other similar waves, hospitalisations so far remain under control.

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Other European counties are also seeing an increase in cases. Denmark, Austria and the Netherlands are looking at reintroducing some mobility restrictions in response.

Otherwise there was little new to note last week.

Macro and policy

US

However you want to slice and dice the inflation data, the key takeaway is that we are looking at 30-year highs.

US CPI grew 0.9% month-on-month — versus 0.6% consensus expectations — and is running at 6.2% year-on-year.

The core data (ex food and energy) rose 0.6% month-on-month versus 0.4% expected. It is running at 4.6% year-on-year.

A rebound in Covid-affected sectors such as auto and hotel prices helped lift both the headline and core readings, but the breadth of excess inflation pressures continued to increase.

Services inflation will be keenly watched as the US economy re-opens. So far it remains in its 10-year band, but has experienced strong recent momentum.

Core CPI will peak at 6.9% in March 2022 according to consensus expectation at this point. This leaves plenty of scope for the market to continue testing the Fed’s “transitory” line in coming months.

Australia

In Australia, employment declined 46.3k in October while the unemployment rate rose 60bp to 5.2%. This was weaker than expected, but the outcome largely reflected measurement issues related to recent lockdowns.

Elsewhere a strong rebound in company forward orders augers well for growth as we emerge from lockdowns.

China

The slowdown in credit may have bottomed in China. October is showing credit growth, potentially improving confidence for the rest of the year and into 2022.

After recent sharpening of concerns over property there are reports that the People’s Bank of China may introduce several measures to ease pressure on the sector. These include:

  • Excluding merger and acquisition loans from the “Three Red Lines” that govern leverage in the property sector, allowing companies to acquire assets from stressed firms such as Evergrande
  • Easing restrictions on development loans, which should reduce cash flow pressure on developers
  • Extending existing bank loans

Elsewhere, approval of Xi’s doctrine on Chinese Communist Party history — the first in 40 years — at the sixth plenum seems to set the stage for Xi to retain power indefinitely.

Markets

Australian ten-year government bond yields largely held on their 30bp rally from the previous week.

The US equivalent yields rose 11bps to 1.56% on the inflation data, but remain well below recent highs.

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The inflation print saw the gold price gain 2.8%.

News of potentially looser policy in China prompted good gains among commodity stocks, though the prices of iron ore (-4.9%) and copper (+2.4%) remained more subdued.

It was a disappointing season for the banks in the sense that all missed consensus pre-provision profit expectations.

ANZ (ANZ) slightly missed due to costs and NAB missed by 2% given weak markets. Westpac (WBC) missed by 17% given a sharp hit to net interest margins (NIMs) and higher costs.

Key themes across the results included:

  1. Mortgage NIMs remain under pressure from competition and changes in product mix, as highlighted by WBC. A focus on price-driven strategies via third-party distribution has led to profitless growth. Business banking NIMs appear to have held up better. The tailwind from lower deposits and funding appears to have largely played out.
  2. Credit growth is strengthening. All banks (ex ANZ) are enjoying the housing boom, though this should peak in coming months. NAB and CBA are starting to see a recovery in business lending which is a very encouraging sign. Institutional activity is increasing, while NZ credit keeps expanding. Growth is becoming broader based.
  3. The markets and trading-based divisions have been weaker, outside of Australian and New Zealand.
  4. All banks recommitted to their cost-out programs, however the market remains very sceptical on success here.
  5. Asset quality was very benign with every bank reporting negative credit charges.
  6. All banks beat expectations in terms of capital positions, reporting strong balance sheets.

About Jim Taylor and Pendal Focus Australian Share Fund

Drawing on more than 25 years of experience investing in top-performing Australian companies and a background in accounting, Jim manages our Long/Short Fund and co-manages our Imputation Fund. He is a Chartered Accountant with membership of the Australian Institute of Chartered Accountants.

Pendal Focus Australian Share Fund is managed by Crispin Murray. The fund has beaten its benchmark in 12 years of its 16-year history (after fees), across a range of market conditions. 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. 

Contact a Pendal key account manager here


This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at November 9, 2021.

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