Global markets were lower overnight, with US Markets (S&P 500 Index -1.0%) falling following the release of minutes from the Federal Reserve meeting which concerned equity investors.
The minutes showed FOMC members believed one or more +50 basis rate hikes and US$95b per month of balance sheet reductions would be appropriate – increasing their hawkish tone. The 10-year Treasury yield jumped 10 basis points to 2.65%, a three-year high on Wednesday – the rate had ended Monday at 2.40%.
The VIX volatility index rose to 22.2 points to its highest level since 18 March, as investors concerns start to reemerge this week, after subsiding over the last few weeks.
Tech shares led the market decline for a second day, as investors braced for higher interest rates to slow the economy. Losses weren’t widespread, investors favouring stability and economically immune stocks like utilities, healthcare and consumer staples climbed to offset losses across growth and economically sensitive stocks like financials, energy and materials.
European markets (Stoxx 600 index -1.5%) were lower amid hawkish Fed commentary and fresh Russia sanctions intensifying inflation concerns.
Westpac (WBC:ASX / WBC:NZX)
Westpac shares have staged a strong recovery this year, up +11.9% year to date and is our preferred bank stock to benefit from rising interest rates, which will help improve its earnings by widening its net interest margins (the amount it makes off loans versus deposits).
US rates are set to rise significantly this year, and the RBA who has been relatively dovish is now likely to follow (in a less aggressive manner to the US and NZ) which would be a tailwind for the sector and partly priced in across the sector so far.
Looking ahead if WBC are able to achieve part of their cost out program, it offers a much higher dividend yield compared to its large banking peers. We are BUY rated on Westpac.
Australia & New Zealand Market Movers
The Australian market was lower yesterday (ASX200 index -0.5%) as a more hawkish tone from central banks both globally and locally weighed down on the market.
Most sectors were down, with technology and materials leading losses, the former sensitive to rising interest rates, while the latter eased from its recent rally. Financials were up as the major banks benefit from a higher interest rate environment and forecasts of RBA bringing forwards their first-rate hike. Magellan Financial slumped -6% with rights to its bonus options issued.
PolyNovo was the second-best performer up +4.6%, after the business revealed robust march quarter update.
The New Zealand market was down on Wednesday (NZX 50 index -0.4%), reversing parts of the previous session’s gains following a weak lead from global markets.
Air NZ continues to lead with the heavy moves, down -9.5% as their rights were open for trade.
Move logistics jumped +11.5% despite no direct news flow other than a broker upgrade for its larger peer Mainfreight stating they would continue to benefit from ongoing trend in heightened freight shipping demand.
3 Things Markets will be Watching this Week
- Geopolitical risks remain extremely elevated with the Russia/Ukraine conflict.
- The economic calendar in the week ahead is very light – minutes from the March US Fed meeting are released and a number of Fed speakers will be on the wires.
- Locally, in Australia the RBA policy decision tomorrow is a non-event, with no change in policy expected ahead of the May Federal election, but another incremental shift to more hawkish commentary wouldn’t look out of line.
