Five issues played on the minds of investors last week, leading to a weaker equity market:

• ASX earnings season: Last week’s results were more mixed than the previous But it was still a net positive. Management teams continue to indicate that lockdowns are not having as harsh an impact as many feared.
• Domestic Covid situation: A deterioration has led to greater restrictions and more risk to economic growth and
• Vaccines: New studies suggest vaccine effectiveness in preventing Covid fades relatively quickly, leading to calls for booster
• US Fed: Signalled a more hawkish stance regarding tapering Quantitative
• China: Beijing continues to reinforce the notion of “common prosperity,” seen by some as a risk of further market-unfriendly

Markets

The outcome was a 1.94% fall in the S&P300 last week. The S&P 500 was down 0.55%.

It feels like we are approaching a key juncture for equity markets.

The case for equities is based on the view that we are near a nadir of sentiment regarding Delta cases and the sell-off in cyclicals. From here policy supports, signs of peaking cases, resilient economic momentum, earnings growth and liquidity will drive markets higher to year end.

The negative take is that markets are extended on the back of excess liquidity. Coupled with some early warning signals in the data, deteriorating market breadth, more speculative sectors rolling over, growth risks from Covid or inflation, and policy tightening it could spell a softer period for equities.

The bull case is built on strong economic growth and earnings revisions, coupled with muted expectations.

The more cautious view is that the market is not as healthy as it may appear.

We are also seeing the US dollar break higher, weighing on commodities and potentially reflecting some risk aversion.

Bond yields remain low. The question is whether this is the result of central bank buying, or a harbinger of disappointing growth as inflation throttles demand and stimulus effects wear off.

Over the next month we should get a better read on three factors that will guide us on which way the market breaks:

• Whether the US delta wave peaks, boosting consumer confidence
• How the US labour market performs as benefits roll off
• Whether the Fed will prioritise inflation risks or slowing growth

Australian equities

Earnings season is still going well, although there were a few more disappointments than the previous week.

Overall, the proportion of companies beating expectations is running above historical averages, although disappointments are in line.

Resources fell 10.7% last week, driven by lower commodity prices and exacerbated by BHP’s plan to consolidate its Australian and UK listings.

However, resources have performed best in terms of earnings. But similar to February, this hasn’t been reflected in stock moves since commodity price falls have dominated.  Financials have so far done better than industrials.

Australia’s Covid situation – ever evolving

The rise in Melbourne cases is concerning. Extended restrictions will mean about 40% of the national economy is now locked down. The acceleration of cases in Melbourne will provide insight on whether lockdowns can achieve Delta variant elimination.

The focus on vaccinations is yielding results, particularly in NSW.

The seven-day moving average of daily vaccination rates is now running at 1% of the population and 1.4% for NSW. This is similar to peak rates in Israel and Canada.

In NSW 57% of people have had one dose and 30% two doses.

Assuming current vaccination rates persist, we should hit 70% of the population with one dose by early September and 80% three weeks later.

There is about a five-week lag to achieve the same proportions for two doses.

The debate now is about how far restrictions can be pared back once we reach these levels.

International Covid Situation

National case numbers continue to rise in the US.

The key question is whether we see evidence of US cases peaking in the next two weeks — as occurred in India and UK. Return to school is a risk to that outcome.

Israel’s experience offers an important perspective for Australia. With a high degree of the population vaccinated, new cases were negligible in June. But as soon as they opened the borders— even with strict controls — the Delta strain took hold and new cases surged.

Hospitalisations have also risen dramatically in Israel, although not to the extent of previous waves (despite similar case numbers).

This highlights the challenges Australia faces in the next phase, especially since Delta is already established here.

Economics

US sentiment surveys show a marked shift in people’s behaviour in response to the growing Delta wave. Interest in restaurant dining, for example, has fallen 33.5% since July.

The US economy remains strong, however. The Atlanta Fed GDP predictor is still implying 6% annualised growth.

The Reserve Bank of Australia’s meeting minutes shows the board remains rather optimistic in the short term and that their bond purchase program (money printing) will continue to be reviewed as data changes, still with an expected reduction starting from September. The Bank’s base case assumes the Sydney lockdown is over by the end of September(???)……At present, over half of the population is subject to lockdown with NSW and Victoria representing almost 60% of Australia’s economic output.

Politics

The disastrous US exit from Afghanistan will be etched in memories for a long time to come with the Taliban almost instantly back in charge after 20 years of US occupation and with 1000s of ally citizens and diplomatic staff still stuck in the country. Yes, the US had to exit, and should’ve exited long ago, but execution of that exit is one of the worst seen in history. US foreign policy of the current administration is under significant pressure.

China’s president put their wealthy elite on notice, outlining a “common prosperity” plan that includes regulating and redistributing income. This follows massive efforts to reduce poverty, with a recent crackdown on the technology industry and criticism against the excesses of celebrity culture. Interesting times!!