Global markets were lower overnight, as US markets (S&P 500 index, -0.2%) traded weaker for a third consecutive session. Investors remain in “wait and see” mode ahead of key inflation data and third-quarter earnings start to kick off.
The International Monetary Fund on Tuesday cut its global growth forecast, citing supply chain challenges and persistent spread of Covid. The IMF commented that “We’re seeing major supply disruptions around the world that are also feeding inflationary pressures, which are quite high and financial risk taking also is increasing, which poses an additional risk to the outlook”. Comments from US Federal Reserve members overnight however seemed to confirm the market view that a pull-back in stimulus ("tapering") will be announced next month. As a result, defensive stocks were mostly higher, while healthcare and tech sector lead losses.
European Markets (Stoxx 600 index -0.1%) slipped slightly overnight, in a choppy session which saw healthcare, retail and basic resources stocks lead losses.
Rio Tinto (RIO:ASX)
Rio Tinto shares have started to stabilise since a sharp pull-back which wiped all its gains since the start of the year – as the price of ore plummeted from record highs. Iron ore price volatility has stemmed primarily from economic uncertainty and policy reform China. Prior to the pull-back, Rio Tinto had delivered a much stronger result for the first half of the 2021 financial year, which was reflective of surging commodity prices, particularly iron which had doubled from the same corresponding period last year and contributed ~76% of RIO’s total earnings.
5 Year Iron Ore Price Chart:
We believe demand for iron ore from China may soften, but not slump completely, and will likely remain supportive at current levels for the iron ore price. We believe RIO would still be in a position to pay an attractive dividend of 7-8.5% over the next few years. For this reason, we maintain our BUY rating for income investors who have a tolerance for price volatility. Due to softer economic outlook from China and commodity price volatility, we add a high-risk caveat to our BUY rating.
Australia & New Zealand Market Movers
The Australian market was down yesterday (ASX 200 index -0.3%), with most sectors trading lower.
Energy stocks paused their current bull run to end the day a touch weaker, while tech stocks lead losses being most sensitive to hawkish tones form central banks around the globe..
Westpac share dropped -1.7% after warning its 2021 result could take a $1.3 billion hit, largely driven by $965m of non-cash write down of its institutional bank.
Telstra’s shares held flat after reiterating its guidance earnings (EBITDA) and revenue would remain unchanged at between $7 billion and $7.3 billion, and $21.6 billion and $23.6 billion respectively. CSL held an uneventful AGM reinstating their revenue growth guidance for the 2022 financial year of 2% to 5%.
The New Zealand market down again on Tuesday (NZX 50 index, -0.2%) recording its fifth consecutive day. A -15% drop in electronic card spending for the month of September was weaker than expected, possibly due to Auckland still being in lockdown but weighed on that retail spending may no bounce back as sharply as it did in the first lockdown.
Most stocks were lower as government yields continues to rise, putting further pressure on defensive yield stocks, particularly highly leveraged property stocks.
Z Energy edged higher, up another +0.3% on speculation of a potential bidding war with another interested takeover party.
3 Things Markets will be Watching this Week
- Key events this week include CPI (inflation) data from the US and China.
- US Third quarter earnings season commences, with the major US Banks set to report this week
- Locally, Employment data in Australia is due and Business Confidence in New Zealand
