Australian market expected to outperform as inflation concerns turn to earnings revisions

Market Reports

by Tim McGowen

US equities were mostly lower in Monday trading following last weeks sharp rally when stocks snapped a big three-week losing streak.

At the closing bell, the Dow Jones fell 0.2 per cent to 31,438, the S&P 500 lost 0.3 per cent to 3,900 and the Nasdaq closed 0.7 per cent lower at 11,525.

Following last week's rally, today's weakness lacked any meaningful directional drivers. Path of least resistance has recently been higher on oversold conditions and contrarian buy signals from depressed sentiment and positioning indicators. Also seems to be some renewed traction surrounding a peak inflation narrative underpinned by some softening in commodities and summer discounting on tap from major retailers.

Overnight tech and consumer names dragged stocks lower overnight with best performing stocks coming from lithium, cannabis and energy companies.

The energy sector was a notable gainer as the ongoing G7 meeting is likely to lead to agreement to impose caps on Russian Oil according to the NY Times.

The caps would limit how much money Russia could earn from each barrel of oil sold on the global market, while ensuring Russian oil continues to flow to consumers worldwide.

While implementation still unclear, the Financial Times said Europe would limit the availability of shipping and insurance services unless price ceiling was observed by the oil importer.

So what does the global economic turmoil mean for the Australian equity market?

Well an interesting note out by T Rowe Price puts Australia into perspective :

T Rowe Price believes that we are only in the early stages of a global earnings downgrade cycle, which is expected to intensify as recession fears increase. As 2022 progresses, the market will come to worry more about slowing growth than about inflation, and thus perceptions of earnings risk will likely increase.

Australia’s earnings revision ratio has so far held up much better than elsewhere thanks to its higher market weights for energy and commodities. Still positive 3-month earnings revisions have largely been driven by the resources sector, by miners, oil and gas.

As global activity slows, earnings revisions for Australia are also expected to turn negative, as cyclical areas like consumer discretionary and media come under greater pressure in the second half of 2022.

However, as a ‘value’ market with roughly 50% of market cap in value sectors like banks, miners and energy, Australia may continue to show some outperformance in relative terms, as earnings revisions deteriorate at an even faster pace in other markets.

From a commodity perspective & while the market looks at Russia the global slowdown in 2023 may be unusual in that Australia’s key commodity prices may remain relatively well supported. The disruption caused by the west’s sanctions on Russia are expected to intensify as Europe strives to phase out purchases of Russian oil and gas by year end. With OPEC so far refusing to increase output quotas, high energy prices, including coal, may persist into 2023.

And China is yet to downgrade its 5.5% growth target for 2022, in which case it may double down on fiscal stimulus via infrastructure spending after the omicron wave has ended, aiming for a rapid rebound in economic activity in 2H.

In that case, we might expect the price of iron ore – the single most important commodity price for Australia’s terms of trade – to remain firm.

Commodities

Iron ore has gained 4.0 per cent to US$119.60. Its futures point to a 2.3 per cent gain.

Gold has lost $6.40 or 0.4 per cent to US$1824 an ounce. Silver was up $0.02 or 0.1 per cent to US$21.18 an ounce.

Oil has jumped $2.17 or over 2 per cent to US$109.79 a barrel.

Currencies

One Australian Dollar is buying 69.34 US cents (Mon: 69.44 US cents), 56.53 Pence Sterling, 94.20 Yen and 65.47 Euro cents.

Australian shares are set to open slightly lower as tech stocks dragged Wall Street down and the G7 pondered a cap on Russian oil prices and a ban on gold imports.

The SPI futures are pointing to a flat start.


Figures around the globe

At the closing bell, the Dow Jones fell 0.2 per cent to 31,438, the S&P 500 lost 0.3 per cent to 3,900 and the Nasdaq closed 0.7 per cent lower at 11,525.

Across the Atlantic, European markets closed mixed. Paris lost 0.4 per cent, Frankfurt rose 0.5 per cent, while London’s FTSE gained 0.7 per cent.

Asian markets closed higher, Tokyo’s Nikkei gained 1.4 per cent, Hong Kong’s Hang Seng jumped 2.4 per cent while China’s Shanghai Composite added 0.9 per cent.

Yesterday, the Australian sharemarket gained 1.9 per cent to 6706.

Dividend-pay

There are two companies set to pay eligible shareholders today

Champion Iron (ASX:CIA)
GQG Partners Inc (ASX:GQG) 

IPO

There is one company set to make its debut on the ASX today. Keep an eye out for Bindi Metals (ASX:BIM) after raising $4.8 million at 20 cents per share.

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