14 May 2021
Investor sentiment soured by plethora of US issues
Markets
- Equity markets fell this week as markets couldn’t handle the confluence of bad news with a weak US jobs number, higher US inflation, US fuel shortages, and escalating tensions in the Middle East.
- In local stock news, casino and resorts operator Star Entertainment Group has proposed an all-stock buyout of larger rival Crown Resorts in a $9 billion tie-up, trumping an earlier bid from US private equity group Blackstone at $8.4 billion in an all-cash deal. The sharks smell blood.
- Macquarie Group reported a strong 10% rise in full-year profit with net profit after tax coming in at $3.01 billion. Shareholders will receive a significantly higher final dividend versus the same period last year.
- A2M shares fell sharply after revealing sales of infant formula to China were lower than expected. The daigou channel has been soft since our borders were shut, which is well known, however sales from stores in China have been softening at an escalating pace due to Chinese government subsidies on local equivalent products and potential “strong-arming” by the government to avoid Australian products (even though A2M is a NZ company).
- Fund manager Pendal Group will double it addressable market in the US with the acquisition of TSW, a value styled investment manager, for $413 million. The acquisition will see Pendal’s funds under management (FUM) increase by almost 30%, with the company also reporting an 18% uptick in FUM over the past 12 months.
- Boral urged shareholders to reject an opportunistic takeover offer from the Stokes’ family controlled Seven Group Holdings. Cheekily, the offer price was at a nil premium to the current trading price. Seven Group has been increasing its stake in Boral over the past 14 months.
- The iron ore price soared above US$200 a tonne as Chinese steel-makers continue their strong demand levels in light of a rapidly improving Chinese economy and as Brazilian iron ore miners continued to struggle with Covid-19.
Economics
- Australian retail trade rose by 1.3% in March, whilst the volume of trade fell in the March quarter as households shifted towards spending on services. For the month of March, spending rose in department stores, clothing & footwear, other retailing and eating out, whilst spending on food was lower and household goods were broadly flat.
- The NAB business survey showed a lift in both business conditions and confidence in April with both measures reaching new record levels. Within the business conditions reading, all three sub-components reached record highs in the month, again validating the government’s decision to end JobKeeper.
- US jobs growth unexpectedly slowed in April with the unemployment rate actually rising in the month. Only 266,000 jobs were added versus expectations closer to 1,000,000. There are currently 8 million unemployed Americans and almost as many job openings. When you pay people to stay at home, they’re going to stay at home.
- US core consumer prices showed the biggest rise in nearly 12 years in April printing a 3% annualised pace on the same time last year, with supply shortages raising the cost of many goods and services. Large fiscal deficits work in emergency times, but outside of emergencies they simply lead to inflation, either temporary or permanent. Supply-side reform is hard but required, whilst throwing money at people is easy but doesn’t fix anything. Political motivations are key.
- China’s export growth unexpectedly accelerated in April whilst data showed that German companies increased their exports for the 11th month in row in March, with growth coming in at twice the rate expected.
- China’s factory prices rose at the fastest rate in 3.5 years in April as the economy gathers momentum after a strong first quarter of growth. Economists have downplayed the risks to inflation.
Politics
- Treasurer Josh Frydenberg handed down the Coalition’s 2021 budget with almost everyone getting a prize, which likely sets up PM Scott Morrison for another term. The budget measures include the deficit reaching $161 billion this year with deficits projected over the next 10 years and the federal debt to hit almost $1 trillion over the next couple of years. The government is clearly hoping that the stimulus spurs a mini-boom of sorts with the economic growth to eat into those deficits and debt pile. The only surprise from the budget was an extension of the tax cuts from last year.
- German Chancellor Angela Merkel has made it clear she does not support a US proposal to waive patent protection for Covid vaccines…the Europeans being less socialist than the Americans…who would’ve thought! No patent protection, means no research & development from healthcare companies. It’s that simple. Globally, more than 1.2 billion vaccine shots have been administered, but the daily pace of vaccinating is slowing particularly in the US where the mixed messaging from the government and the CDC have resulted in a rising level of distrust. The Australian government confirmed that our borders will not open until 2022.
- The US saw a shortage in fuel with fuel rationing in place in parts of the country following a cyberattack on the Colonial Pipeline which transports nearly half of the East Coast’s fuel supplies. Apparently, the attack came from Eastern Europe / Russia, which is coincidentally close enough to the Biden administrations’ ramping up pressure (sanctions and rhetoric) on Russia. The Colonial Pipeline company eventually paid the $5 million ransom (in crypto of course) to release their systems after their pleas for government help fell on deaf ears.
- Israel and Palestine edged closer to all-out war following escalating conflict over disputed and competing claims on land and historical/religious sites. The Palestinians have been emboldened by the Biden administrations’ pro-Palestine stance (less sanctions and more foreign aid) as well as the lowering of sanctions on Iran who support the Palestinians in their conflict with Israel. The fleeting Middle East peace we had for the last 6-12 months looks likely a thing of the past.
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