Rising Rates Rattle Stocks as Geopolitical Risks Emerge
This week rates have headed resolutely upwards, and stocks have not liked it much with most markets heading steadily downwards throughout the week. That said, losses amounted to around 2% and are only down a percent or so for the last few weeks. During that time long-term bond yields have risen by around 0.5% in the US and almost as much as that in Australia. This could have been because stronger retail sales and employment data are likely to reinforce central banks' intentions to hike rates a little further or at least talk about keeping them higher for longer, which they have mostly done.
Or it could be because of increased issuance and the lack of a price incentive for buyers (the Fed is now trying to shrink their balance sheet by selling bonds) as has undoubtedly been the case in the last few months. However, since turmoil erupted in the Middle East almost 2 weeks ago, rising geopolitical risk and the impact on the oil price in particular is probably the most proximate cause. The widespread nature of the stock market weakness here and abroad speaks to the multiple causes but the spike in the gold price suggests that risk appetite in markets is receding rapidly as investors seek a haven, but the underlying supply and demand dynamics of the Treasury market suggests that this time around government bonds are not the haven that investors are looking for.
Australian stocks are down over 1% for the week, and although most sectors were weak, consumer discretionary and healthcare stocks were among the worst performers, down over 3% each. In the former case, this reflects concerns about the impact of high inflation and rising interest rates on consumer spending while in healthcare it was CSL.
CSL has been caught up in the negative sentiment affecting healthcare stocks that are not related to the obesity GLP-1 drugs. Most local fund managers feel that this may be overdone and that some of the share market reaction could be because many large global fund managers are rotating into the GLP-1 drugs and dumping others including many of our national champions. ResMed has also been in the red as less obesity could plausibly lead to less demand for sleep apnea machines but also the week the tide appeared to turn, ResMed was one of the best performers.
Elsewhere in Australian equities, the biggest positive contributors to the index return last week were Woodside Energy, BHP, Northern Star Resources, Newcrest Mining and Whitehaven Coal. Strong gains in these energy and materials stocks has helped cushion some of the losses seen offshore, particularly amidst more encouraging economic news from China where the latest official GDP numbers were well above expectations.
Global equities were also mostly lower. The MSCI World Ex Australia index has gained in AUD terms as the Australian dollar fell, but the hedged index is down just over a percent. In the US, tech and energy stocks outperformed with the top contributors being Microsoft, Netflix, ExxonMobil, Procter & Gamble and Chevron. On the other hand, Apple, Nvidia, Tesla, Amazon and AstraZeneca were the main detractors. The data has been noisy but there is some evidence of strength in sectors poised to benefit from rising inflation and rates while some traditionally growth-oriented segments are facing valuation headwinds unless they look like they could dominate in the AI era but even there we are now seeing some volatility on valuation concerns in stocks such as Nvidia.
In fixed income, increases in yields have been notable because of the level they have reached but in absolute terms have been incremental, resulting in moderate price declines. The Australian composite bond index fell 1.1% and the global aggregate index dropped 1.4% in hedged AUD terms. Credit spreads widened slightly amid some risk-off sentiment as recession probabilities seemed to increase again. The reporting season in the US has got off to a good start but only 10% of companies have reported so there will be much more for the markets to chew on in the coming week.