US inflation has risen at its fastest pace since June 1982. The consumer price index climbed 7% in 2021 according to Labor Department data released on Wednesday. The widely followed inflation gauge rose 0.5% from November, exceeding forecasts.
Despite these figures, markets rose overnight.
US and European stocks all pushed higher, with the Nasdaq, which had been extremely volatile at the start of the year, rising 1%.
“It looks like the market had prepared for even hotter inflation, which obviously didn’t materialise. So the reaction can best be described as relief,” ThinkMarkets analyst Fawad Razaqzada said.
The Dow was up 0.1% and in Europe, London and Paris ended the day up 0.8%, while Frankfurt added 0.4%.
In China, inflation eased, giving Beijing room to move on kickstarting its stuttering economy, with interest rate cuts on the table.
Michael Hewson at CMC Markets UK said that some might be interpreting the Chinese numbers as “a leading indicator that global inflationary pressures might be starting to diminish”.
Hewson does say this may be a premature outlook, yet there is optimism.
“It would appear relentless optimism is perhaps returning to the markets and dip buyers are diving back in,” Oanda senior market analyst Craig Erlam wrote in a note to clients.
The Australian market, however, may not have the same buoyancy at open this morning.
The ASX is expected to open flat or edge lower.
ASX futures were down 3 points to 7347 near 8am AEDT.
Here’s what we saw:
- The Aussie dollar lifted from lows near US72.00 cents to highs near US72.92 cents and was near US72.90 cents at the US close.
- Global oil prices were higher after the US Energy Information Administration reported that US crude inventories fell 4.6 million barrels last week to 413.3 million barrels, their lowest since October 2018.
- The Brent crude price rose by US95 cents or 1.1% to US$84.67 a barrel.
- The US Nymex crude price added US$1.42 or 1.7% to US$82.64 a barrel.
- Nickel prices rose by 1.1% to the highest level in more than a decade after top supplier Indonesia said its considering a tax on exports.
- Copper rose by 3.6% on renewed supply fears.
- Zinc fell by 0.2%.
- The gold futures price rose by US$8.80 or 0.5% to US$1,827.30 an ounce.
- Spot gold was trading near US$1,827 an ounce at the US close. Iron ore lifted by US$3.00 or 2.3% to US$13
Australian markets
Australian shares bounced yesterday led by the energy and technology sectors, however, today is likely to tell a different story.
The market is expected to be flat or down today, however, the dollar looks to be strengthening.
"Short of another virus shock, we consider the Australian dollar is likely past its weak point in this cycle," CBA head of international economics, Joseph Capurso said.
Capurso expects AUD/USD to end 2022 at 0.8000.
"We consider AUD will lift as undervaluation fades, as the world economy recovers and as the USD falls," he said.
Crown takeover heats up
Blackstone Inc has upped the ante on its bid to acquire Crown Resorts Ltd.
Crown has now received a revised non-binding takeover proposal from Blackstone of $13.10 per share. This represents an increase of 60¢ per share compared to the previous offer of $12.50.
The revised offer follows the consideration of ‘non-public information’ provided by Crown during due diligence.
"Blackstone has made the revised proposal after considering non-public information provided by Crown during initial due diligence," Crown said.
Crown will now consider the offer in relation to the best interests of its shareholders and has provided Blackstone with what it needs to put a binding offer together.
Crown’s board said it’s in the interests of shareholders to engage further with Blackstone on a non-exclusive basis in relation to the proposal.
If Blackstone’s binding offer is no less than $13.10 cash per share, Crown’s board will unanimously recommend shareholders vote in favour of the proposal.
Macquarie now bigger than Westpac
Macquarie Group is now Australia’s third-largest bank, with a market capitalisation that surpasses Westpac.
The ‘Millionaires’ Factory’ shares have rallied 1.5% to $208.39 so far this year.
In 2021 Macquarie more than doubled in first-half profit and raised $2.8 billion to fund acquisitions and other growth opportunities.
Macquarie’s market capitalisation – currently just under $80 billion – surpassed ANZ in November. ANZ’s market valuation was $78.9 billion and Westpac’s was $79.5 billion at market close yesterday. National Australia Bank has a market capitalisation of $95.4 billion, while Commonwealth Bank is far and away the market leader at $173.3 billion.
“Macquarie’s recent rise in market capitalisation is reflective of their track record of superior execution and a positive backdrop for earnings growth in most divisions,” Martin Currie Australia senior analyst Matthew Davison said.
