The Bloomberg Commodity Index was up over 11% last week, the biggest weekly gain since inception in 1960. The index is also up more than 25% calendar year to date which would be the second biggest annual gain ever behind 2021’s 27.1% gain.
Australian Share Market (ASX200) – up +1.61% and recouping some of last week’s decline. As the Russia / Ukraine conflict escalates there are winners and losers emerging in the global economy as the fallout continues, which in the short term sees Australia more as a net beneficiary for now. The Energy sector (+8.85%) lead the gains as energy prices jumped to multi year highs as already tight global energy markets were met with heightened supply concerns adding to the upwards pressure. The Materials sector (+8.14%) was also sharply higher with base and precious metals rallying strongly on a combination of heightened supply concerns for base metals, and safe haven buying for precious metals. Commodities traders and importers were sent into a frenzy last week to secure supply amid the sanctions on Russia, given the country’s position as one of the biggest exporters of raw materials including natural gas, crude oil, aluminium, and wheat. Info Tech was the next best (+0.64%) after some heavy falls year to date with global bond yields pulling back from recent multi year highs on a flight to safety and the lower yields providing some support for the beaten down sector. Consumer Staples (-1.64%) led the declines followed by Financials (-1.52%) and Healthcare (-0.91%). The Australian dollar also found support, rising to 74 US cents and a new 8 month high. Not only benefiting from the rise in commodities prices, but geographically Australia is a world away from the conflict with the currency potentially having some safe haven qualities itself. In Europe where the fallout is greatest, with Eurozone equites down 7% last week, the Aussie dollar also made a new 4 year high against the Euro which has plunged against all the major currency pairs as the conflict rolls on.
US Share Market (S&P 500) – down -1.27%, with the Dow (-1.30%) and Nasdaq (-2.78%) also lower for the week. Russia’s invasion of Ukraine dominated the narrative and weighed heavily on risk sentiment with no meaningful breakthroughs in the 2 rounds of peace talks held. By the end of the week, Russia’s control over Ukraine had increased to around 30% of the country with Ukraine’s military infrastructure taking some significant hits and the US and NATO again rejecting intervening in the Ukraine militarily. The Energy sector (+9.25%) led the gains as the oil price surged. Utilities (+4.78%) and REITs (+2.09%) were the next best for the week. Banks globally were among the biggest decliners with the barrage of financial sanctions announced impacting on the Financials sector which led the declines (-4.87%), followed by Info Tech (-3.01%) and Communication Services (-2.64%). Investors were particularly focused on the record surge in commodities during the week, especially energy (oil, gas and coal prices) which is adding to concerns about even higher inflation pressures. There was also a broad based exodus of multinational companies from the Russian economy which added to concerns about supply chain issues and the impacts on profits of companies not doing business there. With the rise in geopolitical tensions the market has now essentially zeroed out the odds of a 50 basis point rate hike at this month’s Federal Reserve meeting. There is now less than a 2% chance of an outsized 50 basis point hike in March, down from over 90% following the hotter than expected January inflation report a few weeks ago. February’s US nonfarm payrolls report on Friday night of +678k jobs added was a big beat and well ahead of the +400k gain expected. The Unemployment rate was down another -0.2% to 3.8% and the Participation rate was up 0.1% to 62.3% and a new post pandemic high.
Citigroup (C) laid out long term plans for bolstering profits. At the firm’s first investor day in five years last week CEO Jane Fraser and other top Citigroup executives said that the global bank has not lived up to its full potential, but it is charting a game changing path that will reap rewards for patient stakeholders. Citi is targeting a return on average tangible common shareholder equity (ROTCE) of 11% to 12% over the next three to five years by maintaining compounded annual revenue growth of 4% to 5% in the medium term. The bank’s ROTCE objective is well ahead of the latest estimates for ROTCE of 9.2% in 2022 and 9.6% in 2023. Citi plans to focus on four equal parts of revenue growth: higher interest rates, better consumer lending, a focus on accelerated growth businesses and market share gains and provided first quarter guidance for a mid-single digit decline in total revenue, excluding divestiture impacts. For fiscal 2022, it’s expecting low single digit growth in total revenue, excluding divestitures.
Honeywell (HON) laid out plans for increasing growth and profit margins. Honeywell provided 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). Reinsurers likely to bear cost of Australia floods. It looks like the global reinsurance market will bear the brunt of Australian general insurers’ rising exposure to the severe flooding according to S&P Global Ratings. It forecasts that the extreme rainfall and flooding could be an A$1 billion-plus insurance event. The exposure could increase to A$2 billion with ongoing Brisbane River inundation in urban areas and as the storm cell moves further into New South Wales. “This would place the insurance exposure alongside that of Australia’s largest flood events,” said S&P. Australian insurers with exposure to the flooding, mainly home and motor exposures, are likely well protected by reinsurance cover from well-rated global reinsurers with IAG stating it is too early to determine the financial impact of the storms and flooding.
The Week Ahead
Domestic data is light this week with just the AIG Services Index out today and NAB Business Confidence tomorrow. There are also a number of our companies going ex-dividend during the week following the first half reporting season.
Internationally, headlines are likely to be dominated by the ongoing Russia / Ukraine conflict. We have China February trade balance figures today, Eurozone and Japan Q4 GDP data tomorrow, China February consumer price index (CPI) and producer price index (PPI) figures on Wednesday, and US February CPI data on Thursday being the main events.
Saward Dawson Wealth Advisors Pty Ltd, a Corporate Authorised Representative of Akambo Pty Ltd t/a Accountants Private Advice
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