28 Aug 2020
US Fed annouces significant policy change
- Global equities rose this week whilst Australian equities treaded water as investors digested Australian company reporting season.
- In local stock news, Suncorp shares rose even though the company reported a 32% fall in full year cash earnings. The company said its earnings were mostly affected by reduced profits in its insurance division from higher reinsurance costs and a low yield environment, and virus impacts on its banking and wealth division. The company will pay a reduced final dividend.
- Iron ore miner Fortescue posted a record annual profit of $6.6 billion. The 49% lift in profit was driven by record shipments (given Brazil iron ore is offline) and ongoing low costs which saw revenue rise to almost $18 billion.
- Qantas is planning to cut another 2,500 workers at airports across Australia, adding to the recently announced 6,000 staff departures, as the airline looks to outsource ground handling crew to save $100 million per year.
- Westfield Australia shopping centres owner and operator Scentre Group reported a large half year loss, after writing down the value of its 42 properties. Shares rose. Management was confident on the future.
- The Aussie dollar rose this week as the USD continued to fall away as the US central bank announced a significant policy change.
- Australian retail trade lifted strongly in July with a 3.3% rise, with all major spending categories rising in the month. This follows a 2.7% rise in June, with sales now up more than 12% over the year. Spending was the strongest for household goods, up 30% on the same time last year, whilst retail trade rose in all states except Victoria.
- Australian business activity fell with the August services reading falling back into contractionary territory due to the reimposition of lockdown measures in Victoria, whilst manufacturing signals remained expansionary. The services sector is multiple times larger. It’s likely the unemployment rate has risen again, whilst input cost inflation accelerated to its fastest pace in 6 months likely caused by disruptions to supply chains.
- RBA governor Lowe confirmed that the cash rate could remain at 0.25% for at least 3 more years and possibly longer.
- The US central bank chair announced a significant policy shift saying that the Fed would adopt a flexible inflation target. Whilst details were lacking, the move likely means the US will be at 0% interest rates out to almost 2024 with more asset purchases (money printing) to come.
- US business activity snapped back to the highest level since early 2019 as companies saw a resurgence in new orders. US home sales rose at a record pace for a 2nd straight month in July and home prices hit all-time highs.
- Europe’s economic recovery faltered this month following renewed restrictions on travel with a key activity index falling due largely to a decline in the services sector. German manufacturing rose, bucking the trend, clearly benefiting from the continued recovery in the Chinese economy. The equivalent UK data also showed a strong rebound.
- The French President and German Chancellor made it clear that there would be no return to generalised lockdowns due to the virus and implored other European leaders to work together to avoid re-imposing border closures. The French President went further detailing the disastrous effects of lockdown on both current and future generations. The calls came after new daily infections began increasing in Spain, Italy, Germany, and France.
- Pfizer and its German partner BioNTech say they’re on track to submit their experimental Covid vaccine for review by regulators as early as October. Phase 2 trials showed promising results with little side effects. Separately, AstraZeneca has begun phase 3 trials for its vaccine candidate whilst Johnson & Johnson said it planned to start phase 3 testing in September. US hospitalisations continued to fall whilst daily new cases were abating.
- The UK appears to be back on the path of a hard Brexit with UK and European officials remaining deadlocked on their trade agreement with a deal seeming unlikely at this stage. The transition period for Brexit runs out at the end of this year.
- US President Trump accused unnamed officials of delaying the process of drug authorisations by the US FDA in order to prevent his re-election. His comments came after the FDA issued emerging use authorisation of convalescent plasma (blood from Covid recovered people) for treating Covid patients. He does have a point in relation to drug authorisations being extremely slow considering there are currently 3 different drug therapies that have showed strong results in testing and these drugs have been used for other purposes for multiple decades. Convalescent plasma should have been approved months ago given the extremely low risks involved in administering it.
- Both the US and China reaffirmed their commitment to the phase 1 trade deal after trade officials from both sides spoke. US officials say they discussed steps China has taken to ensure greater protection for US company IP rights and remove impediments to US companies in financial services and agriculture.
- Australian Treasurer Josh Frydenberg vetoed the Australian Takeover Panel’s decision to approve China’s Mengniu Dairy plans to buy Australian dairy assets owned by Japanese Kirin Holdings. The decision wasn’t surprising but shows that the Federal Government is serious about not letting China bully Australia. In fairness, the takeover panel gave the approval pre-virus.
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