Global markets were mixed overnight, as US Markets (S&P 500 index +0.95%) reversed earlier losses to end the session in the green. Despite no positive news or clear catalyst, it appears as though investors bought the dip, seeing current market levels as oversold.
All sectors ended in positive territory expect for consumer discretionary. Retail giant Target fell -2.3% after downgrading its profit guidance due to cost inflation hurting margins, and as it undertook heavy discounting on unwanted stock to reduce inventory levels. Energy was the best performing sector as oil futures hovered near $120 per barrel.
European markets (Stoxx 600 index -0.3%) slipped lower as investors wait nervously for the ECB’s interest rate decision and US inflation data later this week.
Locally, the Reserve Bank of Australia (RBA) increased the Aussie cash rate by 50 basis points to 0.85%, surprising the market with a higher than anticipated increase. The RBA stated that it is willing to do “what is necessary” to tame inflation with “further steps” in the “months ahead” – increasing its hawkish stance to match global central bank peers. Australian bonds rose sharply, with an increasing likelihood of double (50 basis point) hikes at the July and August meetings, to bring the cash rate to 2.5% by the end of the year. This will put downward pressure on the Australian economy, and we see risks particularly around discretionary spending and the housing market, which is up ~25% since the start of the pandemic. We think the experience in New Zealand will be a good leading indicator of what to expect in Aussie.
Australia and New Zealand Banking Group (ANZ:ASX)
ANZ shares slipped -1.5% yesterday following the RBA’s surprise rate decision. Despite being a benefactor of rising interest rates, the implications of slowing economy and cooling property market does not bode well with banks. Looking ahead loan growth will likely be stagnant, but given the low-risk nature of ANZ dealing predominately with home loans, default risk is still relatively low. Further, net interest margins are set to improve significantly for the bank which should put them in a favourable position to pay an attractive dividend over the medium-term.
We have an optimistic view towards the banking sector, even during a shallow recession due to the tailwinds of rising interest rate environment. Further, a major GFC crisis like event is unlikely given the robust financial system helped by much more stringent lending requirements being imposed in recent years.
We are BUY rated on ANZ
Australia & New Zealand Market Movers
The Australian market was down yesterday (ASX200 index -1.5%), extending its decline following the RBA’s surprise rate hike announcement.
All sectors traded lower, with the rate sensitive technology and real estate shares faring the worst. Buy now pay later shares were hit harder, after Apple announcing they would be introducing their version of the service.
Financials were also a major drag on the market, despite being a benefactor to rising interest rates, as there were concerns around the impact of rapidly rising interest rates on the economy and house prices.
The New Zealand market (NZX 50 Index -1.3%) was lower yesterday as rising interest rates weighed down on the market.
Sky TV slumped -7.2% to lead losses, after confirming it would it was looking into acquire Mediaworks, which disappointed investors that hoped for Sky TV would be the takeover target.
3 Things Markets will be Watching this Week
- Geopolitical risks remain elevated given the Russia/Ukraine conflict.
- Macro level data this week includes Inflation (CPI) data from the US and China, and an interest rate decision from the ECB.
- Locally, the RBA interest rate decision is also due.