Wall St relief-rally continues, Whitehaven Coal, AGL, Qube on watch today: ASX to rise

Market Reports

by Melissa Darmawan

Global major indexes capped off the week on a positive note, as continued geopolitical tensions was offset by optimism amid the world’s largest economies. Investors kept a close eye on a meeting between President Biden and Chinese counterpart Xi Jinping after Biden warned China that the world’s second largest economy would face consequences if aid was given to Russia. Oil rose back above US$100 per barrel.

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Good morning. Talk about talks and tech. I’m Melissa Darmawan for Finance News. This is your market outlook.

US stocks best run since November 2020

The Australian sharemarket is set to rise after closing the week on a positive note.

Wall St notched its best week since November 2020 as technology stocks outperformed. Stocks rallied for a fourth straight day amid persistent economic risks from the war in Ukraine. President Xi Jinping told President Biden that a war in Ukraine was not what they wanted to see while the US warned China of serious consequences if they lend a hand to Russia.

To cap off another volatile week, crude oil consolidated at US$104 mark after a weekly swing of more than $14 as traders comb through the IEA’s 10-point plan to reduce oil demand. Meanwhile, lifting investor sentiment was progress on Russia’s ability to make payments on its debt in the greenback after Moscow gave the cold shoulder on reports of progress in Ukraine peace talks.

However, traders found some comfort when the Fed hiked interest rates in line with market expectations. The US officially moved from monetary easing to monetary tightening, raising interest rates by 25 basis points to counter inflation. The Fed’s focus to fight inflation sparked the relief rally, giving markets some certainty.

With the relief rally, the question lies “are markets getting ahead of themselves?”

Uncertainty brings volatility

There's still a lot of uncertainty. We don't know how many rate hikes that could unfold in the next six meetings, we don’t know by how much, we don't know where oil prices are going to be by year-end, and where inflation is going to land.

So as markets look to make heads or tails of that, volatility is still on the cards as what comes with uncertainty is volatility amid the upcoming meetings this year. Though one thing we are clear here is that we are dealing with a data-dependent bank. The Fed is going to evaluate things as the data comes, taking an agile approach if I might say versus setting things in stone.

Investors now eye for signs of economic weakness

As the Fed monitors figures around economic growth, investors are watching closely for signs of weakness in the economy. Why? As the Fed continues to raise rates, households and businesses are going to have to cope with higher input costs, like energy. New data points on the fabric of these moving parts, could change the colour of the outlook and might prompt some large moves in the market.

So given that the Fed has forecast a slowdown in growth, inflation to rise, and the unemployment rate to remain steady for the year, why did tech shares outperform?

What does history tell us about tech?

Let’s look to history to help us. According to Strategas Securities, on an average annualized basis, the S&P 500 saw technology shares outperform by 20 per cent, followed by real estate and energy up 12 per cent, then health care, and utilities in times when interest rates were rising.

If it’s got you puzzled, you’re not the only one. Usually tech shares are sensitive to rising rates when one does the calculation on expected future earnings using a discount cash flow method.

To bring some colour, I’m going to use the example of Apple and Microsoft being behemoths. They happen to have large cash holdings sitting on their balance sheets, with the latest example of that being Microsoft, who are set to buy Activision Blizzard using cash, no debt for a deal worth US$70 billion.

So these companies are poised to earn interest on their cash, they tend to have less debt financing and sell services without the need to finance over a long term. Imagine buying AirPods or a new iPhone or a software subscription - you can buy it outright in cash, put it on credit and pay it off, or just debit the monthly subscription fee from a card.

Broadly speaking, in a slowing economy, investors are going to look for growth, and where are they going to look for them? Technology shares could be one of them.

Across the globe, we saw tech shares put in an impressive rally last week. Block (ASX:SQ1) rose 15 per cent over the week, as the second best performing stock.

Australia bans aluminium ores to Russia

Meanwhile, locally the federal government has banned the export of alumina and aluminium ores to Russia. The Australian government said yesterday that the ban on exports, including bauxite will limit Russia's capacity to produce aluminium, which is used in industries including automotive, aerospace, packaging, machinery and construction.

