4 Sep 2020
Profit taking sees sharp Tech sector falls drive markets lower
Markets
- Local and global equity markets took a sharp u-turn lower overnight and today, pushing the market into the red for the week as investors took significant profits from an overbought technology sector.
- In local stock news, Boral reported a full year loss of $1.14 billion after it wrote down the value of its US assets. No final dividend declared. Shares rose on the announcement as underlying numbers came in better than expected.
- Harvey Norman lifted net profit by almost 20% to $481 million on the back of a consumer splurge in home electronics and furniture. Shares fell as market expectations were not met.
- IOOF has announced it will buy NAB’s wealth unit MLC for $1.44 billion. A big acquisition considering IOOF’s market cap isn’t much bigger than that and IOOF is still trying to integrate ANZ’s wealth unit. IOOF announced a large and very dilutive equity raising to fund the deal. The deal will double IOOF’s total number of clients to 2.2 million and more than triple its advisers.
- QBE lost its CEO following an investigation into workplace communications. He leaves after just 3 years in the job at a time when the business simplification and turnaround he was tasked with was just gaining momentum.
- The Aussie dollar took a breather this week as a larger than expected 2nd quarter economic contraction, a shrinking trade surplus, and rising volatility in markets put downward pressure on the currency.
Economics
- The RBA left the cash rate at a record low of 0.25% and expanded its support for the banking sector by increasing the term funding facility to around $200 billion, effectively green lighting the banks to lower borrowing rates and increase lending activities.
- An Australian recession was confirmed as economic growth contracted for a 2nd consecutive quarter, rubber stamping Australia’s first recession in 29 years. Economic growth contracted by 7% in June, the largest quarterly fall on record, whilst the household saving ratio spiked to almost 20%.
- Australian company profits rose by more than 17% in the 2nd quarter, with businesses heavily supported by government payments. Inventories fell by 3% in the quarter which will hurt economic growth.
- Total credit to the Australian private sector contracted in July as businesses continue to repay liquidity lines provided in March/April. Demand for new loans are also very low due to the uncertain economic outlook.
- Australian housing credit rose by 0.1% in July, with annual growth remaining steady at 3.1%. Owner occupier credit rose by 0.4% in July with annual growth running at 5.4%, whilst investor housing credit fell in the month.
- Australian wages and salaries fell by 3.3% in the 2nd quarter whilst personal credit growth remained weak. The latter reflects the surge in alternative sources of cash available via buy-now-pay-later operators like Afterpay.
- Building approvals in Australia rose by 12% in July and are 6.3% higher over the year. Private house approvals rose by 8.5% whilst apartment approvals were up more than 22% in July. Dwelling prices fell by 0.5% across the 8 capital cities in August, resulting in the annual growth easing to 6.3%.
- American consumers, who account for more than 70% of the US economy, increased their spending more than expected in July, but the savings rate remained very elevated and well above pre-virus levels.
- US factory activity expanded for the 3rd straight month in August with the highest reading since November 2018. The figures followed encouraging manufacturing surveys from China and Europe.
- A gauge of China’s economy activity showed the services sector as its strongest level since 2018 while expansion of the manufacturing sector remained intact.
Politics
- PM Abe of Japan has announced he will be stepping down due to ill health. He has enjoyed wide support across Japan and is seen as market and economic friendly given his mix of stable government and aggressive monetary and fiscal stimulus.
- A top aide to US President Trump said the president is willing to sign a US$1.3 trillion coronavirus relief bill, four weeks after emergency unemployment benefits expired for millions of Americans.
- Victorian Premier Daniel Andrews confirmed he is preparing a plan to allow people and business more freedom in the state as infections drop. The move comes following persistent pressure from almost everywhere, as concerns rose that there is no plan or way out of stage 4 lockdown, considering the extensions he sought to emergency powers. Melbourne residents remain under curfew and travel restrictions until September 13. Enough is enough.
- On the virus testing, treatment, and vaccine front, we saw positive news across all three areas this week. A US company announced it had received FDA approval for a new testing kit, very much like a pregnancy test, which is 97.1% accurate in detecting the virus and more than 98% accurate in confirming no virus. Dexamethasone, a steroid which assists airway flow, gained more prominence as an effective treatment, whilst Australian Professor Barody continued to push Ivermectin as an effective inhibitor of the virus. More phase 3 vaccine trials begun whilst governments and vaccine producers moved to ensure production facilities are ready to go.
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