CHART OF THE WEEK
Bond yields are on the rise, led by inflation expectations. The anticipated eventual flow on to interest rates and the rise in the risk-free rate is putting some serious pressure on growth and particularly on loss-making tech stocks, who all of a sudden become far less attractive when you can get a reasonable return on your money at the low-risk end of the market. Highly indebted companies like REITs, Utilities and Infrastructure stocks are also victims of the assumption of rising rates.
Australian bond yields are mirroring US yields.
The oil price is rallying on recovery hopes.
The iron ore price is also holding up.
The Aussie dollar, a barometer of economic optimism and commodity prices hit 80c this week.
The ASX 200 coming under a little pressure this week. A bit of a rotation out of tech, bond proxies and highly indebted stocks and into those that benefit (well-established, cash positive businesses). Adding to the pain is the inability of tech companies and specialty retailers to meet the extremely high expectations placed upon their results. Clearly it is much easier to impress if little expected of you in a market like this. Recovery stocks have been among the best performers this results season despite many reporting their worse numbers in recent history. Still holding on to the uptrend, but questions are starting to be asked.
This is the VIX Volatility Index for the Australian market. Still just a little up from proper bull market levels.
This is the S&P 500 chart – not such a great week but still in uptrend. This week’s damage was more obvious in the NASDAQ.
The NASDAQ – 7.6% off the top in 8 days
Volatility picked up slightly this week as the markets showed the potential to top out on the back of the interest rate worries.
The Chinese market coming off multi-year highs:
European markets are quietly recovering. The UK market has been one of the worst performers since the pandemic and potentially offers the most upside.
BANK SECTOR – Flying along nicely as bond yields rise (good for NIM). All the majors got through their reports/updates unscathed and are now sitting pretty with yields back up and government support doing a great job in containing the damage to their bottom line. With CBA out of the way we have a little wait for the next round of results and dividends. NAB HY results on May 6th, ANZ on May 5th and WBC on May 3rd.
RESOURCES SECTOR – Continued to move higher after reporting record results and dividends. Since reporting BHP is up 8.1%, RIO is up 3.5% and FMG is up 1.8%. We may well see the dividends drop out of the price when the big miners go “ex” next week, but there really isn’t much to worry about. The iron ore price is holding up at record levels and talk of inflation bodes well for commodities.
ENERGY SECTOR – The oilers have survived reporting without any major blow ups (outside of BPT) and are slowly following the oil price higher.
HEALTHCARE SECTOR – Bit of a mixed bag coming out of results and the sector is back down at the bottom of the range. Sector heavyweight CSL is down 6.3% since reporting, despite releasing a decent set of result, while COH is up 1.9%. Strong AUD is keeping pressure on the sector, with many big overseas earners.
CONSUMER STAPLES SECTOR – Out of favour as the supermarkets warn of a peak in demand. WOW and COL both down modestly on results.
CONSUMER DISCRETIONARY SECTOR – Still within the trading range of the sectors strong uptrend, but the pressure is on after a number of specialty retailers failed to reach the sky-high expectations. Since reporting JBH is down 13.7%, TPW is down 13.1%, and ADH is down 1.2%. WES too down 9.3% after reporting, on fears that demand has peaked.
MEDIA and ENTERTAINMENT SECTOR – Given back the gains made over the last few weeks, but still well within the broader uptrend.
REIT SECTOR – The REIT sector showed signs of breaking the uptrend this week with most of the majors having gone ex dividend we have rotated out of REITs into resources in our income portfolio. Sectors that carry a lot of debt like REITs, Utilities and Infrastructure are unlikely to perform against the backdrop theme of rising interest rates.
TECH SECTOR – The ALL TECH sector is now down 11% from the high two weeks ago mirroring the hesitation in the NASDAQ on interest rate fears. The concern is that the ”nosebleed” equity valuations will come under pressure as interest rates rise. Also, this week we saw a capital raising from APT which sucks a bit of cash out of the sector and by implication suggest that the APT management think the price is high.
This is the Software and Services Sector. Under pressure along with the rest of the tech names.
UTILITIES SECTOR – Another sector that carries a lot of debt and is vulnerable to a rise in interest rates. AGL down 16.4% since reporting. A sector well and truly in downtrend with more headwinds coming.
TRANSPORT SECTOR – Another sector carrying a lot of debt.
AUTOMOBILES – ARB sold off after its results this week.
TELECOM SECTOR – Telstra went ex-dividend this week. Not much else happening.
GOLD SECTOR – As the recovery theme continues gold remains out of favour and in downtrend. Interest rate rises also work against gold which has a zero yield and tends to underperform when bond yields become more attractive.
SMALL ORDINARIES – Small companies have outperformed since the bottom of the market last year and tend to do well when market sentiment is good, which it has been recently.