The Monday Report – 15 November 2021

This story features ORICA LIMITED, and other companies. For more info SHARE ANALYSIS: ORI

The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Material Gains

News that Evergrande had again managed to find enough money down the couch to make another bond interest payment spurred on buying in mining stocks on Friday, with four of the top five index winners all miners rising 4-5%.

The odd one out is Orica ((ORI)) which rose 4.5% having reported earnings on Thursday, albeit Orica makes explosives for miners.

Even the big iron ore miners saw gains on the day – Rio Tinto ((RIO)) up 3.4% — despite the iron ore price ultimately falling close to -5%.

The materials sector posted a standout 2.3% gain with support from energy, up 1.4%.

From a stock market point of view, resources are a hedge against the impacts of inflation as they are a cause, and on Friday Aussie bond yields suddenly shot back up again to the levels reached last week when the market was challenging the RBA on inflation. The two-year yield rose 11 basis points to 0.68% and the ten-year jumped 8 points to 1.80%.

This is positive for the banks, which rose 0.9% to ensure the two biggest sectors by market cap were responsible for most of the 0.8% ASX200 gain.

Only one sector closed in the red – healthcare fell -0.1% — while gains elsewhere were more modest. Rising yields did not impact on staples (+0.8%), telcos (+0.8%), industrials (+0.3%), utilities (+0.3%) or property (+0.2%).

Technology was up 1.8%, although the sector continues to be led around by Square. Presumably Afterpay ((APT)) will be dropped out of the ASX indices at the December rebalance.

All of Friday’s gains were made in the morning ahead of a peak of up 84 at lunchtime before a bit of Friday drift-off to the close on that additional bottle of red.

Wall Street once again charged ahead on Friday night to be close to recovering losses from last week’s inflation scare, but our futures were cautious on Saturday morning (down -3 points) ahead of today’s data releases from China.

Materially, we note 1% gains for copper and nickel on Friday night but gold steady, iron ore down and the oils down -0.5%.

Stay calm and carry on

There was no obvious impediment for Wall Street to rally again on Friday night and while it was the first week in five the S&P500 closed down for the week, it’s only -0.3% off its high.

Inflation? Who cares? The market is already pricing in a Fed rate hike as early as July next year despite Powell’s insistence otherwise so presumably any pull-forward of Fed expectation would be met less with a “tantrum” and more with “We told you so”.

Every man, woman and their dog had been predicting a 2% ten-year yield by year-end but while the initial inflation scare this year took the yield from below 1% to 1.75%, it’s then been back to 1.2% and now 1.6%. Year to date, the S&P500 is up 25%, excluding dividends. So what’s the problem?

One could note the problem now lies with consumers, as Friday night’s Michigan Uni consumer sentiment index fell to 66.8 for the first two weeks of November from 71.7 at end October to a mark a decade low. Consumers, it seems, are very worried about inflation.

Yet the S&P500 consumer discretionary sector rose 0.5%. Mind you, that’s where Amazon resides, and on Friday night buyers continued to pick up Big Tech names as they always do after any brief pullback.

Economists point out that while such low sentiment is not a good sign heading into Christmas, US consumers remains flushed with cash from covid savings and government stimulus and demand remains very much pent up.

As for the supply shortages driving inflation, Toyota has announced it will be restoring the production levels it was forced to cut due to the chip shortage as it now has enough chips.

Yet there were some interesting numbers on the US labour front on Friday night. The number of US workers quitting their job in September rose to a record 4.4 million at the same time job vacancies hover around a record 10 million. Quitting does not imply leaving the workforce, it implies taking a job elsewhere for higher pay.

But it is that yawning gap of 10 million job vacancies that has business cutting back production or hours because they simply cannot find enough workers. That only serves to exacerbate the supply chain issue.

In other news, and a sign of the times in record-high markets, Johnson & Johnson announced it is splitting into two, separating its consumer products business and its pharmaceutical/devices businesses. One will be called Johnson and the other one…never mind. The news comes in the wake of General Electric announcing its own break-up last week.

GE was an original Dow member but not any more while J&J has been in the Dow for decades.

Commodities

The brief couple of sessions in which Evergrande payments appeared to put a stop to the iron ore price slide gave way on Friday.

The oils appear to be in a bit of a holding pattern around the low 80s, perhaps waiting for signs of increased US production.

The Aussie bounced back quite hard from its recent plunge on Friday night, probably on short-covering. It’s up 0.5% at US$0.7326.

The Week Ahead

China will report October industrial production, retail sales and fixed asset investment today.

The US will see industrial production and retail sales numbers tomorrow night.

New Zealand, the UK, eurozone and Japan all release inflation numbers this week. The latter three are October numbers while slow old NZ, in both data and batting, will report September quarter numbers, with the RBNZ already having hiked twice.

On the local stock calendar it’s a very big week for AGMs, concentrated between Wednesday and Friday.

Elders ((ELD)) and Incitec Pivot ((IPL)) report earnings today, ALS Ltd ((ALQ)), Nufarm ((NUF)) and United Malt Group ((UMG)) on Wednesday, and Aristocrat Leisure ((ALL)) on Thursday.

Commonwealth Bank ((CBA)) will provide a quarterly update on Wednesday and Telstra ((TLS)) holds an investor day tomorrow.

Harvey Norman ((HVN)) goes ex today, as does National Australia Bank ((NAB)).

The Australian share market over the past thirty days…

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