Revenge of the bear

Remember 2021? America’s S&P 500 notched 70 record closes, the second-highest on record. That’s all gone now. On Monday the broad-market index tumbled 3.85% into bear market territory. By Thursday, losses had widened to 6%, erasing all gains since December 2020. The immediate trigger was data showing an unexpected jump in US inflation in May, but volatility is likely to continue until the usual suspects resolve: war in Eastern Europe, surging commodity prices, on-off lockdowns in China, the threat of recession and uncertainty about how far and fast rates will rise.

China wants to corner iron ore

China is the world’s biggest importer of iron ore. Most of it comes from (Western) Australia. Neither country likes each other very much right now. China would prefer to be less dependent on iron ore dug up in the Pilbara, but there aren’t many alternatives. So, if you can’t buy from someone else, why not try and get a better price? And so, on Thursday news broke China plans to consolidate iron ore buying through a central body in a bid to secure lower prices. Will it work? Maybe. Smaller steel mills may strike deals on the side and undermine collective bargaining. Miners also know China’s steel industry needs Aussie iron ore and may refuse discounts, says Morningstar mining analyst Jon Mills.

Australia narrowly dodges blackouts

The electricity market blew up this week. It went something like this: Wholesale electricity prices jumped due to soaring fossil fuel prices and unplanned power station outages. The regulator stepped in and capped prices. Generators scaled back rather than sell at capped prices. Blackouts loomed as electricity demand threatened to outstrip supply. The regulator intervened and ordered generators to provide power where required (they will be paid). Elected officials blame electricity companies for gaming the system. Generators blame the price caps. A decade plus of muddled energy policy is probably the culprit.

BHP can’t sell a coal mine during the coal boom

Nestled in the tranquil Hunter Valley is the Mt. Arthur coal mine. BHP wants to sell it but can’t find a buyer for the right price. Two years after launching a review of its coal assets, BHP announced on Thursday it would retain the mine and keep it open until 2030 (previously 2045). Macquarie analysts believe the mine could add US$1.3 billion to the miner’s earnings thanks to record coal prices.

Bitcoin blows up again but is this time different?

Bitcoin prices fell 22% this week to just over US$20,000, down from US$60,000 last November. Unlike previous busts, the crypto ecosystem now boasts many (less regulated) features of traditional finance: crypto hedge funds, crypto-banks and crypto-money market mutual funds. In other words, the building blocks of a financial crisis. On Monday major crypto-lender Celsius (slogan: unbank yourself) blew up after being hit by an old-fashioned bank run. Major crypto hedge fund 3 Arrows Capital is probably insolvent after failing several margin calls. Shockwaves are spreading through the crypto system as platforms scramble for scarce cash to pay fleeing depositors. Stay tuned.

ACCC severs the Link

The competition watchdog wants more time to look at the proposed sale of Link Administration to Canada’s Dye & Durham. Investors already worried about the deal failing panicked and sent the stock down 10% on Thursday. The ACCC is worried about Link’s 43% stake in Pexa, which has a monopoly on electronic conveyancing in Australia. At $3.36, Link is trading well below the $5.50 bid price. Morningstar equity strategist Gareth James still thinks the deal will go through. The market is less sure.

Woolworths freezes prices

Australia’s largest supermarket will freeze prices until the end of the year on hundreds of essential products including tinned tuna, nappies and laundry powder (list here). Food prices are rising sharply due to bad weather, rising wages, snaffled logistics and reverberations from soaring global commodity prices. The retailer raised prices by 2.7% on average in the March quarter. Is this an act of goodwill, bid for market share or both? Watch what happens to margins when Woolworths reports full-year sales results on 25 August.

Worst week since pandemic: Market recap with AAP

The local stock exchange has suffered its sixth straight losing session and worst week since the beginning of the COVID-19 pandemic in March 2020 - and analysts are expecting more carnage to come.

After falling by as much as 2.7 per cent in morning trade, the ASX200 on Friday managed to claw back some of its losses in the afternoon but still finished down 1.76%, at a 19-month low.

The index followed last week's 4.2% drop, its worst weekly loss since October 2020, with an even bigger 6.6% fall. It's now down 10.2% for the month and 15.2% from last year's all-time high.

"We've broken some big levels in the ASX200, we broke below the bottom of its nine-month range," City Index analyst Tony Sycamore told AAP.

"My thought now from here is that this is going be an extended period of pain."

The Bank of Japan became an outlier on Friday by sticking with its ultra-low rates, but the Bank of England and the Swiss National Bank both raised them overnight.

The surprise 50 basis point rate hike in Switzerland was that country's first in nearly 15 years, while England's central bank warned that inflation could top 11 per cent by October.

Local companies whose shares hit their lowest levels in over a year on Friday were retail banks Commonwealth, ANZ, Westpac and Bank of Queensland; tech companies Xero and Megaport; retailers Breville, JB Hi-Fi, Harvey Norman,; help-wanted site Seek; glovemaker Ansell; Bluescope Steel; building products companies CSR and James Hardie; and property groups Goodman, GPT and Dexus.

The heavyweight mining sector was the worst-performing, falling 2.8% as iron ore prices retreated for a sixth straight day. The financial sector was down by 2.2% to hit its lowest level since January 2021.

Buy now, pay later company Humm Group plunged 21.7% to 45c on Friday after the $335 million sale of its consumer finance division to Latitude Group fell through.

Blue chip movers

  • Magellan Financial Group ↓ 1.0%.
  • Telstra ↓ 1.3%.
  • AGL ↓ 2.6%.
  • Supermarkets: Woolworths ↓ 4.2% / Coles ↓ 4.9%.
  • Resources: Rio Tinto ↓ 7.3% / BHP ↓ 7.5% / Fortescue metals ↓ 12.7%.
  • Big Banks: NAB ↓ 7.8% / Westpac ↓ 9.0% / CBA ↓ 7.5% / ANZ ↓ 8.1%.

What we’re watching next week

  • Tuesday:
    • Speech from Reserve Bank Governor Philip Lowe. Watch for hints on where rates will go next.
    • Minutes from the Reserve Bank’s June meeting.
  • Wednesday: US existing home sales data. Watch for more evidence the US housing markets is slowing.
  • Thursday: Provisional data on global manufacturing and services for June. Watch for signs of economic slowdown.

One good read

Venture capitalists funded a decade long “servant economy” for urban dwellers. Rising rates and resurgent labour are bringing it to an end.