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Monday Market Minutes: Hold the Phone

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2023-05-07

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Sell in May and go away? It’s an old adage for investors in the northern hemisphere at this time of year as they approach summer - normally a time of slow and low stockmarket trading.

But the Sell in May and Go Away adage doesn’t apply here with the southern winter and peak trading period.

We in Australia get tomorrow’s federal budget for the 2023-24 year out of the way (see separate story). If it’s a gloomy document, it could have a similar impact as that adage and see investors selling and going away for a while.

That actually might be the case for listed LNG players like Woodside and Santos after the federal government revealed lift in the take from a key tax that has not performed as it should have (see below).

Their share prices might come under pressure (even as oil prices rose on Friday offshore) and worry other investors about the impact of mooted tax changes in the budget on some types of financial transactions involving dividend franking.

The local market, though, is looking at a very solid 64-point gain from futures trading this morning after wall Street surprised with a solid surge.

Before Friday the adage was looking good for shocked investors assessing the stronger than expected new job numbers, wage rises for April, more fears about interest rate rises and the regional bank crisis. Indeed, some investors would have been booking their holidays early.

But for whatever reason the jobs data didn’t frighten the horses on Friday and indeed it turned out that an average quarterly result from Apple did the trick in turning confidence and allowing the bulls to return to taking Wall Street sharply higher.

While Apple shares added more than 4% on Friday to take the gain so far this year to more than 38%, investors know that there’s Wednesday’s US Consumer Price Index for April to get past.

Any headline reading above March’s 5% will see a return of market worries, as will any gain in the core reading of 5.4%.

Fears over the health of the US regional banking sector faded quickly as Wall Street rebounded on Friday with some of the nominated victims seeing massive rises in their share prices that seemingly put them out of danger for the moment.

The latest victim PacWest saw its shares surge 81% on Friday but still close down 43% for the week.

But there was double punishment for First Horizon Corporation. Already weakened by the state of the banking sector in the US after the failures of SVB, Signature and First Republic, the Tennessee-based lender suffered a setback with Canada’s TD Bank, bailing out of a $US13.4 billion takeover, blaming uncertainty over regulatory approvals.

Its shares rose on Friday but still ended the week down 37%.

Shares in another mooted regional victim, First Western added 12.9% on Friday but lost more than 8% over the week.

All this saw the Dow add 546.64 points, or 1.65%, to close at 33,674.38. The S&P 500 climbed 1.85%, ending the day at 4,136.25. The Nasdaq advanced 2.25% and closed at 12,235.41.

Despite Friday's rally, the Dow and the S&P 500 saw their worst week since March. The Dow lost 1.24%, while the S&P 500 dropped 0.8%. The Nasdaq eked out tiny gain of 0.07%.

Eurozone shares fell 0.5% last week, Chinese shares fell 0.3% and Japanese shares rose 1%.

Australian shares fell by another 1.2% last week and weren’t helped by the surprise RBA rate hike and the weak global lead with financials, resources and telcos leading the falls.

AMP Chief Economist Shane Oliver reckons shares are entering a rougher patch.

"After a strong start to the year - supported by hopes that rates will soon peak enabling a soft landing and better than feared profits - shares are increasingly vulnerable to a rough patch ahead.

"While the Fed is toning down its hawkishness – it along with the ECB and RBA continued to raise interest rates over the last week, adding to recession risks. This is despite ongoing issues with banking stress in the US."

He pointed out that the US debt ceiling issue is hotting up with Treasury Secretary Yellen putting the (when the US Treasury runs out of money) date as early June with a last-minute solution and cuts to government spending looking very likely – both of which will worry share markets as they did in 2011 and 2013.

"The period from May to September is often rough for shares.

"And while China’s economy is continuing to recover its increasingly looking focussed on the services sector and so is less commodity intensive (evident in a fall in the iron ore prices below $US100 a tonne) than we thought might have been the case which is an additional potential drag for Australian shares.”

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A test today for the shares prices of major energy companies like Woodside and Santos after the federal government confirmed at the weekend that the Petroleum Resource Rent Tax (PRRT) will be changed to extract more revenue from the sector.

Don’t be surprised to see a short-term selloff from nervy investors today on the announcement made on Saturday by treasurer Jim Chalmers.

While listed energy companies like Woodside, Santos and Beach Energy will feel any immediate hit from investor nervousness, the impact will probably be felt deeper on foreign companies in LNG like Shell, BP, Chevron, ConocoPhillips, Exxon Mobil and a string of smaller companies from Japan, South Korea and China.

Chalmers said on Saturday the tax change paid by the offshore LNG industry should increase revenue by $A2.4 billion over the next four financial years - or a modest $A600 million a year.

The Treasurer said the government will adopt eight of 11 recommendations from a Treasury review of gas transfer pricing rules, including a key proposal to limit the proportion of PRRT assessable income on LNG projects that can be offset by deductions to 90% from July 1.

"Under the current rules, most LNG projects are not expected to pay any significant amounts of PRRT until the 2030s. The changes announced today address this issue," Chalmers said in a statement on Saturday.

Other changes to be introduced over the next two financial years include equalising the treatment of notional upstream and downstream entities so that losses will be split evenly rather than attributed entirely to the upstream entity.

The Treasury review of gas pricing was started under the previous Morrison government. Chalmers said the Labor government would also proceed with eight recommendations from a separate earlier review that were accepted by the previous government but not acted on.

Chalmers said both reviews had found that aspects of the PRRT were better suited to oil projects than LNG projects, and the deductions cap and other changes would help address that.

The changes will apply to existing projects, there will be a seven-year holiday for new projects such as Browse and Scarborough.

"These changes will mean the offshore LNG industry pays more tax, sooner, (and) will provide industry and investors policy certainty to allow the sufficient supply of domestic gas, and will ensure Australia remains a reliable international energy supplier and investment partner," Chalmers said.

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