Rotation rally continues, ASX 1.7% higher

Rotation rally continues, ASX 1.7% higher, Commonwealth Bank (ASX:CBA) reports, US markets mixed, ASX to open positive
 
The rotation rally continued on Wednesday as investors adjusted portfolios to what appears to be a sooner than expected return to normal.

Every sector finished higher, with COVID beneficiaries including Consumer Discretionary (+0.7%) and healthcare (0.2%) among the ‘weakest’.

The winner once again was the energy sector (+5.0%), with the oil price adding another 4% on Wednesday after jumping 9% earlier in the week.

One of the biggest beneficiaries has been Woodside Petroleum (ASX:WPL) which finished 6.3% higher, despite facing issues with the sale of its Scarborough asset.

Markets are clearly pricing in a quick return to normal trade and travel, but the potential supply responses from key oil producers remains the biggest unknown.

Interesting, despite the rally the share price remains at levels not seen since 2005. It was a busy day on the environmental front, with Woolworths Ltd (ASX:WOW), announcing its intention to be carbon neutral by 2050 and Fortescue Metals Group (ASX:FMG) founder Twiggy Forrest outlining a plan to become the largest renewable energy producer in the world.
 
Commonwealth Bank (ASX:CBA) profit falls 16%, Flight Centre (ASX:FLT) raises $400 million, Government bonds sink
 
Commonwealth Bank of Australia (ASX:CBA) was the latest bank to offer a quarterly update, confirming a 16% fall in cash profit to $1.8 billion.

The result bodes well for dividends in 2021, with management confirming that deferred loans had fallen 60% from their peak, down to just 52,000 mortgages from a peak of 210,000.

With conditions returning to normal in Australia, CBA has pushed forward with an aggressive lending strategy, approving $5.6 billion in new loans during the quarter, twice the sector average.

The strength of CBA’s franchise remains in full display though, with another $15.8 billion in low-cost customer deposits received and now supporting 74% of the groups loan book.

The key pressure facing the CBA and the other banks is a shrinking net interest margin (NIM) or the profit they make on every dollar they lend.

Interestingly, the spike in Government Bond yields overnight, which are resulting in capital losses in traditional bond strategies, are actually a positive for the banking sector.
 
US markets revert to trend, S&P 500 0.8% higher, Nasdaq 2.3%, European Central Bank to extend QE
 
US markets reverted to type, with the technology-driven Nasdaq leading the way overnight after an incredible few days for beaten down ‘value’ stocks.

Among the leaders were Zoom Communications (NASDAQ:ZM) and PayPal Inc. (NASDAQ:PYPL) which finished 9.9% and 4.9% higher respectively.  

Analysts have suggested the initial ‘vaccine rally’ was likely driven by the winding down of short positions in companies ranging from travel to theme parks rather than outright growth in demand for these companies.

Fears are growing about another round of lockdown measures in the US as daily new cases remain above 100,000, with the potential for significant economic damage despite growing likelihood of a vaccine in early 2021.

Evidencing the delicate balancing act between recovery and support, the European Central Bank indicated it would be continuing with its planned increase in bond purchases in December, wary of removing support too early.

My focus this week has been seeking to understand how significant the economic damage has been thus far, the risk that stimulus has been withdrawn too early and the inflation implications, if any, of the recent spike in bond yields.

Drew Meredith

Drew is publisher of the Inside Network's mastheads and a principal adviser at Wattle Partners.