Russian ETFs fall 60% while the Australian market was resilient, oil topping $130/barrel and more...
With the war in Ukraine continuing, the Australian market trudged along and managed to end the week up 1.6%. The S&P 500 saw a very slight dip and the Nasdaq 100 was down 2.5%. This has justified our strategy of selling out of high multiple stocks and holding a bit of extra cash, increasing our holdings in sturdy, resilient companies, as well as having plays in defence and agricultural stocks.
Oil topped US$130/barrel on the news that the US is considering banning imports of Russian crude oil. Although this is good news if you are long in oil, the rest of you will be feeling the pain at the bowser when filling up your car.
The VanEck Russia ETF free-fell 60% last week, as Russia is facing a deep recession due to an unprecedented level of coordinated financial and trade sanctions, as well as investors and even indexes pulling out of Russia due to ethical concerns. The Russian ruble has dived, and the Russian central bank is desperately trying to prevent a bank run, as Russians are queuing up at ATMs to withdraw their deposits before they fear their bank becomes insolvent.
Federal Reserve Chair Jerome Powell testified to Congress last week, where we found out a bit more of what he and the board was thinking. He confirmed what the market already knew and locked in a 25 basis points increase in interest rates. In fact, the market was previously pricing in a 50 basis points rise in March, but this has been tempered back as we wait to see the economic impacts from the war in Ukraine and heavy sanctions on Russia.
He also stated that the Fed expects inflation “to decline over the course of the year as supply constraints ease”, but maintained there was a degree of uncertainty due to the war. In particular, this will cause a level of uncertainty around the prices of wheat, oil and some other commodities.
The US unemployment rate came in at 3.8%, beating expectations of 3.9% and a fall from 4% in January. This was helped by the US adding 678,000 nonfarm payrolls. These strong results should further solidify Powell’s decision of raising rates in March.
The RBA met last week, and as expected they kept rates at 0.1%. Like his US counterpart, RBA Governor Phillip Lowe remained wary about the situation in Ukraine and the economic consequences that would flow from it. Unlike his counterpart, he reiterated the RBA was prepared to be patient with raising rates, and would wait and see how developments in Europe and at home will impact monetary policy. In particular, he maintained he would wait until he saw concrete evidence that actual inflation was sustainably within the 2 to 3% target range. Although recent figures have been within this range, he wants to see a clear sustainable trend rather than one or two data points.
Fourth quarter GDP in Australia grew by 3.4% quarter-on-quarter. This smashed the expectations of a contraction of 2.7%. This shows that Australia has turned the corner regarding the impacts of the Omicron outbreak, which is something we hope lasts. This is further reiterated in retail sales figures for January, which grew by 1.8% from the previous month. An increase in discretionary spending is a positive economic sign as consumers are spending beyond the essentials.
On the earnings front, Target (NYSE: TGT) performed very strongly, jumping 10% after posting strong results. Revenue was roughly in line with expectations and Target reported earnings per share of US$3.19, smashing expectations of US$2.85. Target CEO Brian Cornell said the retailer is seeing “an incredibly resilient American consumer” despite many factors pulling and pushing prices.
Costco (NYSE: COST) also beat expectations, where revenue came in at US$51.9 billion. Wall Street expected Costco to post a revenue figure of US$51.35 billion. Costco particularly benefits from the vaccination rollout and a relaxation of restrictions America-wide as their sales rely heavily on customers seeking a treasure-hunt style shopping experience at their expansive warehouses.
A quieter week on both the economic and earnings front will keep the focus of markets mostly on the developing situation in Ukraine. However, there are a few things to look out for.
Our main focus will be on Core CPI figures for the US in February. It is expected to come in at 0.5% month-on-month growth. We will also be looking at job openings in the US for January, which is expected to come in at 10.3 million. This forward-looking measure indicate that employers are finding more opportunities to fill job positions as there is more demand for their business. A higher number would be a strong sign for the economy.
Have a great week,
Sam Waldron - Research Analyst