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Energy stocks provided the only real cheer during a gloomy start to the trading week as long-term interest rates surged and US equity futures sagged.
The S&P/ASX 200 slumped 40 points or 0.55 per cent, erasing much of Friday’s gains.
Rate-sensitive growth stocks and bond proxies retreated as ten-year bond yields blew through 1.7 per cent for the first time since May. Star Entertainment dived almost 20 per cent following allegations of compliance failures. Energy stocks were boosted by multi-year highs in crude.
What’s driving the market
The market began the week in reverse as a dive in US equity futures compounded a soft finish to last week on Wall Street. S&P 500 futures briefly wilted 0.5 per cent after Goldman Sachs slashed its growth outlook for the economy. Futures trimmed their fall to nine points or 0.2 per cent as Asian markets improved.
Goldman cut its US growth outlook for this year from 5.7 per cent to 5.6 per cent and for next year from 4.4 per cent to 4 per cent, according to Reuters. The investment bank’s economists cited the drag of the pandemic on consumer spending, supply-chain bottlenecks and probable reductions in stimulus.
On Friday, the S&P 500 dipped 0.19 per cent after the economy created fewer jobs last month than economists expected. While the headline number was soft, nothing about the report altered the growing conviction the Federal Reserve will next month outline plans to unwind support for the economy. Treasury yields rallied as Fed futures indicated a rate hike by the end of next year is a certainty.
“US September payrolls were a big miss, but strong revisions to prior months alongside a decline in the unemployment rate and lift in hourly earnings resulted in a relative subdued reaction by markets, suggesting the figures were strong enough to keep the Fed on track to begin its QE tapering programme in November,” NAB currency strategist Rodrigo Catril said. “[Treasury] yields ended the day higher with a rise in oil prices and upcoming supply likely contributing to the move.”
Australian yields duly followed their US counterparts sharply higher. The ten-year yield was lately up more than six basis points at 1.716 per cent. Yields reflect expectations for inflation and official rates.
“The move up in yields was not just confined to the US market,” Mr Catril said. “In the UK, the 10yr rate hit its highest level in more than 2 years… while Germany’s 10-year rate is nearing its own 2½-year high.”
Today’s action reflected modest expectations for the start of the trading week with a partial holiday in US financial markets tonight. The New York Stock Exchange will open for trade, but volumes are likely to be impacted by the closure of bond markets for Columbus Day.
Going up
While rising energy prices are a worry for the wider market, the sector rallied almost 0.9 per cent to its highest since January. Beach Energy put on 3.11 per cent, Whitehaven Coal 6.5 per cent, Oil Search 1.88 per cent and Woodside 0.55 per cent.
Ampol climbed 2.71 per cent after striking a deal to buy New Zealand’s Z Energy for $2 billion. The company announced it had secured the unanimous support of the Z Energy board to acquire all of the shares in the Kiwi firm for NZ$3.78 per share, a 35 per cent premium to the share price before news of the approach broke. Z Energy shares firmed 6.21 per cent today in Australian trade.
Most insurers rallied after the Federal Court found largely in their favour in a test case over whether business interruption claims were valid if caused by Covid-19. The court ruled insuring clauses were not triggered in eight of nine matters contained in the case. Time has been set aside in November for any appeal.
IAG jumped 4.43 per cent. Suncorp gained 0.24 per cent. QBE dropped 2.04 per cent.
Collins Foods lifted 1.97 per cent to an all-time high, boosted by last week’s announcement the group had secured the right to operate the KFC brand in the Netherlands.
A good news/bad news day for investors in takeover target API saw the pharmaceutical wholesaler announce a profit upgrade and a class action. The company said it expected to beat previous guidance announced in July and will defend a class action filed in Victoria’s Supreme Court brought by Priceline franchisees. The company is currently subject to a bidding war between Wesfarmers and Sigma Healthcare. The share price edged up 0.66 per cent.
Going down
Star Entertainment lost almost a fifth of its value following allegations its anti-money laundering controls were inadequate, potentially allowing organised crime and fraudsters to exploit gaps in the casino group’s procedures. A joint investigation by 60 Minutes, the Sydney Morning Herald and The Age accused the group of failings similar to those that resulted in Royal Commissions into Crown Resorts.
Star said it considered “a number” of assertions within the reports misleading, but will address the allegations with regulators. The share price dived 19.04 cent to an eight-week low.
The rate-sensitive tech sector sold off as Australian yields rallied. Afterpay sank 3.84 per cent, Appen 2.02 per cent, Xero 3.14 per cent and WiseTech 1.79 per cent.
Also under pressure were stocks whose appeal diminishes when yields strengthen. Goodman Group fell 1.69 per cent, Wesfarmers 1.22 per cent, CSL 1.46 per cent and Telstra 1.16 per cent.
The big four banks were mixed despite margin opportunities under higher rates. CBA edged up 0.32 per cent. ANZ slipped 0.11 per cent, NAB 0.21 per cent and Westpac 0.02 per cent.
Other markets
The mood on Asian markets was brighter. The Asia Dow climbed 1.69 per cent, China’s Shanghai Composite 0.23 per cent, Hong Kong’s Hang Seng 1.3 per cent and Japan’s Nikkei 1.13 per cent.
Oil continued a rally that has lifted prices to three-year highs. Brent crude rose 73 US cents or 0.9 per cent this morning to US$83.17 a barrel.
Gold edged up US$1.30 or 0.08 per cent to US$1,758.70 an ounce.
The dollar built steadily to a gain of 0.47 per cent at 73.28 US cents.
