US markets were initially stronger on the open after data was released that retail and food service sales rose +0.6% in June but ended Friday (and week) lower (S&P 500 index -0.8%) as a surge in covid-19 cases and concerns around rising inflation start to grow.
Earnings season gets into full swing this week, and so far results have been strong and healthy however reactions have been muted given high expectations and what is "priced in" – it takes a major surprise for companies to impress given current market levels. Despite the fall, and for some context, the S&P 500 US market index is still up +15% for the year and only -1.5% off all-time highs.
European stocks slipped on Friday, with the Stoxx 600 index down -0.3%, as investors took a cautious tone,
Closer to home, in Australia growing covid-19 cases has prompted stricter restrictions in NSW, closing non-essential retail outlooks and ceasing construction activity with Victoria also entering its 5th lockdown. The government has responded by kicking in more stimulus, though not to the same levels we saw last year and there will likely be a short term impact on the economic recovery.
In New Zealand, a very strong NZ CPI inflation print on Friday (+1.3% in the June Quarter giving annual inflation of 3.3%) was the highest rate of inflation since 2011. This well and truly which paves the way for an earlier than expected OCR hike. The market is now effectively pricing the odds of a 0.25% increase in the OCR in Aug close to 90% and has fully priced 0.5% of rate hikes by November.
QBE Insurance (QBE:ASX)
Given recent lockdowns and the prospect of higher interest rates, it is worthwhile looking at the QBE investment case again.
We believe the new lockdowns in Australia could act as a slight boost to earnings for general insurers with lower motor claims due to restricted movement, and as renewed policies no include some pandemic exclusion. Going ahead, margin expansion should be healthy on the back of strong top line growth premium rate rises.
As well as an improvement in QBE's underlying business, concerns over rising rates will actually act as a tailwind for QBE’s investment income (being on of the few benefactors of rising interest rates – as QBE's investment funds can be invested into cash and fixed income securities at an higher rate). For these reasons we remain BUY rated on QBE.
Australia & New Zealand Market Movers
The Australian market rose on Friday (ASX 200 index +0.2%) shrugging off lockdown extensions as market heavy weight BHP hit a record high.
The major miners led gains, BHP up +4.8%, Rio Tinto advanced +4.1% and Fortescue Metals surged +8% on strong iron ore prices. Tech was the worst performing sector with Buy Now Pay later stocks continuing to slide lower – amidst competition concerns from Apple's entry into the market.
Energy and Financials were also weaker both impacted by restricted economic activity locally due to lockdowns and a slip in crude oil prices.
The New Zealand market was lower on Friday (NZX 50 index -0.5%) as NZ CPI data for the second quarter jumped +3.3% – well ahead of expectations causing markets to remain cautious. This elevated expectations the odds higher RBNZ cash rates by the end of the year.
Stocks were mixed with investors swapping from cyclical stocks linked to economic activity. Fletcher remained unchanged, Freightways was down -0.3%, and SkyCity was up +0.9%.
Genesis Energy was the biggest loser down -2.5%, followed by Heartland bank down -2% while Michael Hill Jeweller was one of the biggest gainers up +6.9%.
3 Things Markets will be Watching this Week
- Key events this week include US earnings (Netflix, Johnson & Johnson, Coca-Cola), ECB July rate decision, Eurozone Manufacturing PMI.
- Covid-19 related development globally, and particularly in Australia (NSW and Victoria Lock down).
- RBA Minutes and quarterly updates from Australian miners.