“An example of that execution track record is in Australian mortgage volumes, which has been in direct contrast to ANZ and Westpac. However, of most significance has been the re-rating of the stock’s earnings multiple to reflect the group’s ‘green’ credentials and ability to monetise some of the investment opportunities from decarbonisation trends globally.”
ANZ and Westpac continue to struggle with mortgage growth.
BHP Group Ltd undervalued
Analysts at Goldman Sachs (NYSE:GS) have noted BHP and Rio to be undervalued.
Paul Young said the companies trade on about four times their EBITDA, relative to historical multiples of 6-7 times, and they trade on free cash flow yields of 11-12%, which is below the 15-year historical average of 7-8%.
"We forecast an attractive average sector dividend yields of 8%/6% in FY22/FY23 despite increased spend on growth and decarbonisation," Young says.
"We see capital allocation – production growth versus decarbonisation spend versus shareholder returns, M&A and portfolio optimisation as the key themes for the sector in 2022."
With BHP to become a sole ASX listed entity, Saxo Markets Australian market strategist Jessica Amir says this could have a big impact on the local market.
"By size, they're already a $221 billion company and it just means that their market value goes up quite significantly," she said.
"BHP is currently about 6% of our market, the ASX 200, and it'll grow to about 10%."
The ASX is certainly set to get an iron ore boost.
"Currently, the biggest company on the ASX is BHP. The third biggest is Rio Tinto and then Fortescue Metals is the 10th-biggest stock," Amir said.
"So it means now there's going to be a huge over-concentration in the top 10 on mining first and foremost. And secondly, of course, iron ore miners."
Amir says the benefits for ASX shareholders are attractive.
"Down the track, it'll be more attractive because the dividends will get larger, and then there's the franking credits," she said.
"BHP already pays fully-franked dividends, but it means that those fully-franked dividends will be shored up so they'll continue to pay them," she explained.
"They'll also bring forward $6 billion of franking credits as well."
US markets
The surge in US inflation has given the Federal Reserve all the ammunition it needs to tighten monetary policy, noting the rise in consumer prices may not have reached its peak.
“The elevated and sticky rate of inflation has front-run the Fed’s original plans envisioned under the flexible average inflation targeting framework,” said Kathy Bostjancic, chief US financial economist at Oxford Economics.
“The Fed now sees it as its top priority to ensure that inflation moderates back towards the long-run 2% inflation target in order to promote a long-lasting economic expansion that brings about maximum employment over time.”
The Fed is expected to raise rates in March, although this could blow out to mid-year depending on when inflation peaks.
“The risks are likely skewed towards higher for longer inflation with the Federal Reserve ending up responding more aggressively to keep it in check,” ING chief international economist James Knightley said.
“There is no evidence that inflation pressures are abating. Energy prices declined slightly in December, but pressures have broadened significantly beyond this, with core goods and services prices all surging,” ANZ economists said.
“Inflation pressures are likely to intensify as the labour market tightens further and wage pressures grow. The peak in US inflation is not in yet, and the Fed will be grappling with inflation in a 7 to 8 per cent year-on-year range for quite a few months to come.”
As for the markets, they seem to be taking things in their stride.
Mega-cap technology shares of Apple up 0.3%, Microsoft up 1.0%, Alphabet up 1.2% and Tesla up 3.9% led the way.
Shares of Dish Network (NASDAQ:DISH) lifted 2.8% following news that the company is in merger talks with DirectTV.
The loser was Goldman Sachs (NYSE:GS) whose shares fell by 3.2% ahead of major bank reporting results on Friday.
At the close of trade, the Dow Jones index rose by 38 points or 0.1% with the S&P 500 index up by 0.3%. And the Nasdaq index added 35 points or 0.2%.
European markets
Also closed higher.
The pan-European STOXX 600 index rose by 0.7%, with basic resources stocks climbing 3.2% on Chinese stimulus hopes.
The German Dax index added 0.4% and the UK FTSE index gained 0.8%.
In London trade, shares in Rio Tinto (+2.8%) and BHP (+4.5%) both lifted.
The Stoxx 600 should be the standout fourth-quarter performer, with profit, according to Refinitiv Data, for companies on the index expected to rise 48.5% in the fourth quarter to €108.7 billion from a year earlier – only a slight drop from the prior estimate of 49.3%.
“Overall, it should be another good season, but several companies communicated a lot of the good in 2021. What could be a catalyst for the market is going to be the guidance for 2022,” Societe Generale’s Kaloyan said.
German software company TeamViewer surged 14.9% and French cloud computing company OVHcloud was 4.6% higher.