Reporting season better than many feared
Glenmore Asset Management
In August, equity markets were weaker, driven by expectations around the number of future interest rate rises needed to reduce inflation. In the key US indices, the S&P 500 was down -4.2%, the Nasdaq fell -4.6%, whilst in the UK the FTSE 100 performed better, declining -1.9%.
Australia outperformed, where the All Ordinaries Accumulation Index rose +1.3%, driven by its heavy weighting to resources and oil and gas stocks, which outperformed strongly. Property, consumer staples and utilities sectors lagged.
The key driver of declines in global indices were comments made by Jerome Powell (chair of US Federal Reserve) in late August which indicated the US Federal Reserve monetary policy will be aimed very strongly at bringing down inflation closer to its long range target of ~2%, which in turn indicates the interest rate hiking phase will be larger and go for longer than some equity investors had hoped for. On this issue, our base expectation is that central banks will need to raise rates aggressively for another 6-12 months in order to reduce inflation to more acceptable levels. Whilst this will lead to a challenging and volatile period for equity markets, the positive is that this volatility is likely to provide excellent buying opportunities in stocks across a range of sectors on the ASX.
In fixed interest markets, the US 10 year bond yield rose sharply, climbing 42 basis points to close at 3.13%, whilst the yield on the Australian 10 year bond also rose sharply, by 54bp to close at 3.55%. The A$/US$ fell -2.0% to close at US$68.5.
Commodities were broadly lower in August, iron ore fell - 16.0%, crude oil -12.3%, copper fell -2.1%, whilst thermal coal continued to outperform, rising +4.2%.
Overall, the August reporting season was better than many investors had feared, with most results coming in close to consensus expectations. With that said, we are still quite early of the interest rate hiking cycle, with company results for the December 2022 half likely to be more impacted by rising interest rates, higher cost of living, and general caution on household spending.
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