The Monday Report – 27 September 2021

This story features CENTURIA INDUSTRIAL REIT, and other companies. For more info SHARE ANALYSIS: CIP

The company is included in ASX200, ASX300 and ALL-ORDS

World Overnight
SPI Overnight	7304.00	+ 2.00	0.03%
S&P ASX 200	7342.60	– 27.60	– 0.37%
S&P500	4455.48	+ 6.50	0.15%
Nasdaq Comp	15047.70	– 4.54	– 0.03%
DJIA	34798.00	+ 33.18	0.10%
S&P500 VIX	17.75	– 0.88	– 4.72%
US 10-year yield	1.46	+ 0.05	3.55%
USD Index	93.33	+ 0.23	0.25%
FTSE100	7051.48	– 26.87	– 0.38%
DAX30	15531.75	– 112.22	– 0.72%

By Greg Peel

All Yield

On Thursday night the US ten-year bond rate jumped 7 basis points to 1.41% as Wall Street absorbed the Fed’s more hawkish stance. The Bank of England left rates unchanged but signalled rising inflation would soon force its hand. Norway’s has become the first major-economy central bank to raise rates.

On Friday the Aussie ten-year yield leapt a whopping 14 basis points to 1.39%.

Higher rates are not good for yield-paying stocks. Friday saw the property sector fall -2.2%, Industrials (including toll roads and airports) -0.7%, telcos -0.6% and utilities -0.3%.

Property’s fall was exacerbated by announced capital raisings, for the purchase of assets, by REITs Centuria Industrial ((CIP)) and APN Industria ((ADI)).

The exception to the rule are banks – at least when coming off historically low rates. Higher yields mean higher interest margins, leading financials to be one of only three sectors closing up on the day (+0.7%).

Consumer staples (+0.3%) should by rights not like higher rates but a 1.4% gain for energy is all about ongoing oil price increases.

Material sector woes continued (-1.3%) as the big iron ore miners again fell, despite a (small) bounce-back in the iron ore price, and gold miners took a hit on the drop in the gold price. Three of the top five index losers on the day were gold miners.

Healthcare lost -1.1% after Cochlear ((COH)) fell -4.8% on a patent dispute.

Technology should also be a higher yield loser on discounted cash flows but managed to fall less than -0.1% given the Nasdaq actually rallied on Thursday night.

All the action occurred in the morning on Friday before battle-weary traders headed off to lunch and stayed there, after a torrid week. I say that metaphorically of course.

To that point, the good news is restrictions are being eased in Victoria, and as the NSW case-count has clearly peaked and the state passes 85/60% vaccination, Gladys will unfold her latest “road map” out of lockdowns today.

On the weekend Sydney-siders were allowed five to a picnic. Reports suggest parks were crammed with five-person groups virtually shoulder to shoulder.

But at least there is some light at the end of the tunnel.

Although the US ten-year yield jumped another 5 basis points on Friday night.

Finally

The US government is forecast to run out of money by late October/early November. The Democrats want to deploy emergency measures into December, but the Republicans won’t have a bar of it. One presumes there would be subsequent pressure on US bond prices.

Except that matters of money require only a majority (not 60%) in Congress so as the Republicans have pointed out, the Dems can just push through a bill anyway. Biden’s stance since election has been to at least try and garner bipartisan support on all matters.

That said, Wall Street has all year, and particularly since the big inflation numbers started rolling in, expected US bond yields to rise. That assumption has been thwarted by simple sovereign demand for US debt on a comparative yield basis.

But given subtle changes in global monetary policy now appearing, as noted above, perhaps that demand may now begin to ease. More notably, one of those subtle changes is a shift to the hawkish side from the Fed.

The sticking point is taper timing. The Fed chair said on Wednesday night tapering would be “gradual”, before suggesting it would end mid-2022. Assuming tapering is announced in November and commences in December, as expected, the implied pace of tapering would be almost twice that of 2015’s tapering out of the GFC.

And the Fed balance sheet has grown substantially more, as a result of covid, than it did post GFC.

Wall Street took time to think about it, with the ten-year yield not moving on Wednesday night, then jumping 7 basis points on Thursday night, and another 5 points on Friday night.

But all three major stock indices still managed to close slightly higher for the week despite the big Evergrande plunge early in the week. The bias was slightly away from growth on Friday night, but the Nasdaq still managed to hang in there.

There has been no new news on the Evergrande front but Wall Street is working on the assumption it will be sorted one way or the other. The news out of China on Friday is that Beijing has now made trading in digital currencies illegal.

The impact on bitcoin was not all that substantial, down -6%.

We now head into the final week of the September quarter, suggesting the potential for volatility by week’s end (ditto Australia). It is also financial year’s end for some US companies, such as Apple (ditto Australia: banks).

If the trickle of selling of US bonds becomes a flood, things might get interesting. The suggestion is that with inflation at current levels, the US ten-year should by rights be somewhere in the 2-3% range.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1750.20	+ 7.40	0.42%
Silver (oz)	22.38	– 0.12	– 0.53%
Copper (lb)	4.24	+ 0.02	0.46%
Aluminium (lb)	1.32	– 0.01	– 0.94%
Lead (lb)	0.98	+ 0.01	1.06%
Nickel (lb)	8.67	– 0.11	– 1.27%
Zinc (lb)	1.39	+ 0.00	0.04%
West Texas Crude	73.98	+ 0.68	0.93%
Brent Crude	78.09	+ 0.87	1.13%
Iron Ore (t)	110.15	+ 1.25	1.15%

Higher US yields have the US dollar on the rise but commodity prices are for the main part holding their ground.

Even gold managed a small bounce-back having fallen sharply on Thursday night.

The recovery in oil prices shows no sign of abating.

Thanks to the greenback and US yields, the big jump in Aussie yields on Friday did not stop the Aussie dollar falling -0.6% to US$0.7258.

Strap yourselves in, the SPI Overnight closed up 2 points.

The Week Ahead

The two economic data points that arguably stand out this week are US PCE inflation on Friday, and September PMIs from across the globe – particularly China on Thursday and then everyone else on Friday.

The US will also see numbers for durable goods orders, house prices and consumer confidence. The June quarter GDP will be revised one more time but who cares.

Locally we’ll see a final read on August retail sales along with numbers for building approvals, private sector credit, house prices and housing finance.

We hit a big ex-dividend day on Wednesday as a swathe of REITs and other funds go ex together.

ASX ((ASX)) and Pilbara Minerals ((PLS)) hold AGMs on Wednesday.

Chalice Mining ((CHN)) reports earnings on Wednesday.

It’s a long weekend this coming weekend but only in NSW, the ACT and South Australia. The ASX will be open next Monday but activity, including broker research, will be minimal.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
AGL	AGL Energy	Upgrade to Buy from Hold	Ord Minnett
BAP	Bapcor	Upgrade to Buy from Neutral	Citi
CIA	Champion Iron	Upgrade to Buy from Neutral	Citi
FSF	Fonterra Shareholders Fund	Upgrade to Outperform from Underperform	Macquarie
SFR	Sandfire Resources	Downgrade to Neutral from Outperform	Credit Suisse
SIG	Sigma Healthcare	Downgrade to Neutral from Buy	Citi
TCL	Transurban Group	Upgrade to Outperform from Neutral	Credit Suisse

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

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