6 June 2022 | Weekly Snapshot

Did you know?

18 months ago at the peak of the work from home boom and oil price bust, Zoom Video Communications had a larger market capitalisation than global energy giant Exxon Mobil. With those boom and busts having reversed since then Exxon Mobil is now over 10 times larger than Zoom by market capitalisation.

Market Movements

Australian Share Market (ASX200) – up 0.80% for the third week in a row with offshore leads mixed. The Energy sector (+3.96%) led the gains followed by materials (+3.83%) with news of China easing restrictions boosting energy and commodity stocks. Industrials were the next best up 1.49%. Utilities (-4.71%) led the declines with Financials (-1.30%) and Consumer Discretionary (-0.57%) also lower. More than a week after the election, Labor secured the seats required to form a majority government last week winning 77 seats in the lower house as final votes were tallied with 2 of the 3 reaming seats going to Labor. The highlight last week was our first quarter GDP numbers which increased by 0.8% over the quarter and was ahead of the 0.7% gain expected. The economy grew by 3.3% over the year and well ahead of the 3.0% expected. The stronger than expected data pretty much cements an RBA rate hike when they meet tomorrow although views remain split on whether it will be a 25 basis point hike or a bigger 40 basis points. The prospect of interest rate rises does seem to have taken the heat out of the Aussie housing market with Australian home values registering their first monthly decline since September 2020 according to CoreLogic’s Home Value Index which fell 0.3% month on month in May. The big Sydney and Melbourne housing markets declined and weighed on the index but growth trends in smaller cities and the regions remained positive. Affordability constraints, increased household sensitivity to interest rates, and tightened lending conditions were impacting demand while supply was increasing amid a rise in inventory across Sydney and Melbourne according to the report.

US Share Market (S&P 500) – down 1.20%, with the Dow (-0.94%) and Nasdaq (-0.98%) all easing back after the prior week’s 6% gains. With that 6% relief rally in US equities the main US indices closed largely flat for the month of May which according to Deutsche Bank made the first 5 months of 2022 the biggest year to date loss for the S&P500 since 1970. With oil prices and inflation at current levels there are some parallels to the 1970’s according to market historians. US equity markets remained fairly well supported last week as a narrative build around a potential Fed pause on interest rate hikes in September after some aggressive rates hikes are expected between now and then. For the September pause to occur the Fed would need to see some signs of economic weakness which potentially creates a situation where the equity market starts seeing weaker economic data (and less rate hikes) as a positive and stronger data (so more rate hikes) as a negative. We may have seen the first of this on Friday night when despite a much stronger than expected non-farm payrolls report, stocks fell on the better than expected news. US non-farm payrolls increased by 390k in May and well ahead of estimates for a 322k increase. Average hourly earnings grew 0.3% in line with last month but slightly below the 0.4% consensus. On an annualized basis average hourly earnings increased 5.2%. The Unemployment rate remained unchanged at 3.6%, slightly above consensus 3.5% but still at a five-decade low and maybe difficult for it to go much lower than that. Ultimately though the path for interest rates will depend on the inflation data with the May Consumer Price Index on Friday the highlight of the coming week.

Portfolio Movements

Shell (SHEL) to develop Crux gas project offshore W.A. Shell Australia and its joint venture partner have taken a final investment decision last week to proceed with the development of the Crux natural gas field off the coast of Western Australia. Crux will provide further supplies of natural gas to the existing Prelude floating LNG facility. The Crux field is located in the northern Browse Basin, 620 kilometres north east of Broome. The development will consist of a platform operated remotely from Prelude. Five wells will be drilled initially, and an export pipeline will connect the platform to Prelude, which is around 160 kilometres to the south-west of Crux with construction to start later this year and first gas is expected in 2027. News comes after the Australian Energy Market Operator was forced to step in and cap east coast gas prices last week as prices soared up to 50 x normal levels putting the east coast gas market into crisis.

Diageo (DGE) to sell off low performing brands in India. Drinks giant Diageo is focusing on profitability in the Indian market by selling off 32 low margin locally produced brands to Inbrew Beverages. Inbrew will pay just over US$100 million for the portfolio which includes brands such as Haywards, Old Tavern, White-Mischief, Honey Bee, Green Label and Romanov. The sale specifically excludes the McDowell’s and Director’s Special labels which lead the market for Indian produced spirits which will be retained by United Spirits (USL), the Diageo controlled subsidiary on the sub-continent. Since it took control of USL in 2014 Diageo has consistently said that it would overhaul its portfolio of locally produced Indian brands as there were many areas of overlap generating extra costs and downward pressure on slim margins. India is one of the fastest growing alcoholic beverages markets globally, with an estimated market size of US$52.5 billion in 2020 that is predicted to expand at a compound annual growth rate of 6.8%.

Microsoft (MSFT) lowers guidance due to high USD. Microsoft lowered revenue and earnings guidance for the current quarter last week citing the impact the stronger US dollar. The company said it now expects fiscal fourth quarter sales of between $51.94 billion and $52.74 billion, down from the previous guidance of $52.4 billion to $53.2 billion. Expected EPS was also lowered to be between $2.24 and $2.32, down from prior guidance of $2.28 to $2.35. Microsoft already sounded cautious the other week when they said they would slow the pace of hiring in the software division due to the increasing uncertainties. The surging USD (USD index hit a 19 year high recently) has been a surprise. The war in Eastern Europe is pressuring the Euro and the Bank of Japan’s reluctance to hike rates as aggressively as other central banks has lowered the Yen. The high USD will help to reduce inflationary pressures at home but for US multinational companies is lowering revenue and earnings when they translate their significant offshore revenues back to USD.

The Week Ahead