The Monday Report – 20 December 2021

This story features SEZZLE INC, and other companies. For more info SHARE ANALYSIS: SZL

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World Overnight
SPI Overnight	7177.00	– 30.00	– 0.42%
S&P ASX 200	7304.00	+ 8.30	0.11%
S&P500	4620.64	– 48.03	– 1.03%
Nasdaq Comp	15169.68	– 10.75	– 0.07%
DJIA	35365.44	– 532.20	– 1.48%
S&P500 VIX	21.57	+ 1.00	4.86%
US 10-year yield	1.40	– 0.02	– 1.41%
USD Index	96.57	+ 0.55	0.57%
FTSE100	7269.92	+ 9.31	0.13%
DAX30	15531.69	– 104.71	– 0.67%

By Greg Peel

Interest Fades

The local market ignored Wall Street on Friday and instead looked to commodity prices and local bond rates in driving the ASX200 up 55 points by early afternoon, led by materials, energy and the banks. But as the Christmas party approached, afternoon selling led to a close of up just 8.

Just as well. More weakness on Wall Street on Friday night had our futures down -30 points.

The Fed’s pivot to a more hawkish stance drove metal prices up on Thursday night, leading to a 1.2% gain for materials on Friday, with energy tagging along with 1.0%.

In the wake of Thursday’s record jobs numbers, the Aussie yield curve steepened as the ten-year yield rose 4 points to 1.60%. The banks rose 0.8%.

The big counter on the day was technology, down -3.9%. While reflecting overnight Nasdaq weakness the fall was exacerbated by a US regulator moving in on the BNPL space. Afterpay ((APT)) fell -7.6% (this time the tail wagged the dog) and Zip Co ((Z1P)) -6.1%, while Zip also pulled out of merger talks with Sezzle ((SZL)), which fell -9.9%.

Fund managers are still trying to sort out their healthcare positions in order to fit in more CSL ((CSL)). Healthcare fell -0.9% and CSL fell -0.3% to $272, to be below the issue price.

Also helping to square out the session against banks and resources were consumer discretionary (-1.1%) and telcos (-1.2%).

For the former there are likely fears omicron is going to upset Christmas, although NSW is so far sticking to its guns despite cases jumping from zero to 2500 in just over a week. Also impacting on consumer sentiment is a clear drop-off in housing market interest, as auction clearance rates fall.

Domain Group ((DHG)) was the worst index performer on Friday in falling -8.5% and rival REA Group ((REA)) fell -2.7%, but both are technology stocks.

Volumes on the ASX will no doubt begin to thin out this week as schools break up and holidaying begins. Hence we could see some sharp volatility, particularly as Wall Street is in a rather volatile mood of late, chopping and changing from growth to value and back again.

Broking houses will also begin to wind down, leading to less research and as Friday approaches, less interest.

Make up your mind

Friday night was the quarterly “quadruple witching” of equity derivatives on Wall Street so if you’re looking for some volatility, that’ll do it. It was a very up and down session, particularly for the Dow.

Having clobbered growth stocks all week (Nasdaq down -3%), the market turned on value on Friday night, led down by the banks and energy, which each fell over -2%.

The fear is the Fed is now going to tighten into a slowing economy, with the rapid spread of omicron once more threatening the economic recovery.

Consensus all year, and more so as each month brought higher inflation numbers, has been that the US ten-year yield would finish the year around 2.0%, once the Fed began to taper its bond purchases. But with two weeks to go it’s at 1.40%, having fallen another -2 points on Friday night.

The Fed’s hawkish pivot is being reflected only at the short end of the yield curve, thus flattening the curve to the long end. This is indicative of expectations of a slowing economy ahead, and omicron is clearly a potential driver.

This is bad news for bank margins, while renewed lockdowns across the globe (there’ll be no Vrolijk Kerstfeest in the Netherlands) again threaten international travel and thus oil prices.

And it’s not just the Fed getting hawkish. In the covid chaos that is the UK, the Bank of England raised its rate for the first time last week.

Those who have claimed all year the Fed has been “behind the curve” despair that had tapering and rate hikes come faster, as inflation  began to run away and the economic recovery remained solid, then the FOMC would have had a buffer from which it could again loosen policy were omicron to lead the economy back into recession.

But that is now the threat, and the Fed is going the other way, having just conceded inflation may not be quite as transitory as first thought.

While Christmas does not shut the US down to the extent it does in Australia it is still a holidaying period, and this year, by virtue of a Saturday Christmas, Wall Street actually gets four days off instead of the usual one.

Commentators warn volatility will be the name of the game as the year winds up, and having rallied 25% to this point (S&P500), there’s a lot of incentive to take profits and then take a break rather than punt on a new year’s rally.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1798.70	+ 1.60	0.09%
Silver (oz)	22.35	– 0.06	– 0.27%
Copper (lb)	4.31	– 0.02	– 0.55%
Aluminium (lb)	1.22	+ 0.02	1.36%
Lead (lb)	1.06	– 0.01	– 0.58%
Nickel (lb)	8.97	+ 0.02	0.19%
Zinc (lb)	1.55	– 0.02	– 1.17%
West Texas Crude	70.86	– 1.12	– 1.56%
Brent Crude	73.52	– 1.17	– 1.57%
Iron Ore (t)	118.25	+ 3.55	3.10%

The standout here is a return to selling in oil.

Iron ore seems to be have broken away from the gravitational pull of US$100/t.

Also standing out a big drop for the Aussie (-0.7%) to US$0.7128, as the US dollar index jumped 0.5% and the shorters, it would seem, have been cleared out.

The SPI Overnight closed down -30 points or -0.4%.

The Week Ahead

Wall Street has some important data releases to get out of the way this week ahead of closing altogether on the Friday and not reopening till next Monday.

Wednesday night brings existing home sales and another GDP revision while Thursday it’s new home sales, durable goods, consumer sentiment and the Fed’s preferred PCE inflation measure.

Locally we’re definitely winding down, with tomorrow’s release of the RBA minutes the only data release of note this week.

Sydney Airport ((SYD)) releases monthly traffic stats today and Metcash ((MTS)) goes ex-dividend tomorrow.

The ASX will close at 2.10pm on Friday.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
AWC	Alumina Ltd	Upgrade to Accumulate from Hold	Ord Minnett
CSL	CSL	Upgrade to Buy from Neutral	Citi
CTD	Corporate Travel Management	Upgrade to Outperform from Neutral	Macquarie
JBH	JB Hi-Fi	Upgrade to Buy from Hold	Ord Minnett
PDN	Paladin Energy	Outperform	Macquarie
SGP	Stockland	Downgrade to Underperform from Neutral	Macquarie
STO	Santos	Upgrade to Outperform from Neutral	Macquarie
WES	Wesfarmers	Upgrade to Accumulate from Hold	Ord Minnett

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

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