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Good Morning, It’s Monday 5th of June and I’m Will from Milford.

Global shares markets posted solid gains again last week led by mega cap US tech stocks. Market breadth, a measure that looks at the number of stocks in an index that are rising vs falling is at record lows. Simply, this means that a very small number of stocks are driving all of the rise in the headline index. In the US the leading tech favorites Microsoft, Apple, Alphabet, Meta, Amazon, Tesla and Nivida are up a whopping 52% YTD, compared to the S&P 500 which is only up 10%. More interestingly, when you take these 7 stocks out of the S&P500, and look at the returns of the remaining 493 stocks in the benchmark, their combined YTD return is almost flat.

Further to this, when we look at the market cap of the 5 largest stocks in the S&P 500 as a share of the total index, at 23% it is close to the highs of the last 45 years. Historically poor market breadth is often followed by weak index performance, as the rally has been driven by a small number of stocks making it vulnerable, however that is not a given.

Turning to Australia, we had a number of key pieces of economic data out last week that will influence what the RBA does at their June board meeting tomorrow. Early in the week we had the April monthly CPI, which came in hot, surprising to the upside at 6.8% MoM vs a market expectation of 6.4%. While some of this was due to cycling a previously weak period in which fuel price excise tax was temporarily removed, there are some areas that will concern the central bank. Rents in particular continue to surge, currently running at 6% annually, however these are likely to continue moving higher as rent increases take time to flow through the CPI data compared to other higher frequency data that shows much larger increases particularly in the capital cities.

The other key piece of data, was the Fair Work Commissions annual decision on the minimum and award wages for the year ahead. Both the award wage, and minimum wage increased by 5.75%, generally in line with what most economists were expecting. This decision walks a fine line, between providing a large portion of workers with a wage rise that looks somewhat close to inflation levels, while not trying to send the Australian economy into a wage price spiral. Overall this decision seems slightly higher than what the RBA may have had in their forecasts, but we will need to wait till tomorrow to see if we get any further color from the bank.

In the US, developments around a resolution to the US debt ceiling kept markets focus last week. Early in the week House speaker Kevin McCarthy and President Joe Biden reached an agreement to suspend the debt ceiling until 2025, in exchange for cuts to non-defense spending. This deal avoids any changes to major programs such as Medicare or social security, and instead focuses on discretionary spending including clawing back unspent covid funds. Overall, the deal ended up being reached with little market turmoil as it was passed by both houses late in the week. This debt deal means that the issue of a further, and potentially longer term, raise will be soon after the US presidential election in 2024. Focus for the market will now switch to the inevitable issuance of US debt and rebuild of the treasury general account which has the potential to drain significant liquidity from the financial system.

Turning to stock news, university testing and placement provider IDP education sold off sharply on Monday after Canadian authorities said they would accept university entrance tests from other testing providers. IELTS, which is the testing arm of IDP contributed nearly 1/2 of their gross profit in 1H23 coupled with Canada being a significant market, which saw the stock fall 16% on the day.

NZ electricity Gentailer, Contact energy held their investor day last week reaffirming EBITDA guidance for $530m for this year. Contact continues to be of significant interest for a number of investors, and customers as the majority of their power comes from renewable sources. On the day they announced a new wind project in Southland along with a power deal with Microsoft.

Bank of Queensland was slapped with a enforceable undertaking by regulator AUSTRAC, after it was found that they had significant gaps in their risk management framework. This undertaking requires BOQ to hold an additional $50m of capital until such time that the regulator is satisfied that they have a plan in place to remedy the gaps. Investors didn’t like this news, pushing the stock down over 5% on Wednesday.

This week the data front is generally quiet. The key focus will be the RBA meeting tomorrow afternoon with the market finely balanced between a hike and a pause. Late last week post the wages outcome, a number of economists moved to call for a hike tomorrow, coupled with a higher terminal rate. The market remain on the fence, with under 1/2 a hike priced.

Thanks for listening, have a good week. 



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