ASX Update: Market loses gains as inflation worries persist

The share market declined for a second session as investors weighed surging commodity prices, inflation worries and rising long-term interest rates.

The S&P/ASX 200 gave up early gains to reach mid-session 27 points or 0.37 per cent in the red. Earlier the index touched its highest in almost two weeks.

Newcrest, Rio Tinto and CSL were the best of the heavyweights. Westpac retreated following a profit warning. Long-term interest rates reached their highest level since April before receding.

What’s driving the market

Investment markets are torn between the economic boost to exports from soaring raw materials and energy prices, and concerns about the implications for inflation. Overnight, US crude hit a seven-year peak and aluminium a 13-year high. Spot iron ore prices increased their gain to beyond 16 per cent in two sessions since trade resumed after China’s Golden Week holiday. Natural gas hit a 14-year peak last week.

The flipside to rising commodity markets is inflation. Investors kept a wary eye on interest rates. The yield on ten-year Australian government bonds hit a six-month high of 1.778 per cent this morning, before turning negative, easing less than a basis point to 1.727 per cent. Yields have risen by around 50 basis points in less than three weeks.

This morning’s advance in yields came as rising energy prices increase pressure on central banks to rein in inflation. Overnight, the Bank of England said central banks would have to act to stop inflation becoming embedded.

“The rise in energy prices is fuelling concerns that the transitory lift in inflation seen in the wake of the pandemic may prove to be longer lasting,” NAB Director, Economics, Tapas Strickland, said. “Yields were unsurprisingly higher on the mix of higher oil prices and hawkish rhetoric,” he added.

Investment manager Natixis expects inflationary pressures  to drive rates for some time to come.

“We expect yields to continue to rise as monetary policy normalization continues, the recovery unfolds and inflation pressures remain unresolved. We still believe inflation to be transitory, but it is likely to remain anchored at a higher level before declining and stabilizing,” wrote the firm’s head of multi asset portfolio management, James Beaumont, and head of cross-asset investment solutions, Nuno Teixeira.

US stocks turned lower overnight amid concern about the impact of increased costs and supply-chain issues on earnings on the eve of a new reporting season. The S&P 500 fell 0.69 per cent. The Dow shed 0.72 per cent. Tomorrow night’s update from JPMorgan Chase marks the unofficial launch of a new season

“There are a lot of headwinds out there as we embark on corporate earnings, and traders will be looking for any and all indications of guidance — especially as the threat of slower growth looms large,” Chris Larkin, managing director of trading at E-Trade Financial, told CNBC.

Back home, consumer confidence rose to a 13-week high ahead of the easing of lockdown restrictions in NSW. The ANZ-Roy Morgan Australian confidence index climbed 1 per cent to 105.6 last week from 104.6 the previous week. Confidence in Sydney lifted 2.5 per cent.

Business confidence also improved. The NAB gauge bounced 19 points from -6 in August to +13 last month. Unsurprisingly, NSW showed the largest increase, surging 42 points as the state government outlined the road out of lockdown.

Going up

The big three ore miners spearheaded this morning’s advance before turning mixed. Rio Tinto retained a gain of 0.93 per cent. BHP faded to a loss of 0.17 per cent. Fortescue Metals shed 0.33 per cent. On the wider market, Aluminium miner Alumina jumped 4.19 per cent, Pilbara Minerals 2.54 per cent and Orocobre 1.41 per cent.

Newcrest rallied 1.97 per cent after the board approved feasibility studies on four growth projects. The gold and copper projects advancing from the pre-feasibility studies (PFS) stage offer an internal rate of return of at least 16 per cent and could increase the miner’s copper production by 37 per cent.

“The projections generated by the PFS studies for these projects indicate compelling rates of return and a material improvement in operating margin and cash flow,” CEO and Managing Director Sandeep Biswas said.  

Other gold miners to see gains included Perseus +4.67 per cent, Regis +2.76 per cent and Ramelius +3.01 per cent.

CSL rose 0.75 per cent on news the health giant expects revenue to grow 2 – 5 per cent this year. CEO and Managing Director Paul Perreault told today’s virtual AGM net profit was expected to be around US$2.15 – US$2.25 billion, down from US$2.4 billion last financial year. Profits will be dented by the increased cost of collecting plasma in a pandemic.

“CSL is a growth company,” he said. “Although the impact of COVID on plasma collections puts FY22 behind this year’s profit number, we will continue to invest in the business and look forward to returning to the growth all of you expect from CSL.”

Going down

Westpac eased 1.65 per cent after warning first-half profit will take a $1.3 billion hit from write-downs, divestment/transaction costs and provisions for customer refunds and legal costs. The charges will be partly offset by the sale of the bank’s general insurance business and the reversal of a write-down on the sale of its Pacific business after the PNG regulator objected to the transaction.

Commonwealth Bank announced it had completed a remedial action plan to address weaknesses in governance and culture identified by an inquiry commissioned by APRA in 2018. An independent reviewer assessed all milestones as complete and effective and all recommendations as closed.

Shares in the bank edged up 0.33 per cent during a broadly negative session for the sector. ANZ shed 0.1 per cent and NAB 0.7 per cent. Macquarie Group bounced 0.76 per cent.

Telstra expects to achieve mid single-digit earnings growth this year of around $450 million, CEO Andrew Penn told today’s virtual AGM. Underlying earnings are forecast to rise to $7 – $7.3 billion from FY21 EBITDA of $6.7 billion. The company is working on stripping out fixed costs as part of its T25 strategy. The share priced faded 0.26 per cent.

Star Entertainment declined for a second day in the wake of allegations that gaps in the casino group’s compliance measures were exploited by organised crime to launder money. The company disputes the allegations. The share price dropped 1.97 per cent to a 12-month low.

Other markets

US futures wilted with Asian markets. The Asia Dow gave up 1.1 per cent, China’s Shanghai Composite 0.02 per cent, Hong Kong’s Hang Seng 1.3 per cent and Japan’s Nikkei 0.89 per cent.

S&P 500 futures slid 25 points or almost 0.6 per cent.

Oil retreated further from last night’s multi-year peak. Brent crude declined 44 US cents or 0.53 per cent to US$83.21 a barrel.

Gold fell US$1.90 or 0.1 per cent to US$1,753.80 an ounce.

The dollar retreated 0.19 per cent to 73.34 US cents.