4 April 2022 | Weekly Snapshot

Australian Share Market (ASX200) – up 1.18% for the 3rd weekly gain in a row, recouping all of the January and February declines and is back in positive territory calendar year to date. The Materials sector (+3.65%) led the gains followed by Info Tech (+1.19%) and Consumer Staples (+1.13%). The Energy sector (-1.27%) led the declines followed by Consumer Discretionary (-0.57%) and Telecommunication Services (-0.42%). The ASX200 gained 6.39% in March outperforming global peers with significant contributions from our two largest sectors, Materials and Financials, over the month. The highlight of the week was the big spending budget announced by Treasurer Frydenberg with the Federal election expected to be called any day. In response to voters struggling with rising living costs, the government will spend big on a $8.6 billion cost of living package, petrol tax will be cut by 22 cents per litre for six months, 10 million low and middle-income earners will get a one-off, bonus tax rebate, and $250 cheques will go to six million pensioners and welfare recipients. The budget position was much improved, boosted by strong commodity exports and low unemployment. Of the $114.6 billion in extra revenue and savings over four years that have appeared since the last update in December, this budget re-spends $30.4 billion, or 27% of it. The deficit for this financial year has been revised down from $99.2 billion to $79.8 billion and the cumulative deficit over four years is $103 billion lower than forecast in December. Despite the improvements, the increased spending will see the budget stay in deficit for at least the next decade. And gross debt will peak at 44.9% of GDP, or $1.117 trillion but not until the 2024-25 period.

US Share Market (S&P 500) – up 0.06%, with the Dow (-0.12%) and Nasdaq (+0.65%) were mixed after a couple of strong weeks. There has been a defensive undertone during the recent rally in US equities with REITs (+4.51%), Utilities (+3.71%) and Consumer Staples (+2.33%) leading the gains last week. Financials (-3.28%), Energy (-2.40%) and Industrials (-1.49%) led the declines. Yield curve inversions (short term yields being higher than longer term yields) were attracting the attention of investment strategists during the week with the March quarter seeing the greatest Q1 US yield curve flattening ever. The 2 year/10 year inverted for the first time since late 2019, while the 30 year yield fell below the 5 year yield for first time since 2006. The flattening move is being attributed to stagflation concerns and expectations for an aggressive Fed tightening cycle. However, some analysts also see bonds as oversold after the recent rout, with some noting expectations for increased flows into USD assets particularly given uncertainty in both Europe and Asia. Bank of America economists also played down the yield curve signalling, noting factors including larger impact of quantitative tightening on longer-term yields. JPMorgan also noted that real rates are still very accommodative and still negative, compared to +200bp in past curve inversions. The final March University of Michigan consumer sentiment reading came in at 59.4 and well below February’s 62.8 reading for a new 11 year low. The US jobs market on the other hand remains strong with the US unemployment rate falling to a new pandemic low of 3.6% over the weekend with the March nonfarm payrolls report showing employment increased by another 431k jobs. The participation rate rose to 62.4% vs. 62.3% in February, a new post-pandemic high.

Portfolio Movements

Fortescue’s (FMG) Fortescue Future Industries outlines multibillion dollar green hydrogen deal with European energy giant E.ON Fortescue Future Industries (FFI) is a global green energy start-up company committed to producing zero-emission green hydrogen from 100 per cent renewable sources. It is a relatively new division of iron ore miner Fortescue Metals Group. Unlike natural gas, hydrogen emits water rather than carbon dioxide when burned as fuel. But extracting hydrogen is an energy-intensive process that can itself release large quantities of carbon dioxide and remains expensive to produce and challenging to transport because it is highly flammable. Green hydrogen is produced using power from wind or sunlight, a process that doesn’t generate such emissions. The goal is to produce hydrogen in Australia using wind and solar power and begin shipping it to Europe, where it would be distributed through E.ON’s pipelines E.ON operates one of Europe’s largest energy networks providing energy to 50 million customers. Europe has targeted hydrogen as a potential source of power to run factories in the future.

Telstra (TLS) outlines steps to finalise its legal restructure. Telstra’s T22 strategy, announced in 2018, included the creation of a standalone infrastructure business, Telstra InfraCo, to improve the transparency and performance of Telstra’s infrastructure assets, and the optionality to realise additional value from those assets. Following the establishment of Telstra InfraCo, in 2020 Telstra proposed a legal restructure as the next step in creating potential opportunities to monetise its infrastructure assets and deliver additional value to shareholders. The final proposed structure will result in a new holding company, Telstra Group Limited, with four main entities – InfraCo Fixed, Amplitel (InfraCo Towers), Telstra Ltd (ServeCo) and Telstra International. Telstra’s proposed legal structure would see Telstra Corporation shareholders receive a 1 for 1 share in the new Telstra Group limited entity with the scheme needing to be approved by the court with a first hearing scheduled for August.

Apple (AAPL) developing new technology to bring financial services in house. Apple is currently developing new technology and infrastructure to bring a wide range of financial services for consumers in-house, reducing its reliance on outside partners. The multiyear plan is said to include payment processing, risk assessment, fraud analysis, credit checks, and additional customer service functions. Part of the project has been given the internal codename “Breakout.” The project would propel Apple further into the financial services world, building on a line-up that already includes the Apple Card, peer-to-peer Apple Pay payments, and the Wallet app. The move could reduce Apple’s reliance on third-party partners, it could also help the company expand into other countries. Apple Pay for example is available in 70 countries and regions worldwide. Apple Card on the other hand is only available in the U.S.

The Week Ahead