The ASX could edge lower this morning, or at least open flat, following mixed overseas leads.
SPI Futures are currently pointing to a 0.1% fall, attributed to US share markets ending Friday’s session in the red.
Despite the dip, two sectors are likely to stand out: energy and iron ore.
Oil prices are at multi-year highs, while iron ore had a rare good day on Friday, with the favourable trend likely to continue.
Commsec analyst Craig James said, “The iron ore price rose $US7.25, or 6.2%, on Friday, to $US125.05 a tonne, so we may see some knock-on gains for BHP, Rio Tinto and Fortescue.”
Here’s what we saw:
- The Aussie dollar rose from lows near US72.90 cents to highs near US73.35 cents and was near US73.05 cents at the US close.
- Global oil prices rose on Friday. Reuters noted that soaring European gas prices have prompted a shift to oil for power generation.
- The Brent crude price rose by US44 cents or 0.5% to US$82.39 a barrel. Over the week, Brent rose by US$3.11 or 3.9%.
- Base metal prices rose by between 0.6-5.3% on Friday with nickel up the most and aluminium up the least. Over the week, metals rose 2.8-7.0% with nickel up the most and copper up the least.
- The gold futures price fell by US$1.80 an ounce or 0.1% to U$1,757.40 an ounce. Spot gold was trading near US$1,757 an ounce at the US close. Over the week gold fell US$1.00 or 0.1%.
- Iron ore rose by US$7.25 or 6.2% to US$125.05 a tonne. Over the week iron ore rose by US$8.05 or 6.9%.
Australian market
The best performing sectors last week were Energy up over 3%, followed by Financials and Utilities, up over 2%. The worst performing sectors included Health, Information Technology and Communication Services, all down just under 1%.
The best performers in the S&P/ASX top 100 stocks included Worley Limited up over 7% followed by QBE and Downer EDI, both up over 6%. The worst-performing stocks were Magellan down over 7%, followed by a2 Milk, Fisher & Paykel and Washington Soul Patterson, all down over 5%.
As we do each week, we asked Wealth Within founder and analyst Dale Gillham about what to expect from the market moving forward. Here’s what he had to say.
“The Australian stock market continues to exhibit indecision, as the bulls and bears battle for dominance. While the All Ordinaries Index was slightly in the green last week, the move is far from convincing.
“Financial stocks make up around 30% of our market, which held up the All Ordinaries Index last week given that all of the big four banks together with Macquarie and QBE traded up. In other words, there are only a few companies stopping the market from falling away, and if financials turn down then the market will fall heavily.
“We are still in the timeframe for the low to occur and I still believe the Australian stock market may fall further with my target for the low below 7,200 points, which I expect will occur anytime between now and mid-October.
“As I have previously stated, now is the time to be patient rather than trying to grab a bargain, as you may be disappointed. The market will settle in the next month and you will be rewarded for your patience, as there are many good buying opportunities unfolding.”
Let’s talk about a2 Milk
As we know a2 Milk is going through enormous turmoil at the moment, with a hefty lawsuit hanging over its head.
Gillham believes it is only going to get worse, with the stock still to fall.
“Former stock market success story a2 Milk is in the news once again as Slater and Gordon file a class action on behalf of shareholders alleging that a2 Milk engaged in misleading or deceptive conduct between August 2020 and May 2021. The question for shareholders right now is whether this class action will negatively impact the share price of a2 Milk.
“A2 Milk listed on the ASX in March 2015 and in the five years to June 2020, it had risen to an all-time high of $20.05 or over 3,500% in price, making it an investor's dream. Over the next 11 months to May 2021, it continued to fall away to a low of $5.04 suffering a fall of almost 75%.
“While I won’t comment on the class action, I think it is pertinent to point out that the uncertainty created by the COVID pandemic caused many companies to struggle with providing accurate financial guidance to the market, as there were simply too many lockdowns, which impacted on supply chains.
“Unfortunately, those investors who bought into a2 Milk between September 2020 and May 2021 were buying when the stock was falling in price with the expectation that it would return to delivering the speculator returns of the prior five years. However, rather than getting a good buy, they have said goodbye to their money. So, when do we expect a2 Milk to turn around?
“Warren Buffett is famously quoted for saying ‘buy in doom and sell in boom’, and right now with a2 Milk facing a class action, there could not be more doom but does this spell opportunity? Absolutely, but not just yet.
“While I believe a2 Milk has fallen at least 80 to 90% of what the total impact will be, it may still fall to around $2 although I am confident it is near the end of its current move down. In fact, we may have already seen the bottom but it is too early to tell. Regardless of what unfolds with the class action short term, I think investors will be rewarded over the longer term.”
Australian indices
- ASX 200 +0.87% to 7,320.10.
- ASX24 futures -0.1% to 7,273.
- S&P/ASX Small Ordinaries +0.84% to 3,460.60.
- All Ordinaries +0.88% to 7,617.30.
US markets
Worse than expected jobs data led the market lower on Friday. This causes a conundrum for the Fed in how to manage the economy.
“The US job market is improving on a trend basis, we see that in terms of the unemployment rate but there still might be a degree of caution by the policymakers about winding back stimulus,” Commsec’s Craig James said of the unemployment report.
“There isn’t any convincing need for the Federal Reserve to be too gung ho in terms of winding back, so it‘s still a waiting game I would have thought.”
Bo Prince co-chief investment officer at Bridewater Associates – the world’s biggest hedge fund – believes high inflation is here to stay and central banks will be powerless to thwart it.
“If there is inflation, the Fed is in a box because the tightening won’t really do much to reduce inflation unless they do a lot of it because it is supply-driven. And if they do a lot of it, it drives financial markets down, which they probably don’t want to do,” he said.
“Deciding between the lesser of two evils, what do you choose? I think most likely you choose inflation because you can’t do much about it anyway.”
Stagflation could provide a further issue to deal with.
The rising energy crisis is driving inflation. However, economic growth is slowing.
The equation looks something like this: global shortage of energy commodities = multi-year high prices = higher consumer prices = slow economic activity.
Analysts are reluctant to play the stagflation card, however, it remains a risk.
“Growth should be reasonable, but stagflation is a risk and supply chains are supporting that,” K2 Asset Management (ASX:KAM) executive director George Boubouras said.
US indices
- Dow Jones flat at 34,746.25.
- S&P 500 -0.2% to 4,391.34.
- Nasdaq -0.5% to 14,579.54.
European markets
While Wall St was lower, European markets were mixed.
Oil and auto stocks led gains while tech stocks fell by 1.4%.
The UK FTSE index added 0.3%, supported by travel stocks on news that Britain will scrap COVID-19 quarantine requirements for 46 destinations.
In London trade shares in Rio Tinto fell by 0.4% but BHP shares were 0.7% higher.
European indices
- STOXX 600 -0.28% to 457.29.
- German Dax -0.3% to 15,206.13.
- UK FTSE +0.3% to 7,095.55.