13 May 2022
“The whole reason that our capitalist system works the way it does is because there are cycles, and the cycles self-correct.”
– Seth Klarman
Key Points
- Forward looking indicators show difficulty coming
- The market correction continues, and the crypto world is under pressure
- Australian Residential auction clearance rates falling to new lows
- Dramatic fall in consumer confidence
- Food price inflation will continue to be a major issue for some time with the war Ukraine cutting of major supply lines
- Did you know that close to 70% of dividends in the Australian stock market in 2022 is expected to come from just 7 different companies? It’s not too late to diversify your income streams and look at corporate bonds.
Australia
Increasing interest rates have continued to impact the residential housing market. Cautious buyers pulled auction clearances to a new lows in the last week of April, led by Sydney, which is on track to post its third week of a sub-60 per cent clearance rate.
Not surprisingly consumer sentiment has started to fall substantially. Overall confidence fell 5.6% in May with sentiment falling into pessimistic territory over the months. The fall in confidence was the largest in almost seven years (excluding the COVID crisis) according to the Westpac-Melbourne Institute consumer sentiment index published this week. Westpac’s chief economist Bill Evans commented “Two stunning developments are clearly unnerving consumers – headline CPI rising to a shock 5.1% in the year to March 31, and the Reserve Bank of Australia lifting its record low 0.1% cash rate for the first time since November 2010.” He further highlighted that ‘‘While headline inflation pressures may ease from this point, consumers are aware that the Reserve Bank plans to continue increasing the cash rate for some time.’
The election campaign continues to disappoint and none of the major parties really inspire the voters. Just to highlight one policy initiative during the week – Scott Morrison announced that wine, spirit and craft beer makers will get a $20mio boost under a tourism promotion program. Morrison hopes that the money will help to get tourists back into breweries and cellar doors. The election can’t come soon enough and will be held on Saturday 21st of May.
Global
Here’s a summary of the year-to-date performance:
S&P 500 minus 18%
NASDAQ minus 27%
CSI 300 (China) minus 20%
DAX (Germany) minus 13%
Bitcoin minus 40%
ASX 200 minus 7%
Widespread losses in the global financial markets continued during the week and Wall Street continued to tumble together with about just everything else expect for the all mighty US Dollar. High inflation combined with a wave of global monetary-policy tightening has started to rattle investors and the impact of the China lock down and the Russian invasion of Ukraine is weighing heavily on investor and consumer sentiment. Once again, the saying “sell in May and go away” has come true and it will be very interesting to watch the response from the US Fed to see when all this will have an impact on their thinking.
During the week the Bank of England warned that the UK faces the dilemma of double-digit inflation and a shrinking economy later this year. The BoE took aim at inflation on Thursday by raising its key interest rate 0.25%, a fourth consecutive time, pushing the benchmark to a 13-year high of 1%. Interestingly, 1/3 of the BOE committee pushed for an even more hawkish 0.5% increase. This combined with the war in Ukraine will certainly shock the economy and the outlook continues to deteriorate.
Fitch ratings agency warned this week that higher grain prices will affect negatively Chinese protein and food producers. Fitch expects grain prices in China to rise further in 2022 amid tighter supply, higher fertiliser costs and rising global agricultural commodity prices. Their report stated that rising grain prices will increase the costs for food companies for which grain is a major input, and industry leaders in their respective sectors will pass on most of the price increases to customers due to strong pricing power, while livestock feed producers’ margins are also not affected as sales contracts are usually cost-plus-based. This of course will put upward pressure on inflation and together with the ongoing lock down in big parts of China will continue to slowdown the Chinese economy.
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