Borrowing costs

Tech spearheads rally as borrowing costs drop – The Market Herald

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The equity market extended its lead for the week as gains in technology and defensive sectors offset declines in energy and financials.

The S&P/ASX 200 swung to a gain of 30 points or 0.46 percent at midterm. The rally kept the benchmark on track for its first weekly increase in three weeks.

Tech stocks and proxies for rate-sensitive bonds climbed as the cost of long-term borrowing continued to retreat. Declines in copper and crude oil have limited commodity inventories.

What is driving the market

A mixed market included sectoral moves in both directions after commodity prices fell and the bond market rally accelerated. Copper minors fell after the ‘metal with the degree of economy’ plunged to a 16-month low. The materials sector hit its lowest level since November before reversing as Chinese iron prices improved for a second day.

US stocks rose overnight as bond yields faltered. The S&P500 rose 0.95%, holding the course for a positive week.

A recovery on bond markets helped equity markets stabilize in recent sessions. This week’s Australian bond market rally is the strongest in a decade, according to Bloomberg. The yield on ten-year government bonds plunged 45 basis points. (Yields move inversely to prices.) A drop on this scale would be the biggest weekly drop since August 2011.

There are several reasons why this is important for stock investors. Lower yields make the returns offered by stock dividends more attractive. Cheaper borrowing costs also benefit the bottom line of companies that borrow to finance growth. Lenders, however, lose the ability to increase their margins.

Thus, the Australian financial sector fell this morning, while technology stocks, REITs, healthcare and consumer staples rallied.

“The recent decline in bond yields appears to be going well for tech companies that rely primarily on borrowed money to fuel their growth. Australian bond yields fell today as weak economic data in Europe and the US have added to recession fears,” said Kalkine Group CEO Kunal Sawhney.

“Defensive sectors like healthcare and consumer staples, which may not see much pressure from a recession on their earnings, also gained this morning.”

To go up

The technology The sector climbed 4.7% to its highest level in more than a week after the Nasdaq Composite led U.S. gains overnight. Biotech Imugene climbed 14.29%, app maker Life360 16.18% and network provider Megaport 11.8%.

The beaten buy now, pay later sub-sector benefited from a rare day in the sun. Zip Co rebounded 14.2%. Afterpay parent Block put 10.78%. Sezzle climbed 9.43%. Splitit gained 9.09%.

lithium miners rebounded after days of heavy selling pressure. Lake Resources jumped 17.14%. Liontown gained 11.65%, Pilbara Minerals 7.8% and Basic Lithium 9.52%.

A cash injection from European automaker Stellantis raised lithium junior Vulcan Energy 30.4 percent. Stellantis will pay $76 million for an 8% stake in Vulcan, making it the miner’s second largest shareholder. The companies have a levy agreement until 2035.

On the heavyweight side, property giant Goodman firmed 1.71%, retail conglomerate Wesfarmers 1%, biotech CSL 0.74% and supermarket Coles 0.85%.

Qantas Coupled on 0.11% on the news, the airline’s debt levels continue to improve as travel volumes resume. Net debt will rise from $6.4 billion at the height of the pandemic to around $4 billion by the end of this month. Underlying full-year earnings were on track to be between $450 million and $550 million.

Game Software Group punters rebounded 23.33% from a two-year low following the announcement of a market buyback. The company will buy back up to 10% of the issued capital from July 12.

Descent

Energy was the morning’s worst performance following Brent crude’s six-week low. Oil prices have fallen sharply this week, along with other commodities, as traders anticipate weaker demand as the global economy slows.

Woodside Energy dropped 1.53%, Santos 1.36% and VIVA Energy 3.19%. Ampol lost 2.09%.

Decline in industrial metals helped bring South32 down 1.36%. Rio Tinto lost 0.79%, BHP 0.72% and Fortescue Metals 0.2%.

Agrifood Nufarm and Elders fell 1.87% and 1.78% respectively. Wheat and oat prices fell this week along with other “soft” commodities.

Manufacturer of skincare products BWX entered a trade halt, pending a trade update.

Other markets

US futures were boosted by a positive morning on Asian markets. The Asia Dow gained 0.42%. China’s Shanghai Composite gained 0.67%, Hong Kong’s Hang Seng 1.08% and Japan’s Nikkei 0.74%.

S&P 500 Futures Contracts climbed 18 points or 0.46%.

Oil remained under pressure. Brent crude slid 40 US cents or 0.37% to US$106.06 a barrel.

Gold fell for a fifth session, slipping US$3.90 or 0.2% to US$1,825.90 an ounce.

The dollar firmed 0.04 percent to 69.05 US cents.