Nickel’s 250% record price spike in a little more than 24 hours last week plunged the industry into chaos and forced the London Metal Exchange to suspend trading for the first time since 1985 when an international tin cartel collapsed. As sanctions on Russia ramped up, panic buying set in and turned out the world’s biggest nickel and stainless steel producer, Tsingshan Holding Group, had a very large short position in the metal which at the peak of the Nickel price spike had generated an US$8 Billion margin call.
Australian Share Market (ASX200) – down 0.66% as the Russia-Ukraine war continues to dominate headlines and keep volatility around the highest levels since the earlier days of the pandemic in mid-2020. The first high-level, face-to-face peace talks since the start of the conflict were held as Russian Foreign Minister Lavrov met Ukrainian counterpart Kuleba in Turkey late in the week but nothing was achieved. The oil price spiked to US130 a barrel during the week, the highest level since 2008 on supply concerns as sanctions continued to ramp up, before easing back somewhat later in the week. Financials (+2.20) led the gains with Bank stocks the best performers of the week. Consumer Staples was the only other sector higher followed by Consumer Discretionary (-0.47%) that fell the least. The Materials sector (-3.44%) led the declines, pulling back after the +8% surge the week prior. Info Tech (-1.79%) was the next weakest followed by Telecoms (-1.63%) which is down 5 weeks in row. In a change of stance, the Reserve Bank of Australia (RBA) Governor said he is open to a rate hike this year and that the RBA recognises Russian sanctions have created a new supply shock that will extend the period that inflation will be above the RBA’s target rate. Governor Lowe said there was now a risk in the RBA waiting too long to raise rates, especially in a world with overlapping supply shocks and high headline inflation. Brokers were bringing forward and increasing their expected pace of rate rises last week with Goldman Sachs now forecasting headline CPI at 5.3% by June, with the inflation overshoot caused by the sanctions and recent flood damage and for the RBA to hike rates in August, September and November. Commonwealth Bank economists now predict a June rate rise, instead of August.
US Share Market (S&P 500) – down 2.88%, with the Dow (-1.99%) and Nasdaq (-3.53%) also lower for the 2nd week in a row. The Dow alos down for the fifth-straight week which is the longest decline since May 2019. Geopolitics continued to dominate headlines with the war and the sanctions continuing to ramp up during the week. February’s US nonfarm payrolls report last week of 678,000 jobs added was a big beat and well ahead of the 400,000 expected. There were also another 92,000 in upward revisions to the prior 2 months reports. Much of the strength in the report was from private payrolls up 654,000 and almost double the 340,000 expected. The Unemployment rate was down another 0.2% to 3.8% and also beating estimates of 3.9%. February’s Consumer Price Index report was out last week with the annual inflation rate in the US accelerating to 7.9% and the highest since January of 1982 but was in line with market expectations. The month on month increase was higher than expected. Energy was again the biggest contributor with gasoline prices surging 38%. Inflation accelerated for shelter, food, new vehicles and used cars and trucks. Excluding the volatile energy and food categories the CPI rose 6.4% which was also the most in 40 years with the surge in energy costs due to the sanctions on Russia still to come through. This is putting increased pressure on the US Federal Reserve who are meeting this week and will be the main focus with the market widely anticipating the first rate hike since the onset of the pandemic. Rate hike estimates have swung widely in recent months with first a 0.25% rise, then a 0.50% rise and now back to a 0.25% rise expected. After the initial fall in bond yields on the flight to safety as war broke out, US 10 yr. treasury yields had rallied back to their recent highs above 2% by the end of the week.
Amazon (AMZN) approves 20 for 1 share split. The Amazon board approved a 20 for 1 share split last week. Subject to shareholder approval, each AMZN shareholder on the record date 27 May 22 will have 19 additional shares for every one share held reflected in their accounts on or about 3 June 22. Trading is expected to begin on a split adjusted basis on 6 Jun 22. The board also authorized the company to repurchase up to US$10 bill of the company’s common stock. The program allows the company to repurchase its shares opportunistically from time to time when it believes that doing so would enhance long-term shareholder value. This stock repurchase authorization replaces the previous US$5 bill stock repurchase authorization, approved by the board in 2016, under which the company had repurchased $2.12B of its shares.
Honeywell (HON) laid out plans for increasing growth and profit margins providing an updated growth strategy and enhanced long term financial framework at their 2022 investor conference last week. The company highlighted anticipated growth acceleration and enhanced margin expansion, upgrades to the company’s long term financial framework including higher capital deployment commitments, stronger alignment to improved ESG outcomes and disclosures, and reaffirmed first quarter and full year 2022 guidance. Honeywell raised its organic sales growth target to 4% to 7% a year from 3% to 5%. The company also wants to improve operating profit margins by 0.4% to 0.6% a year. The goal had been 0.3% to 0.5%. Honeywell also announced plans to spend $25 billion in capital over the next few years, much of it on growth. The $25 billion is roughly $10 billion more than projected free cash flow generation less dividends paid out over the same span so is a sign that Honeywell is willing take on debt to grow. “Today, we turn our focus to the next phase of Honeywell’s growth, including driving innovation that builds on our long-standing expertise in controls, automation, and software,” said CEO Darius Adamczyk.
Insurance Australia Group (IAG) provided a claims update following east coast floods. IAG updated the market saying they had received 24,000 claims for the floods and storms and was still too early to determine the number and nature of claims, which are expected to rise further over the coming weeks. IAG has extensive reinsurance protection in place and as a consequence estimates it will incur a net claims cost of approximately $74 million from the storm and flooding event that commenced in February 2022. This is lower than the $95 million estimate provided on 1 March 2022 due to development on previous claims which further eroded the FY22 aggregate deductible and reduced the net claims cost. IAG has increased its expectation for FY22 net natural perils claims costs to approximately $1.1billion, compared to the previous estimate of $1,045million. IAG did reaffirm the FY22 reported margin guidance range of 10%-12% but now expect it to be in the lower half due to the floods.
The Week Ahead
Domestic data is light this week with just the employment data on Thursday. Internationally, we have Eurozone industrial production and US producer prices tonight, US retail sales Wednesday. The main data point this week is the FOMC meeting on Thursday. Also Thursday we have US business inventories, NAHB housing market index, housing starts and the Philadelphia Fed index. On Friday there is US capacity utilization and industrial production and CPI data for Japan. ACN will report Q2 earnings on Thursday.
Saward Dawson Wealth Advisors Pty Ltd, a Corporate Authorised Representative of Akambo Pty Ltd t/a Accountants Private Advice
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