Crispin Murray: What’s driving the ASX this week?

Here are the main factors driving the ASX this week, according to Pendal’s head of equities CRISPIN MURRAY. Reported by portfolio specialist Chris Adams

• The gravest fears for a material market sell-off look to be over
• Positive first week for ASX reporting season
• Find out about Pendal Focus Australian Share fund
• Register here to join Crispin’s upcoming Beyond the Numbers live webinar

A BOUNCE-BACK in equities accelerated last week as the market gained confidence that the US economy was not entering recession, liquidity remained supportive and the bulk of the Japanese yen carry-trade unwind had played out.

The S&P 500 rose 3.99%, breaking through technical resistance levels to get within 2% of the July high, while the S&P/ASX 300 gained 2.57% and is also within 2% of its highs.

Key US data points indicated the labour market was holding up. Retail sales and Walmart results pointed to a solid consumer and survey data suggested August may be stronger relative to July.

Since a back-track from the Bank of Japan, the yen has stabilised and the Topix has staged a strong recovery. This materially reduces the risk of a negative liquidity spiral.

The VIX (a measure of stock market volatility) has unwound its spike and is back to the levels of late July, which means the forced cutting of positions should have finished.

So, the gravest fears for a material market sell-off look to be over.

With negative seasonal effects and limited new positive news, we expect that the market can now consolidate. It has shown impressive resilience and that should help underpin returns into the year end.

All eyes are on Fed Chair Powell and his Jackson Hole speech this Friday.

In Australia the first major week for results was positive.

Banks, telecom and discretionary stocks are seeing upgrades and the broader read on the economy suggests things are holding up well.

US growth – recession risk reduced, the soft-landing narrative has resumed.

A series of data points, while not strong, highlight the economy is holding up and the payrolls panic is now dissipating.

1. Survey data is supportive — Indicators such as the Evercore ISI Company Survey are ticking higher in August.
2. Solid US retail sales growth — Headline retail sales rose 1.0% month-on-month in July, helped by a weather-related bounce back in auto sales. But even the underlying ex-auto data was solid, growing +0.3% month-on-month and taking the three-month annualised rate back to 4.9%, the highest level since late 2023. The market was relieved there were no signs of renewed weakness and encouraged by the improvement in some of the discretionary sectors such as consumer electronics, hardware and auto. Survey data such as the Evercore ISI Retailers Sales Survey indicate August may be good, with firm back to school sales. Decelerating income growth remains the risk to consumption.
3. Strong Walmart sales — Walmart, along with Amazon, is the proxy for US retail sales at ~10% of market. It reported 4.2% sales growth, which is ~150bps above the US average. This is driven by its E-com business, but also signals disinflation easing. General merchandise saw the first positive sales growth since Q4 2021. It is interesting to note that Walmart represents 15% of total US retail sales growth, while Costco (with 3% market share) is capturing 6% of total growth and Amazon is getting 45% of the growth.
4. Initial jobless claims eased off — The market was focused on this as a read on non-farm payroll data, given the latter prompted recent volatility. A longer term look at continuing claims, which are correlated to job losses, also suggests we are not at recessionary levels.

We did see some weakness in housing starts and also in the homebuilder survey, despite the recent move lower in US mortgage rates.

This is an interest rate-sensitive sector and will motivate the Fed to cut rates.

Inflation gives them scope to do so:

• July’s headline consumer price index (CPI) rose +0.2% month-on-month and is at 2.9% year-on-year. Core CPI is up +0.2% for the month and 3.2% for the year.
• “Super-core” inflation is running below the 2% target on a three-month annualised basis.

This suggests inflation is not a barrier for rate cuts, that there is no need to hold rates in the 5% range, and that we should see 75-100bp of cuts by the end of the 2024.

On the political front, the RCP Betting Average data indicates that Kamala Harris is currently the clear favourite to win this year’s Presidential election. Her win probability is sitting at ~53% versus ~46% for Donald Trump.

We are beginning to see some indication of policy from Harris. The most relevant for our market was the potential for first time home buyer support for new homes, which would be positive for James Hardie.

Australia

We saw more strong employment data, with employment rising 58k month-on-month versus market expectations of about 10k. Full time employment rose 62k.

Both the three and six-month rise in employment is accelerating, which highlights that the economy is fine.

Hours worked also rose, up 0.4% month-on-month, although there were material reductions to prior months, which should help productivity measures look better.

Unemployment did rise, up 0.1% to 4.2%. This is due to labour participation rising to record levels of 67.1%.

The bottom line is the economy remains in good shape, and the consumer should hold up while the labour market remains as it is.

We also saw the RBA talking hawkishly about the outlook for inflation and clearly signalling rates won’t be cut until next year. The market is expecting the first cut in February.

Markets

The rally in markets has broken the technical downtrend and now looks likely to test the highs, but will probably consolidate in a trading band through to October, in our view.

Technical indicators such as the stock advance/decline ratio show some good strength, albeit now as positive as we saw at the market low in October last year.

The proportion of stocks above their 200-day moving averages also suggests the market is unlikely to break down.

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Bonds are hovering around the support levels of 3.80% (for US 10-year treasuries). We would probably need to see more weak data for them to go lower from here.

All this suggests we are back to the best of both worlds – inflation low enough to cut rates combined with a slowing economy that is avoiding recession.

ASX reporting season

Australia also had a strong week, benefiting from the broader global market bounce and a good start to reporting season.

The first big week of results season was a clear positive for the market:

• Large index stocks are all doing well. Commonwealth Bank saw positive earnings revisions on better margins and lower bad debts. Telstra also saw positive revisions. CSL was revised down 4%, but this was seen more as them being conservative.
• Stocks exposed to the domestic economy all point to solid back drop. JB Hi-Fi said June and July retail sales were good. Seven Group, a bellwether for industrial demand, was positive on the outlook.
• Popular growth names like Pro Medicus and Car Group were comfortable with their outlooks
• Any negative surprises tended to be limited and generally stock specific. Cochlear and Origin Energy had cost issues, while Seek’s challenges relate to job advertisement volumes, which are more tied to labour turnover than job losses.

M&A activity is providing additional support. Orora received a takeover approach while Sims sold off a business at a good price.

It is worth highlighting the substantial sector rotation between banks and resources.

Another ~7% relative move last week takes calendar year-to-date outperformance of banks versus resources to more than 30%, which is a material move in a historical context.

This reflects domestic economic resilience and better margins, while China remains weak with an uncertain outlook.

Iron ore weakness is weighing on Resources. China’s largest steel maker, Baowu, warned China’s steel industry is facing a crisis more serious than the downturns of 2008 and 2015.

This prompted both Tangshan and Yunan provinces to announce steel production cuts in an attempt to improve margins.

We also continued to see weakness in lithium with a poor auction for material in China leading to talk of stock having to be dumped on the market.

We are approaching levels where we may see supply adjustment.

About Crispin Murray and the Pendal Focus Australian Share Fund

Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and leads one of the largest equities teams in Australia.

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management. 

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