S&P 500 on cusp of bear market, Credit Suisse's view on A2 Milk, APA Group on watch: ASX to dip

Market Reports

by Melissa Darmawan

Wall St closed lower as global indexes posted declines on mounting recession concerns. Shares in China bucked the trend as hopes continue to grow on the easing of lockdown restrictions in June. 

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Good morning. I’m Melissa Darmawan for Finance News. This is your market outlook.

The Australian sharemarket is set to open soft today after a flighty session on Wall St.

S&P 500 on the cusp of a bear market

US stocks fell, closing in the middle of today’s trading range after shares moved through gains and losses. Investors traded with caution amid disappointing results from retailers, concerns about the consumer and rising costs. While concerns mount whether the Fed will be able to effectively raise rates while avoiding a recession.

At the closing bell, the Dow Jones lost 0.8 per cent to 31,253, the S&P 500 fell 0.6 per cent to 3,901 and is on the cusp of a bear market while the Nasdaq closed 0.3 per cent lower to 11,389.

Across the S&P 500 sectors, materials, healthcare, consumer discretionary edged higher by 0.7, 0.2 and 0.1 per cent respectively. Consumer staples was the worst decliner, down 2 per cent, followed by information tech, and industrials by 1 per cent each. The rest closed lower.

As investors sell the greenback, this bodes well for treasuries and gold. Prices rose as the yield on the 10-year treasury note dipped 4 basis points to 2.84 per cent while the safe haven gold is back on the move firmed up by 1.3 per cent as Bitcoin consolidates.

Why the reaction?

Investors are concerned about the health of the economy after several retail giants missed earnings, blaming higher input costs, lower demand as the everyday consumer is starting to watch what they spend. This was a 180 to the retail sales figures we received earlier in the week which showed that consumer spending is still strong despite how high prices are due to inflation.

This was reinforced by several economic prints released during the session. The weekly jobless claims rose to its highest reading since 22 January, sales in the existing housing market cooled for its third straight month due to rising mortgage rates and hot property prices, while the Philadelphia Federal Reserve gauge of manufacturing fell sharply over the month to 2.6 from 17.6 in April. This painted a grey picture for investors.

Secondly, lay-offs are starting to occur with Netflix set to let go of 150 staff. It might not seem a lot for Netflix for a workforce of around 11,000 people, but it’s an indication that the company is tightening their budgets. The streamer is known for their lavish spending and committed to spending US$17 billion on content this year, but you can see that they’re now looking at ways to cut costs. Facebook owner Meta said last week that they’re preparing to cut back staff in its Reality Labs division, which creates the Metaverse.

Are we headed for stagflation?

If other companies take the lead, it’s the missing piece to the technical definition of stagflation. High inflation, slow economic growth and high unemployment.

What does this mean?

Despite the gloomy picture, you will hear from advisers and analysts not to sell in a panic. In times like these, it can present opportunities. If we are close to hitting the bottom of the market, several investment tools like dollar cost averaging, diversifying your portfolio and understanding your time horizon could be useful during these times.

Operation fly formula

Crude prices rallied as the European Union is on the fringe of paying for Russian oil in roubles. Meanwhile, President Joe Biden has launched 'operation fly formula' to address nationwide shortage of baby formula. The Biden administration has authorised flights to go overseas to import baby formula. The Defense Production Act requires suppliers of formula manufacturing to fulfil those orders before other customer orders.

Figures around the globe

European markets closed lower. Paris lost 1.3 per cent, Frankfurt fell 0.9 per cent while London’s FTSE dropped 1.8 per cent.

On the London Stock Exchange, Rio lost 0.5 per cent, BP dropped 2.3 per cent and Shell fell 1.8 per cent.

Asian markets closed mixed, Tokyo’s Nikkei lost 1.9 per cent, Hong Kong’s Hang Seng dropped 2.5 per cent and China’s Shanghai Composite added 0.4 per cent.

Yesterday, the Australian sharemarket closed 1.7 per cent lower at 7,064.

SPI futures

Taking all of this into the equation, the SPI futures are pointing to a 0.1 per cent fall.

What to look out for today

In AGMs, AMP (ASX:AMP), Invocare (ASX:INC), Life360 (ASX:360) are on the docket.

In earnings, Oceania Healthcare (ASX:OCA) is slated to release full year results.

In broker moves, Morgans cut Nufarm (ASX:NUF) to hold with a price target of $6.65 while Jefferies raised Technology One (ASX:TNE) to hold with a price target of $11.

Keep an eye out for ASX listed baby milk formula companies, A2 Milk (ASX:A2M), Synlait (ASX:SM1), Bubs Australia (ASX:BUB).

Credit Suisse rates A2 Milk with a neutral rating and a price target of $5.15. The broker notes that despite the lockdowns in Shanghai, the company has been able to deliver infant formula as an essential product. However, the congestion at major ports hasn’t helped. However if the Biden Administration has put in the Defense Production Act, it could bypass this situation.

In company news, Woodside Petroleum's (ASX:WPL) shareholders voted for a merger with BHP Group's (ASX:BHP) petroleum arm.

We could see some selling pressure with Crown Resorts (ASX:CWN) set to be removed from the ASX 200 by May 25, subject to shareholder and final court approval of the scheme of arrangement whereby the company will be acquired by Blackstone Inc.

APA Group (ASX:APA) is being circled by at least one prospect in hopes to take the company private, according to The Australian.

Block (ASX:SQ2) founder Jack Dorsey told investors the acquisition of Afterpay will help the company create a financial services and retailing platform that combines the company’s original payments services with its consumer financial management “super app”, backed by tools to lift access to bitcoin.

Ex-dividend

There is one company set to trade without the right to its dividend.

Kelly Partners Group (ASX:KPG) is paying 0.363 cents fully franked

Dividend-pay

There are five companies set to pay eligible shareholders today

Cromwell Property Group (ASX:CMW)
Healthco Healthcare and Wellness REIT (ASX:HCW)
HomeCo Daily Needs REIT (ASX:HDN)
Jupiter Mines (ASX:JMS)
Katana Capital (ASX:KAT)

Commodities

Iron ore futures point to a 2.9 per cent gain.

Gold has gained $23.40 or 1.3 per cent to US$1,846 an ounce. Silver was up $0.39 or 1.8 per cent to US$21.93 an ounce.

Oil has added $1.92 or 1.6 per cent to US$111.51 a barrel.

Currencies

One Australian Dollar at 7:00 AM has strengthened since yesterday, buying 70.67 US cents (Thu: 69.57 US cents), 56.58 Pence Sterling, 90.37 Yen and 66.64 Euro cents.

That’s all for the outlook. I’m Melissa Darmawan for Finance News. Have a great day and stay safe.

Disclaimer

The views, opinions or recommendations of the commentators in this presentation are solely those of the author and do not in any way reflect the views, opinions, recommendations, of Sequoia Financial Group Limited ABN 90 091 744 884 and its related bodies corporate (“SEQ”). SEQ makes no representation or warranty with respect to the accuracy, completeness or currency of the content. Commentators may hold positions in stocks mentioned. The content is for educational purposes only and does not constitute financial advice. Independent advice should be obtained from an Australian Financial Services Licensee before making investment decisions. To the extent permitted by law, SEQ excludes all liability for any loss or damage arising in any way including by way of negligence.

Source: Bloomberg, FactSet, IRESS, TradingView, UBS, Bourse Data, Trading Economics, National Association of Realtors, U.S. Department of Labor

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