Aluminium is also a critical input into weapons and Australia supplies nearly 20 per cent of Russia's alumina. Prime Minister Scott Morrison told a media conference that "Russia must pay a very high price for its brutality. It must pay that price economically,"

The move comes after Rio Tinto (ASX:RIO) unveiled its plans to exit out of business dealings with Russia this month.

As a country, we are set to donate at least 70,000 metric tons of thermal coal to support Ukraine's energy security. Whitehaven Coal (ASX:WHC) has arranged shipment, with Australia footing the bill for the coal and delivery to the destination port.

Figures around the globe

At the closing bell, the Dow Jones gained 0.8 per cent to 34,755, the S&P 500 added 1.2 per cent to 4,463 while the Nasdaq jumped 2.1 per cent at 13,894.

Across the S&P 500 sectors, a broad rally with tech leading the charge, up 2.2 per cent followed by consumer discretionary, up there with tech at 2.2 per cent also. A very risk-on feel with utilities as the only laggard, down 0.9 per cent.

The yield on the 10-year treasury note fell by 4 points to near 2.15 per cent, over the week it rose by 16 points, gold fell on a weaker greenback.

Across the Atlantic, European markets closed higher as Russia averts its sovereign default for now. Paris added 0.1 per cent, Frankfurt closed 0.2 per cent higher and London’s FTSE gained 0.3 per cent amid Ted Baker skyrocketed over 17 per cent after US private equity firm Sycamore Partners said it is in the early stages of making a potential takeover.

On the London Stock Exchange, Rio gained 0.5 per cent, BP fell 2.1 per cent and Shell lost 1.2 per cent.

Asian markets closed mixed. Tokyo’s Nikkei gained 0.7 per cent, Hong Kong’s Hang Seng lost 0.4 per cent while China’s Shanghai Composite added 1.1 per cent.

On Friday, the Australian sharemarket closed 0.6 per cent higher at 7,294, over the week, the index jumped 3.3 per cent, its best performance since February last year, and is down 2 per cent so far for the year.

It was the third straight day of gains for the ASX with the tech sector doing the heavy lifting, up 7.8 per cent for the week with Afterpay owner Block (ASX:SQ1) surging more than 7 per cent on Friday. Energy stocks saw a rebound on Thursday amid the International Energy Agency, saying that 3 million barrels per day of Russian oil is set to leave a hole for global markets.

SPI futures

Taking all of this into the equation, the SPI futures are pointing to a 0.8 per cent gain.

What to keep an eye out for

The title for the best performer has rotated between energy and tech last week. So keep an eye out for tech shares today to see if they will take the crown from energy.

Amid the news around the help to Ukraine, keep an eye out for Whitehaven Coal (ASX:WHC), AGL Energy (ASX:AGL) after the giant received the green light from the state government to build a 500 megawatt battery on a coal-fired plant in NSW, three times the size of Tesla’s battery in South Australia, and Qube (ASX:QUB) amid a $270 million block trade sale.

As for any meaningful catalyst, it’s quiet on the data front but we have a raft of central bankers around the globe set to speak. So we will be talking about talks this week!

Ex-dividend

Adairs (ASX:ADH) is paying 8 cents fully franked
Apiam Animal Health (ASX:AHX) is paying 1.2 cents fully franked
K & S Corporation (ASX:KSC) is paying 4.5 cents fully franked
NRW Holdings (ASX:NWH) is paying 5.5 cents fully franked
Paragon Care (ASX:PGC) is paying 0.6 cents fully franked

Dividend-pay

There are two companies set to pay eligible shareholders today

Carlton Investments (ASX:CIN)
Hansen Technologies (ASX:HSN)

Commodities

Iron ore has added 3 per cent to US$151.35. Its futures point to a 2.2 per cent gain.

Gold has dropped $14.30 or 0.7 per cent to US$1,934 an ounce. Silver is down $0.53 or 2.1 per cent to US$25.09 an ounce.

Oil has gained $1.72 or 1.7 per cent to US$104.70 a barrel

Currencies

One Australian Dollar at 7:40 AM has strengthened from Friday amid strong commodity prices, buying 74.10 US cents (Fri: 73.79 US cents), 56.33 Pence Sterling, 88.24 Yen and 67.13 Euro cents.

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