1 August 2022 | Weekly Snapshot

Did you know?

While the S&P500’s 9.11% gain for the month of July was the best month since November 2020, it was the best July for US equities since 1939.

Market Movements

Australian Share Market (ASX200) – up 2.26% for the 2nd week in a row on improving risk sentiment and positive offshore leads with our market hitting a new 7 week high and recouping over half of the June losses. Cyclicals led the gains again last week with the Materials sector up 4.94%, Energy up 3.36% and Financials up 2.49%. Healthcare (-0.83%), Consumer Discretionary (-0.69%) and Telecoms (-0.13%) were the only sectors lower. It was a big week for US Q2 reporting with 175 company results out with the big tech companies featuring prominently. Results to date, with 56% of S&P500 companies having now reported, could be best summarised as ”not as bad as feared”. A narrative that also helped boost our market as our full year reporting season kicks off this week. The highlight of the week was our Q2 inflation data which came in at 6.1% annual rate and increase from the 5.1% in Q1 and the highest in 21 years although it was lower than the 6.3% rise expected. While fuel largely drove the headline increase, inflation was increasingly broad based with trimmed mean CPI, the RBA’s preferred measure, higher than expected at 4.9% for the year versus estimates for 4.7% and up sharply from the 3.7% in Q1. The higher trimmed mean but lower than expected headline number has seen a 50 basis point rate hike at tomorrow’s RBA meeting firm up as the expected outcome, with the slight probability of an outsized 75 basis point hike no longer priced in. Bond yields fell sharply during the week as economic growth concerns continued to outweigh inflation concerns. Our 10 yr. govt bond yield fell from 3.36% to a 3 month low of 3.06% during the week with a significant repricing of interest rate hike expectations. The market now expects a cash rate of around 3.25% over the next 12 months compared to expectations of a 4.25% cash rate a couple of months ago.

US Share Market (S&P 500) – up 4.26%, with the Dow (+2.97%) and Nasdaq (+4.70%) all sharply higher on a big week of “not as bad as feared” earnings and a notable change in rhetoric from the US Federal Reserve. Big tech earnings from the likes of Microsoft, Apple, Google and Amazon steadied the ship and provided a further leg up in the bear market rally that has run for all of July and generated some impressive monthly gains, recouping almost all of the heavy losses from June. US equities surged following the Federal Reserve’s interest rate decision where they hiked rates by another outsized 75 basis points as expected to a 2.25%-2.5% range but the market was buoyed by a clear pivot in rhetoric from Federal Reserve chair Powell whose comments were less hawkish than feared. In the economic commentary statement the reference to economic activity picking up from last month was deleted, and a new note inserted that recent indicators of spending and production have softened. Powell down played recession fears and added there has already been some evidence they may be seeing the economic slowdown they think they need. US Q2 GDP disappointed last week with the economy contracting 0.9% versus 0.8% growth expected. Bond yields plunged with the US 10 yr. also dropping to a new 3 month low of 2.67%, a big reversal from the 11 year high of 3.5% last month with the US economy seemingly weaker than expected with the lower bond yields helping the growth cohort of stocks outperform value stocks for the 3rd week in a row. With 56% of S&P500 companies having now reported Q2 numbers, analysts have started downgrading some full year 2022 and 2023 earnings estimates. While the rally in equities has been encouraging and some value in the most beaten-up stocks has emerged, a rally into a slowing economy and lowering earnings revisions needs to be treated with caution and some defensive positioning remains warranted.

Portfolio Movements

Macquarie Group (MQG) AGM sees Q1 upgrades. Macquarie provided a first quarter trading update at their AGM last week noting favourable trading conditions with MQG operating groups delivering net profit contribution higher vs the prior corresponding period, although trading conditions did soften during the quarter. The Banking and Financial Services segments combined Q1 net profit contributions was significantly up on the year ago period, boosted by income from Green Investment Group (GIG), whilst the contribution from BFS was broadly in line with 1Q22. Commodities and Global Markets saw strong results across the commodities platform due to income recognition on gas transport and storage contracts and higher investment related income. MQG’s capital position remained strong and ahead of regulatory requirements with the company seemingly well placed to handle the current conditions.

Honeywell (HON) reports strong Q2 results. Honeywell reported strong results for the second quarter last week that either met or exceeded the company’s prior guidance. They also raised the low end of their full year organic growth, adjusted EPS, and margin guidance ranges. CEO Darius Adamczyk said “Organic sales grew 4% led by strong double-digit growth in our commercial aerospace, building products, advanced sensing technologies, and advanced materials businesses. Aerospace, Honeywell Building Technologies, and Performance Materials and Technologies all grew organically and expanded margins in the quarter.” As a result of the company’s Q2 performance and management’s outlook for the remainder of the year, full year sales are now expected to be in the range of $35.5 billion to $36.1 billion, up 5% to 7% organically, or up 7% to 9% excluding the one off impact of COVID-driven mask sales declines and the impact of lost Russian sales.

Amazon (AMZN) up strongly last week. Amazon reported a Q2 loss on a further write down of their Rivian investment but the underlying result came in better than expected. Revenue growth of 7% to $121.23 billion was better than the $119.09 billion expected with Amazon Web Services revenue a standout, up 33% to $19.7 billion and also better than the $19.56 billion expected. Amazon guided for third-quarter revenue of between $125 billion and $130 billion, or growth of 13% to 17%, also ahead of current estimates of $126.4 billion. The company is also doing well managing costs with CEO Andy Jassy stating “Despite continued inflationary pressures in fuel, energy, and transportation costs, we’re making progress on the more controllable costs we referenced last quarter, particularly improving the productivity of our fulfillment network.”

The Week Ahead