Global markets were quiet overnight as the US market was closed. The focus remains around Trump’s last day in office tomorrow & the Biden inauguration.
Former Fed Chair Janet Yellen appeared before the Senate Finance Committee as part of her nomination to be the next US Treasury Secretary. Yellen commented that she sees risk of longer, more painful recession in a push for Biden’s stimulus package.
Markets finished 2020 on a high, and for the 2020 calendar year market returns experienced were almost unimaginable back in March. The US market (S&P 500 index) total return was +18.4%, New Zealand market (NZX 50 index) +11.4%, Australian market (ASX 200 Accumulation index) +1.4%.
The key development since we last wrote our last daily in December was the Democrats’ unexpectedly victories in the two Senate run-off races in the state of Georgia. The results give the Democrats 50 out of the 100 seats and, with VP-elect Kamala Harris having the casting vote, overall control of the Senate, albeit with a wafer-thin majority. The Democrats’ control of both the House and Senate gives President-elect Biden greater ability to pursue his policy agenda, including more fiscal stimulus. Biden has outlined his plans for a huge $1.9 trillion stimulus (~9%/GDP), comprising another round of cheques for households ($1,400 for most Americans), $400 per week in additional unemployment benefits through September, and greater funding for state and local governments, health care and education. Biden is seeking the support of some Republicans in the Senate to push through the stimulus (60 votes are needed to avoid the filibuster), so the proposal might yet get watered down during negotiations.
The first 100 days of a Biden presidency will likely be focusing on tasks like a mass-vaccinations, renewed stimulus checks, and a larger fiscal package. Longer term however, there remain market negatives from a Biden administration such as the possibility of higher corporate taxes and potential for anti-trust laws being imposed on the big technology stocks. Given the Senate majority is only 1 vote, in any case it will be difficult to pass "non-mainstream" policy.
While markets continue to drive higher, there has been a rotation by investors into value sectors from high flying growth stocks, most notable when comparing the performance of US large cap stocks and small caps since the US election. US small caps are up +30% (Russell 2000 index) versus large +13% (S&P 500 index). As vaccines are rolled out and economic growth recovers, and with the prospect of more stimulus spending by Democrats (post winning the Senate) this could further drive a rotation into economically sensitive cyclical and value stocks. However, risks remain from a sub-optimal COVID-19 vaccine rollout and further virus mutations.
Genesis Energy (GNE:NZX / GNE:ASX)
In recent months electricity stocks have been driven higher by something other than fundamentals. Meridian Energy and Contact Energy in particular appear to have benefitted from a wave of purchasing by renewable energy funds, which have found favour with investors in the US who are betting on a return to more environmentally-aware policy settings under a Democrat-led government. To what extent that investment trend continues to exert upward pressure on their valuations remains an open question.
The big news locally has been that Rio Tinto last accepted Meridian Energy’s offer of a lower electricity price for the NZ Aluminium Smelter (NZAS), and will now continue operating at Tiwai Point until at least 31 December 2024. The electricity companies (particularly Meridian) will absorb the $100m "cost" of providing lower power prices to the smelter.
The deal is positive for the electricity sector as it provides greater certainty of demand and reduces the chance of a retail price war for the next four years. The biggest winner from the latest smelter news is Genesis Energy given the prospect of less retail price competition, and Genesis looks attractively valued versus the sector, still trading at close to a 5% dividend yield (we have a BUY rating on Genesis).
Australia & New Zealand Market Movers
The Australian market started the week off in the red (ASX 200 index -0.8%). The e-commerce and spending boom unleashed by COVID-19 is still carrying some of 2020's winners into the new year, propelled by an upbeat trading update from JB Hi-Fi that brightened an otherwise grim session for the market's mining stocks.
JB Hi-Fi shares added 3.8% after first-half net profit jumped 86% to $371.7 million, and sales rose 24% to $4.94 billion. JB Hi-Fi online sales climbed 162% to $679 million, or almost 14% of total sales across the group. Likewise, Super Retail, which owns the Rebel sporting goods and Supercheap Auto brands, said its sales rose 23% in the 26 weeks ended December 26, guiding to operating earnings of $253 million – $256 million.
On the flipside, the woes continue for QBE which fell -5.7% as it expanded its COVID-19 provision after losing a UK insurance case.
The New Zealand market sold off on Monday (NZX 50 index -1.4%) for a 6th session as investors continued to pare back the holiday rally which drove renewable energy firms to record highs. Renewable energy generator Meridian Energy remained the biggest drag on the market, still falling from inflated levels after a clean energy index directed a flood of money into the relatively illiquid stock during the holidays.
3 Things Markets will be Watching this Week
- The week ahead is a busy one with Biden’s inauguration on Wednesday (US time) a focal point.
- There are also a number of central bank decisions including the European Central Bank and the Bank of Japan.
- Quarterly US earnings season is underway, with the week ahead dominated by financials. Key results include: Netflix, Procter & Gamble, United Air, Bank of America, Morgan Stanley, Goldman and Gilead.
Team
