Fed Hints at Early Rate Hikes | Woolworths Upgrade

18 June 2021

US markets were lower overnight (S&P 500 index -0.5%) following a more hawkish tone from the US Federal reserve, as it looks to potentially dial down its stimulus sooner rather than later. Overall we were surprised by the lack of market impact from the announcement.

Fed policy makers signalled they expect two interest rate hikes by the end of 2023, but held the target range for its benchmark policy rate unchanged at 0-0.25% – a shift in tone since March of no-change until 2024. The Fed also pledged to continue asset purchase at $120 billion per month pace until "substantial" further progress had been made with employment and inflation, as they continue to believe current inflation is mostly "transitory". Adding that the pandemic, lock down, and reopening shifts demand rapidly, creating bottlenecks, hiring difficulties and other constraints.  The Fed also raised its headline inflation expectations to 3.4% for 2021, a full percentage point higher than the March projections.

US 10-year Treasury bond yields rose +7 basis points to 1.55%, which dragged all sectors in the red except for consumer discretionary. Selling was mainly broad based with defensive sectors (Utilities and Consumer Staples) hardest hit, while high growth big tech names were also hit hard being most sensitive interest rate rises.

European stocks were higher (Stoxx 600 index up +0.2%) as investors awaited the outcome of the Fed's policy meeting, with commodity stocks weak following China's announcement to release national metal reserves to stimulate supply and prices. 

Woolworths (WOW:ASX)

Retail giant Woolworths (WOW) shareholder's will be voting on the de-merger of its Endeavor drinks and  hotel business tomorrow, in order to make the group operations simpler and defensive. The funds from the de-merger will provide adequate headroom funding for growth by investment in current business and further  acquisitions. Woolworths will be able to expand and lead its online grocery business and leverage their online capabilities across its other retail chains.

We upgrade Woolworths to a BUY rating as a more defensive retail exposure. We see gains coming from growth of new investments and WOW's valuation re-rating higher given the lower risk portfolio of businesses.

 

Australia & New Zealand Market Movers

The Australian market (ASX 200 index) eked out a small +0.1% gain yesterday.
Most sectors traded higher but their gains were offset by losses mining/commodity stocks following China's announcement to elevate supply. 

On the flip side, Energy stocks were higher leading the market as several trading houses maintain a bullish view on crude oil citing rising demand and recent under-investment in the sector. Financials and Healthcare stocks also performed strongly as well as a number of other blue chips.

The New Zealand market (NZX 50 index -0.9%) fell as investors prepared for the Fed's interest rate decision. 
Tourism Holdings led loses falling -3.1%, and stocks that performed well in the previous session gave back some gains A2 Milk -3% and Fisher & Paykel down -0.9%.

Pushpay shares were down following their AGM, with little new information the church payments processor keeping their 2022 full year operating earnings (EBITDA) guidance unchanged at US$64m to $69m. 

Scales shares were up +2.1% as investors shook off the initial disappointment of it withdrawing plans on acquiring Villa Maria winery. 

 

3 Things Markets will be Watching this Week

  1. Key events this week include the latest US Federal Reserve decision.
  2. NZ 1st quarter GDP data is due on Thursday, as well as Australia's latest employment data.
  3. Both Auckland Airport and Sydney Airport are due to release monthly updates, while Pushpay and Z Energy are scheduled to host AGM’s this week.
US markets were lower overnight (S&P 500 index -0.5%) following a more hawkish tone from the US Federal reserve, as it looks to potentially dial down its stimulus sooner rather than later

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