What’s driving Aussie equities this week

Here are the main factors driving the ASX this week according to Pendal investment analyst ANTHONY MORAN. Reported by portfolio specialist Chris Adams

• Find out about Pendal Focus Australian Share fund
• NEW ON-DEMAND WEBINAR: Watch Crispin Murray’s bi-annual Beyond The Numbers webinar

THE dominant narrative of resilient global economic momentum and higher-for-longer rates continues.

US 10-year government bond yields rose 7bps last week, driven by higher oil prices, a slightly higher-than-expected inflation print and resilient economic and corporate data.

At the margins there was data suggesting China’s economy is turning a corner.

Commodities were strong overall and US dollar took a breather after its strong rally over the quarter-to-date.

The European Central Bank took a dovish turn after increasing rates last week. President Christine Lagarde indicated the tightening cycle was most likely done. The problem for Europe is they are heading into a recession.

The S&P 500 fell 0.12% and the S&P/ASX 300 gained 1.82% last week.

Oil drives sentiment

Oil continues to be a major driver of sentiment with Brent crude up a further 3.6% last week to $94/bbl. It has risen more than 25% so far this quarter.

This is an upside risk to inflation.

There is an argument oil may be reaching a peak since OPEC supply discipline has driven the rally.

We are now at OPEC’s desired price levels, but we are beginning to see a supply response with US weekly oil production hitting its highest level since Covid.

The long-oil position is crowded. Commodity trading adviser allocations to oil are estimated to be at the highest level since mid-2021.

US economy and macro

In the US, August headline inflation data accelerated to 0.6% month-on-month, primarily due to petrol.

The August core CPI was +0.3% month-on-month, above the 0.2% expected by consensus and the 0.2% print in July.

However, the market wasn’t too worried on the day, since it wasn’t a big miss and showed favourable composition.

The beat in core inflation was primarily driven by higher airline fares (passing through fuel cost increases) and higher car insurance costs.

Car insurance is a lagged flow-through of the Covid surge in car prices. This will roll over as car prices have done, but airline fares should rise next month.

The core deflationary drivers of flat goods inflation and slowing rents remained consistent in August, giving the market some comfort that inflation would continue to slow.

The data can be sliced and diced to support either a hawkish or dovish thesis.

The fact that both can be argued tells us something about the stability of CPI relative to market expectations.

The market was flat on the day of the release. There wasn’t much in there to challenge expectations that the Fed will keep rates on hold this week.

Other economic data supported the “Goldilocks theme” of slowing without a recession.

• Industrial production was +0.4% in August versus +0.1% expected, though mostly driven by oil production. Manufacturing production is flat (excluding autos).
• August US retail sales grew +0.6% versus consensus at +0.2% but the surprise was driven by higher petrol prices. Excluding that, core retail sales growth slowed to +0.2%, which is pretty much in the Goldilocks zone for the deflation trade

Looking ahead, we need to keep an eye on the risks of US government shutdown and the potential impact of the United Auto Worker strikes.

Iron ore

Iron ore rose 7.7% last week and is up 10.5% so far this quarter.

Strength in iron ore is surprising given the depressed state of the Chinese property market. Though this has been offset by steel demand from infrastructure investment and by restocking in low port inventories.

Importantly, Beijing has been happy to let steel production remain strong rather than delivering expected steel production cuts.

This has resulted in Chinese steel exports remaining high (+35% growth yearly) which makes it someone else’s problem and keeps steelworkers employed.

China

Beijing continues to add layers of incremental stimulus.

Last week we saw a 50bps cut in the banking reserve requirement ratio, which should stimulate lending.

There were marginal signs that the economy may be starting to turn less negative.

August economic activity data, while still weak, perhaps indicates a corner has been tuned.

Industrial production was up 4.5% yearly versus +3.7% in July; fixed asset investment gained 2% (prior +1.2%) and retail sales jumped 4.6% (prior +2.5%).

August financing data was much better than expected with total social financing (a broad measure of credit and liquidity) up 9% year-on-year.

Australia

Employment data was strong with +65,000 jobs in August.

But strong labour supply growth from population growth and a lift in participation (a record high of 67%) has kept the unemployment rate flat at 3.7%.

A shift to part-time work potentially reflects growth in second jobs.

Hours worked dipped but the trend has been strong.

Immigration is preventing tightening in the labour market but shifts inflationary pressures from wages to rents and other areas.

Markets

Resources led the equity market last week, driven by stronger iron ore and some China positivity.

Fortescue Metals (FMG, +9.38%), Rio Tinto (RIO, +6.96%) and BHP (BHP, +5.77%) were among the best performers last week in the ASX 100.

Soul Pattinson (SOL, +7.18%) and Whitehaven Coal (WHC, +6.89%) rose on a coking coal supply outage in Queensland.

Financials also outperformed, likely due to firmer bond yields and resilient economic data.

The smaller names such as Bank of Queensland (BOQ, +4.60%) and Virgin Money UK (VUK, +4.49%) did better than the majors.

The market liked Ramsay Health Care’s (RHC, +5.01%) progress on asset sales.

There were positive noise from Malaysian government about potentially working with Lynas (LYC, +4.66%) on investment in downstream rare-earth processing.

Incitec Pivot (IPL, +4.32%) continued its strong run of recent months.

IPL delivered a positive business update as price and cost discipline helped margins in its US explosives business and the Australian explosives business recontracted at better margins. It is still seeing operational issues at Phosphate Hill.

Viva Energy (VEA, -7.64%) was weaker after Vitol sold 16% of the company in a block trade, taking its stake to about 25%. The next major piece of news for VEA will be an ACCC ruling on its proposed purchase of the On The Run chain of petrol stations and convenience stores.

BlueScope Steel (BSL, -6.90%) fell on weaker steel spreads and the US autoworker strike, which will hurt steel demand.James Hardie (JHX, -4.92%) fell on weak sentiment towards homebuilders in the US due to high mortgage rates, despite strong new sales data from the number two national homebuilder Lennar during the week.

---

About Anthony Moran

Anthony Moran is an analyst with over 15 years of experience covering a range of Australian and international sectors. His sector coverage has included Australian Industrials and Energy, Building Materials, Capital Goods, Engineering & Construction, Transport, Telcos, REITs, Utilities and Infrastructure.

He has previously worked as an equity analyst for AllianceBernstein and Macquarie Group, spending a further two years as a management consultant at Port Jackson Partners and two years as an institutional research sales executive with Deutsche Bank.

Anthony is a CFA Charterholder and holds bachelor’s degrees in Commerce and Law from the University of Sydney.

Find out more about Pendal Focus Australian Share Fund  

Contact a Pendal key account manager