28 NOV 2022 – Monday Market Highlights – Transcript

Good Morning it’s Monday the 28th of November, and I’m Will from Milford.

Last week was relatively quiet for markets with a shortened trading week in the US due to the Thanksgiving holiday.

The Reserve bank of New Zealand hiked rates by 0.75% last Wednesday, to take the official cash rate to 4.25% in a widely expected move. The tone of the statement and Q&A that followed was however, a hawkish surprise, with Governor Orr noting that the bank tossed up between a 1% and 75bp hike, while increasing their terminal rate track a whopping 1.4%, from 4.1% to 5.5% in mid-23. The bank has made it clear that they are concerned on the risk of inflation and wage rises becoming entrenched, and want to act aggressively to stamp this out. As noted in the statement and Q&A, spending from both households and businesses remains elevated which needs to reduce for inflation to ease. In addition employment markets remains tight beyond full employment which is leading to wage rises. As a result of these hikes, the RBNZ expects median house prices to fall by 20% by early 2024 in NZ.

In sharp contrast to the RBNZ, RBA Governor Phil Lowe spoke on Tuesday night in a reiteration of his dovish stance. Inflation remains far less of a concern for the RBA, with the view that much is caused by offshore supply side factors that are likely to ease. Lowe again was reluctant to give much colour on potential future rate moves beyond saying that further rises are expected, however the size and timing of these will depend on future data and developments. Perhaps somewhat surprising, was the fact he didn’t highlight a potential need for further tightening in light of the recent strong wage and employment data. The market is pricing a peak of 3.9% late next year, compared to 5.5% in NZ and 5.1% in the US.

The US FOMC released its November minutes on Thursday and concluded that it would “soon be appropriate” to reduce the pace of rate increases, signalling Jerome Powell & Co. are leaning toward downshifting to a 50-bp hike next month. At the same time, officials noted that the peak rate will be higher than previously expected. Some FOMC members said a slower tightening pace would allow them to judge progress on their goals post the sharp rise in rates this year.

Turning to stock news last week, Qantas announced another upgrade to guidance after the last upgrade coming in only October, as global travel continues to rebound strongly. Qantas expect 1st half profit to be between $1.35 and $1.45b, a 12% lift from previous guidance. In addition net debt is now expected to only be 2.3-2.5b at 31 December compared to $3.2-3.4b previously.

Anyone who has travelled recently with Qantas will know the issues they face with delays, exorbitantly priced fares, old planes and understaffing. The question for investors is, is this as good as it gets and if so what brand damage may be being done during this period of poor service, but super profits.

UK bank Virgin Money announced a strong second half profit beat, which saw the stock rise 10% on Tuesday. Profit before tax was 7% ahead of consensus, driven by lower bad debts than the market was expecting. The company also announced an additional 50m pound buyback which was positive, as the market has been concerned in the past around the lack of capital returns.

We also got a couple of equity raisings with Life360 and biotech Polonovo asking investors for fresh capital last week.
Tracking software provider life360 raised $50m at $6.30, a 6.5% discount to the pre raise price. The proposed use of funds was too sure up the balance sheet in the face of a uncertain operating environment.
Polonovo meanwhile raised $30m at $1.90, a 9% discount. PNV was looking to raise cash to support growth offshore, and fund construction of a new manufacturing and R&D facility.
After a quiet period of raising in Australia, investors may be wondering if this is the start of a wave of raises to shore up balance sheets for tougher times ahead, or just opportunistic after a strong market rally in recent weeks.

This week the data is light as we start to quieten down on the approach to Christmas.

In Australia we can expect retail sales and the new monthly CPI series. Neither of these data points are tier 1, however will help build a picture leading into the last RBA meeting of the year. In the US we can expect labour market data, and ISM releases.

AGM season also continues with Link, Sandfire, Ramsay Healthcare and Fisher and Paykel Healthcare

Thanks for listening, enjoy your week.