10 yrs spike, Aussie CPI runs hot, and US tech gets punished

26 October 2023

US

US markets (S&P 550 Index, -1.3%) were down overnight falling to its lowest level since June, as a rebound in interest rates and a ‘weak’ result from Alphabet sparked a market-wide sell-off.

The only one immune was Microsoft after delivering a strong earnings beat. Alphabet’s result did beat however, that was not enough to stop investors from pushing the sell button, due to weak cloud numbers. This saw the stock fall -9.5%, its largest single-day fall since March 2020 (keep in mind the stock is still up +22% year to date, well ahead of the market but underperforming its “magnificent 7” peers). We think this is a clear over-reaction…we are buyers of Alphabet at this level…

US 10-year Treasury yields rebounded back to above 4.9% with volatility likely to persist as traders weigh prospects that borrowing costs will remain elevated, strong economic data pointing to a resilient US economy, and expectations the treasury will increase its bond sales to cover the surging budget deficit.

Meta shares are up +2% in after-hours trade — like Alphabet its revenue and earnings beat market expectations as advertising spending continues to hold up.  Third-quarter revenue came in at $34.15 billion, up +23% from last year, the fastest rate of growth since 2021. Looking ahead Meta expects fourth-quarter revenue to fall between $36.5 billion to $40 billion roughly in line with market expectations of $38.85 billion. We still prefer Alphabet over Meta to gain exposure to online advertising, given the amount of cash burn and lack of optimism we have towards the success of Meta’s Reality Labs division…does anyone really want to be in the metaverse??

Misc > noting PE firm Silver Lake is considering an offer for talent agency Endeavor, valuing it at an EV of ~14bn (founder Ari Emanuel was famously the inspiration behind the character of Ari Gold in Entourage). Comes hot on the heels of the Pinault taking a majority stake in CAA. Endevor shares up +25% on the news. Talent in hot demand…


Australia

The Australian Market (ASX 200 Index) ended the day flat, recovering losses from earlier in the session which was weighed down by hotter-than-expected inflation print for September.

Australia’s headline consumer price index rose +1.2% in the September quarter ahead of the +1.1% increase expected by economists and ahead of the +0.8% increase for the June quarter. In annual terms, core inflation was up +5.4%  against a forecast of 5.3%. While trending in the right direction inflation is still remaining stubborn and a little hot – making a call for a November rate hike more certain by the RBA.

Aussie CPI…

The Aussie Dollar against the greenback has come under severe pressure recently, dropping sharply towards October lows at 63 cents ahead of the RBA Bullock testimony. The pair remains under pressure after falling from weekly highs at a crucial support area, highlighted in the chart by the three green support lines. The main reason behind the move down is due to a stronger US dollar and weaker market sentiment from Australia, as CPI accelerated to 5.6% YoY in September surpassing expectations. Investors will now focus on the remarks of Governor Bullock post the higher CPI reading. As per the chart, the pair currently rests above 63 cents, however, there are a few support levels to be considered given further breaks lower, at 0.62698 and 0.62887, respectively. Should the Aussie reverse some of its recent losses, the bulls may look to target 0.63289 as the first target, just shy of two key MAs crossing over.

The hot CPI print saw interest rate sensitive stocks fall heavily — RE being the hardest hit — these losses were offset by gains for miners as commodity prices were up for the session.

Shares in Mineral Resources rose +4.6% after the iron ore and lithium miner reaffirmed its 2024 volume guidance. Rare earth miner Lynas was up +4.4%, with two positive days of trade after having its Malaysian license extended to help smooth operations. Reaffirming buy on Lynas. Malaysian license extension is a big help…

The New Zealand market (NZX 50 index, -0.7%) was down as higher interest rates and earnings guidance weighed down on the market.

Skellerup shares were a touch lower despite telling shareholders it expects net profit after tax for 2024 to come in between $50m to $55m, building on its record result of $50.9m. Another positive update came from Restaurant Brands, after reporting third-quarter revenue jumped +5.8%, reflecting recovery impacts from Covid and price increases implanted. Buy-rated on Skellerup — 18x earnings, ~5.00% divvy, very dilligently managed balance sheet run in a typically conservative manner.

PGG Wrightson on the other hand expects operating earnings to be weaker in the current year based on a more challenging operating environment due to weak economic recovery in China. No view. Easier ways to make money…


Misc.

Bankers’ lunch > if you’re in Auckland, well worth checking out Gilt Brasserie in the CBD…we predict it will be the new “spot”. Well priced unpretentious food (we’re not paid to say that, we swear!)

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