Bank stocks unravel; World in race to rise rates; AGL's new largest shareholder: What we learned this week
Federal Reserve gives hawkish traders an unpleasant surprise.
RBA’s patience wears thin
Governor Philip Lowe is on the move. After declaring in February that “the Board is prepared to be patient” for evidence of inflation and wages, Lowe has seen enough. The RBA raised the cash rate by 0.25% on Tuesday, bringing it to 0.35%. Why? In his words: “given both the progress towards full employment and the evidence on prices and wages, some withdrawal of the extraordinary monetary support provided through the pandemic is appropriate.”
Fed shows traders who is boss
Hawkish bond traders were wrongfooted on Wednesday after the US Federal Reserve raised rates by 0.5%. Before the meeting, markets had all but priced in a 0.75% hike. Powell struck a mostly hawkish tone, reminding investors that even though economic activity edged down in the first quarter, inflation remains elevated at 8.5% in March. Markets jumped in response on Wednesday before collapsing the next day as the Nasdaq notched its biggest fall in two years.
Earnings are up but share price is down?
ANZ, NAB and Macquarie Bank ended down this week despite reporting increased profits. All three banks fell between 0.5% and 8.5%. ANZ’s cash profits fell 5% in the half year versus the previous period. Cash profits for NAB increased 4.1% to $3.48 billion. Macquarie Bank reported a 56% increase in net profit to $4.7 billion for fiscal 2022, but investors dumped shares amid a pessimistic outlook. NAB edged out ANZ’s dividend payout of 72 cents a share for the half, delivering shareholders 73 cents per share.
Mike Cannonball-Brookes delivers a blow to AGL’s plans
Atlassian founder and tech billionaire unveiled an 11.3% stake in AGL Energy this week and plans to use it to block management’s strategy to demerge its coal assets. He called the plans “flawed”, explaining they would do little to cut emissions and leave spun off coal-fired assets stranded. The move opens a new front in Cannon-Brookes’ public campaign to change how AGL Energy responds to climate change and the energy transition, following his rebuffed takeover bids.
Round one: Woolworths v inflation
Woolworths chief executive, Brad Banducci acknowledged higher prices on Tuesday and promised Australians that the company is working hard to make sure that customers ‘Get Their Woolies Worth.’ Average prices increased by 2.7% in comparison to the year prior. Banducci’s arsenal includes the Low-Price program, Woolworths Own Brands, Specials and continued enhancements to Everyday Rewards. Australia’s largest supermarket reported an 9.7% increase in third quarter sales due to rising prices and the return to Covid-19 related shopping behaviour.
Kogan continues to slide
Online retailer and former champion of the pandemic economy Kogan is still feeling the after effects of the virus. Kogan reported an $11.9 million loss after tax when it reported earnings last Friday. Both Kogan’s gross profit and gross sales are down for the half year coming in at 11.2% and 3.8% respectively. Since reporting, Kogan shares have dipped a dramatic 21%. The online retailer blamed covid-19 impacts adding to operating costs, in particular logistics. Selling and distribution expense as well as warehouse expenses increased during this half year by 25.7% and 8.44% respectively.
Musk's a-knockin’ for more money
The world’s richest man has reportedly been attempting to find other ways to finance his takeover of social media network Twitter. Tesla CEO Elon Musk had originally sold $8.5bn of stock in a bid to drum up cash for the bumper purchase, but it’s now thought he is looking to a series of investment banks and hedge funds to help him reduce the $21 billion cash contribution he originally committed to fund the deal. In a nutshell, that means loans.
Volatility reigns: Market recap
Australian shares ended the week lower in volatile trading weighed by big losses in the US as investors worried rapid central bank rate hikes will slow economic growth.
“It's all about inflation and interest rates this week,” says Jun Bei Liu, portfolio manager at Tribeca Investment Partners.
The benchmark S&P/ASX 200 fell sharply at the open on Friday, declining a full 2.2% by close. It plummeted 3.09% for the week with Australian REIT’s declining furthest as the interest rate sensitive sector was slammed by the first jump in the cash rate since 2010, down 8.18% by Friday close.
All sectors ended the week down. The heavyweight materials and financials sectors were down over the week 3.14% and 2.49%, respectively.
Markets tumbled around the world this week as a series of rate hikes from the Reserve Bank and its colleagues in the US and UK raised fears central banks would kill growth and markets in their campaign against inflation, says Aaron Binsted, a portfolio manager at Lazard.
“The Bank of England recently said that inflation in the UK could get as high as 11%, at the same time when they expect zero economic growth, and also potential job losses in 2023 and 2024,” says Binsted.
“What the BoE is now putting forward as a scenario is the definition of stagflation.”
Coles, Woolworths and Wesfarmers were among ASX’s top 20 gainers, on Friday increasing 1%, 0.03% and %,0.3% respectively.
Australian shares staged a brief relief rally on Thursday in line with Wall Street as US investors cheered Federal Reserve Chairman Jerome Powell ruling out a 0.75% rate hike.
Shares collapsed 24 hours later, as the implications of a hawkish tightening cycle sunk in, says Binsted.
“While you know there may not be a 75-basis point increase in a particular meeting, we're looking at really significant interest rate rises through a whole year. Which pulled down lots of interest rate sensitive sectors and stocks which include high growth,” says Binsted.
Technology stocks sold off sharply this week with Xero falling 10.15% over the week.
Liu explains a high interest rate environment is a challenge for growth companies as the discount rate they depend on is so highly correlated to interest rates.
“When that interest rate goes up, the discount rate goes higher, which means the valuation for those growth companies goes lower. And that's the challenge.”
REA Group fell 8.2% on Fridays open after delivering disappointing earnings in premarket with net profit margins down 18.66%.
Blue chip movers
- Magellan Financial Group ↑ 5.8%
- Telstra ↓ 1.7%.
- AGL ↓ 3.8%.
- Supermarkets: Woolworths ↓ 0.9% / Coles ↓ 0.2%.
- Resources: Rio Tinto ↓ 3.2% / BHP ↓ 2.5% / Fortescue metals ↓ 3.7%.
- Big Banks: NAB ↓ 3.1% / Westpac ↓ 0.2% / CBA ↓ 1.4%/ ANZ ↓ 2%.
What we’re watching next week
- Monday: Westpac earnings
- Tuesday: Pendal earnings
- Wednesday: CSR earnings, Graincorp earnings
- Thursday: Xero earnings, ABS release Weekly Payroll Jobs and Wages in Australia
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Additional reporting from Ollie Smith, editor, Mornignstar UK.