What’s driving ASX stocks this week

Here are the main factors driving the ASX this week according to portfolio manager Brenton Saunders. Reported by portfolio specialist Chris Adams

EQUITY market remain volatile and driven by macro factors.

Last week we saw a +4.8% rebound in the S&P 500 and +5.2% in the NASDAQ. The S&P/ASX 300 fell 1.2%, but may catch up this week after strong moves in the US on Friday.

Markets remain intent on buying any suggestion that the rate of rate increases will slow, despite limited evidence.

Nevertheless, comments from Minneapolis fed president Neel Kashkari were taken as dovish. The UK’s U-turn on economic policy and intervention to support the Japanese yen also helped buoy sentiment.

Global equity market strength came despite bond yields and the US dollar moving higher.

Major support levels in the S&P 500 continue to hold. Along with heavily bearish market positioning this may provide a base for further short-term recovery in equities.

US economic and policy

US building permits came in at 1.4% higher month-on-month, versus consensus expectations of -0.8%. But overall trends in the housing market remain weak, with mortgage rates topping 7%.

Kashkari – a voting member of the Federal Open Market Committee which determines the direction of US monetary policy – highlighted signs of a slowing global economy and a possible peaking in headline inflation.

But he also noted there was no evidence that core and services inflation had peaked. This is as dovish a statement as the Fed dares venture at this point. The inflation landscape (as revealed in Evercore surveys) remains confusing.

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Sectoral surveys of rents, wage expectations, freight, retail pricing power and commodities suggest inflation may be rolling over.

But this is not reflected in core inflation, which remains supported by tight labour markets.

Bank deposits continue to decline as consumers dip into savings to underpin spending and pay mortgages.

Business health is declining, but still strong, according to company surveys. Although demand remains stubbornly strong, company CFOs expectations around labour costs are declining.

China economics and policy

Confirmation of Xi Jinping’s third term as China’s leader was not surprising, but the degree of his apparent control is greater than most expected.   

The new standing committee of the Communist party’s politburo – the key decision-making body – will be only seven members, all of whom are seen as Xi loyalists. There was some hope of broader factional representation.

Most commentators suggest this is a worst-case outcome in terms of concentration of power. It’s likely to embolden Xi to continue pursuing his regional and global geopolitical ambitions.

A change to the constitution officially ruled out Taiwanese independence.

Details of a five-year plan will be forthcoming. But it appears the main aim will be to replace the “successfully achieved” Moderately Prosperous Society with a Modern Socialist Society.

This is seen as part of China’s ambitions as a technology powerhouse and ability to project power and influence.

This may suggest the economy remains on a relatively austere pathway by historical standards. Stimulus could be used in a more surgical manner to achieve economic goals where needed.

The potential outcome is the property market remains muted. This is a headwind to economic growth and demand for steel-making materials beyond the short-term.

UK economic and policy

Political turmoil continued in the UK as Prime Minister Liz Truss resigned. Chancellor Jeremy Hunt reversed course on the Truss government’s policy of unfunded tax cuts, which helped stabilise the UK bond market and the pound sterling.

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The Bank of England retains a hawkish mindset given high inflation, despite intervening in the bond market to help liquidity for UK pension funds. The latter issue continues to lurk.

Australia economic and policy

The monthly unemployment and participation rates remained essentially unchanged at 3.5% and 66.6% respectively. This week’s CPI data will help inform the size of the RBA’s next hike.

The implied peak rate for Australia is now back to 4.3%, having fallen to 3.2% in early October on the RBA’s surprise 50bp hike.

US Q3 earnings

About 20% of the S&P 500 market cap reported last week. Earnings have largely been in line with expectation, though EPS beats are running at 39% versus a 48% historical average.

Some weakness in consumer appliances and in companies with European exposure is evident. This suggests a downturn may be on the way.

Netflix bucked the trend with better-than-forecast new subscription growth.

Another 46% of the market will report this week.

Markets

European and North American gas prices continued to decline given a mild start to the winter and high levels of storage.

The market remains watchful of the weather. This will determine the degree of re-stocking needed next year, which may see market tighten again.

US equity investors are at extreme levels of shorting – back to similar numbers prior to the June/July rally.

Macro positioning is also fairly aligned with ongoing trends of higher rates, stronger USD, weaker markets and rising inflation.

Any surprise to these “negative” trends will likely result in a short-covering rally in risk assets.

The S&P/ASX 300 fell 1.2% last week and is down 7.2% for 2022. It underperformed US markets last week due to weakness in large-cap miners and some industrial cyclicals.

Lithium stocks continue to run hard.

About Jim Taylor and Pendal Focus Australian Share Fund

Drawing on more than 25 years of experience investing in top-performing Australian companies and a background in accounting, Jim manages our Long/Short Fund and co-manages our Imputation Fund. He is a Chartered Accountant with membership of the Australian Institute of Chartered Accountants.

Pendal Focus Australian Share Fund is managed by Crispin Murray. The fund has beaten its benchmark in 14 years of its 18-year history (after fees), across a range of market conditions. Find out more about Pendal Focus Australian Share Fund here.

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

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