News Analysis: RBA holds cash rate steady; Star posts $1.7 b loss; China cuts key rate

Welcome to the essential investor brief, featuring handpicked news for the week ending 27th September 2024.

This week's highlights include:

-RBA stays hawkish: The RBA's decision to maintain rates is based on high immigration and government spending sustaining demand. Without significant economic weakness, the RBA sees no pressing need for a rate cut at this time.

FINANCE & MARKETS

Inflationary pressures still too high for the RBA to consider cutting rates.

News highlights

The RBA held the cash rate steady at 4.35%, with governor Michele Bullock dismissing near-term cuts. The RBA expects inflation to rise again next year after the government energy rebates expire.

• Takeaway: Investors may need to prepare for a prolonged period of higher interest rates in Australia, with cuts likely delayed until 2025. This could affect sectors sensitive to borrowing costs such as real estate and consumer goods.

Inflation fell to 2.7% in August, down from 3.5% in July, driven by government energy rebates. Excluding volatile items, the CPI hit 3% while core inflation also slowed to 3.4% from 3.8%.

• Takeaway: While the inflation numbers are encouraging, prepare for potential delays in rate reductions as the RBA prioritises long-term inflation stability.
  
  

The RBA has warned that the rapidly growing superannuation industry could threaten the country’s financial stability. With increased investment concentration and significant stakes in the domestic banks, the RBA has urged better regulatory oversight to ensure stability.

• Takeaway: Australia’s growing superannuation sector could amplify shocks in the future. Concentrated investments mean that coordinated actions during market stress may pose financial risks, emphasising the need for careful monitoring of fund strategies.

Non-bank lenders now provide over 10% of business financing, as banks retreat from riskier sectors. This has raised alarms about increased defaults amid rising borrower stress.

• Takeaway: Private credit is dominated by lending to property development, and as defaults rise, the opacity and loose regulation of private credit may raise liquidity risks.

China's leaders have pledged increased fiscal spending to meet their growth target. The country’s central bank reduced the medium-term lending facility rate to 2%, marking the largest rate cut to date.

• Takeaway: China's stimulus measures may boost commodity demand, benefiting Australian mining stocks. However, analysts believe more aggressive fiscal actions are needed to sustain this potential market improvement.
  
  

CORPORATE NEWS

The Australian supermarket sector is under intense scrutiny due to concerns over transparency and ethical marketing practices.

News highlights

The ACCC has accused Woolworths and Coles of misleading shoppers, by falsely advertising price drops while actually increasing prices. This has reignited political scrutiny over supermarket practices, leading to potential penalties and calls for regulatory action.

• Takeaway:The ACCC's allegations against Woolworths and Coles could result in substantial fines, signalling potential reputational damage and operational changes for both supermarket giants.

Three months after its ASX listing, early investors in Guzman y Gomez, including QVG and Aware Super, are selling their shares after strong gains. Despite increased institutional buying, some analysts have downgraded the stock due to its high valuation.

• Takeaway:Early sell-offs by major backers signal concerns over Guzman y Gomez's high valuation. Despite strong performance, analysts' downgrades highlight their caution, suggesting stock price appreciation potential may be limited at current levels.

Star Entertainment CEO Steve McCann plans to cut 300 jobs, cancel bonuses, and sell $300 million in assets to address the company's financial crisis. It reported a $1.7 billion loss last year, largely due to asset write-downs.

• Takeaway:While recent funding and regulatory backing offer a lifeline for Star Entertainment, ongoing financial challenges, including high debt and declining market share, could lead to increased volatility and uncertainty for stakeholders.
  
  

Until next time...