US markets (S&P 500 Index -1.5%) closed lower on Friday to register their worst month since March 2020, down -9.3%. It appears that the markets are coming around to the fact that the Fed will be holding interest rates higher for longer. There are also signs of financial stress building, highlighted by the actions of the Bank of England last week.
Utilities (-2.0%) and Technology (-1.9%) stocks, led the market down on the day, with Consumer Discretionary (-1.8%) and Consumer Staples (-1.85) following closely.
On a positive note, shares of Twitter (+2.6%) rose on the day after a Bloomberg report suggested that the company and Elon Musk were pursuing an out-of-court settlement regarding the failed buyout attempt.
European markets (Stoxx 600 Index, +1.3%) climbed on Friday led by Construction (+2.4%) and Media stocks (+2.3%). The euro (-0.3%) and British pound (-0.2%) fell marginally on the day.
On the economic front, the annual inflation rate in the Euro Area rose to double digits for the first time ever on Friday, from 9.1% in August to 10.0% in September.
Nike (NKE: NYSE)
US earnings season has kicked off with a bang. Nike reported less-than-desirable results, largely due to a contracted gross margin, and the market reacted in kind; the stock sold off aggressively after-market Thursday and closed -12.8% lower on Friday.
In our opinion, this has less to do with Nike’s results and more to do with Nike’s position as a “General” of Consumer Discretionary – it serves as a harbinger of things to come. The old Wall Street adage that the market is led by its generals sometimes rings true.
To us, this suggests a broader margin & earnings contraction across the US market — we warned of this in our previous reports last earnings season — we are beginning to see the fruit of this now. Net margins of the S&P 500 (excl. Financials/ Energy) fell 100bps YoY; from 13% in 2021 to 12% in 2022. Most consensus forecasts for the S&P in aggregate have margins rising; yet we think the data shows otherwise. This is borne out in what we are seeing now – Nike’s net margin and gross margin both declined — we expect the S&P 500’s net margins to fall another 100bps YoY.
As such, we expect more major companies to have disappointing earnings and the market to react accordingly. We are overweight cash, as we think there will be the opportunity to purchase equities at good prices down the line.
Australian & New Zealand Market Movers
The Australian market (ASX 200 Index, -1.2%) closed out September on a low note, bringing the month’s tally to -7.3% and approaches the 2022 low it printed in June. Materials (+1.1%) was the only sector not in the red on Friday.
October will likely be the month we see the market break bearish or bullish out of its current double bottom pattern. Determining factors will be the RBA’s Interest Rate Decision on Tuesday (or Monday US time), and the subsequent meeting minutes that are released on October 18, 2022.
The Australian dollar (-1.8%) fell almost -2.0%, wiping out all gains made earlier in the week.
The New Zealand market (NZX 50 Index, -1.2%) fell on Friday due to currency volatility and higher end of month trading.
The weak NZ dollar (-2.3%) is starting to filter into the earnings of exporters. A2 Milk (-0.7%) updated the market on Friday, noting that first-quarter sales were ahead of schedule due to the NZD’s depreciation, however, the stock still fell on the day. The company also declared its intention to commence an “on-market” $150 million share buyback beginning Wednesday this week.
What Markets will be Watching this Week (UTC –4)
Monday
AU RBA Interest Rate Decision
Tuesday
US JOLTs Job Openings (AUG)
NZ RBNZ Interest Rate Decision
Wednesday
US Unemployment Change (SEP)
US Balance of Trade (AUG)
Thursday
AU RBA Financial Stability Review
Friday
Us Non Farm Payrolls (SEP)