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A negative open awaits local investors on the last session of a strong month as a resurgent dollar dulls the outlook for Australia’s export-driven economy.
Index futures point to a three-week opening low despite solid gains on Wall Street. ASX SPI200 futures slumped 40 points or 0.7 per cent as the dollar soared more than a cent to 73.67 cents, its highest level since December 2018.
Currency wars
The rising dollar has become an increasing headwind as the share market pushes towards its fifth straight winning month since the February-March pandemic meltdown. Despite a 0.6 per cent setback last week, the S&P/ASX 200 would need to dive 146 points or 2.4 per cent today to break that run of monthly gains.
The dollar has now rallied 33.8 per cent since its March meltdown low, presenting an increasing problem for the Reserve Bank’s economic recovery plans. While importers rub their hands, a higher dollar makes Australian exports more expensive for overseas buyers at a time when the nation’s biggest trading partner is already conducting a unilateral trade war targeting Australian barley, meat, wine and education.
The catalyst for the latest upleg in the Aussie was a US Federal Reserve policy change announced last week to use “average inflation targeting”, rather than a fixed goal. The long-term effect will be lower US interest rates for longer. The short-term effect was a slump in the greenback against not only the Aussie but the euro and sterling, aiding President Donald Trump’s long-held aim of a cheaper dollar.
This week
The Reserve Bank meets tomorrow but is not expected to unveil any major policy changes. Market interest resides in whether the central bank hints at any future action.
Second-quarter gross domestic product data are due on Wednesday and are expected to confirm that the country entered a technical recession for the first time in 29 years. Economists expect the report to show the economy contracted by around 6 per cent in the three months to the end of June as lockdown restrictions strangled activity.
The full-year reporting season peaked last week. Today brings updates from Northern Star, Sezzle, Regional Express Holdings, OpenPay Group, Kingsgate, Helloworld Travel and Cooper Energy.
Wall Street
While the ASX stuttered last week, Wall Street powered on: record closes for the S&P 500 and Nasdaq Composite on Friday as the Dow Jones Industrial Average turned positive for the year for the first time since February.
The S&P 500 climbed 23 points or 0.67 per cent to its sixth record close since regaining its pandemic losses. The Nasdaq rose 70 points or 0.6 per cent. The Dow gained 162 points or 0.57 per cent.
The Dow was the last of the major market gauges to return to positive territory. Friday’s close put the S&P 500 8 per cent ahead for 2020. The S&P 500 and Nasdaq have both risen for five straight weeks. The S&P 500 is on track for its best August since 1984.
“By any metric, valuations are in nosebleed territory, but there is this entrenched view that the Fed has your back, that the polls are wrong and there will be a Trump sweep, and that a vaccine is coming this fall,” strategist David Rosenberg of Rosenberg Research told MarketWatch. “These are hardened views in the marketplace. That’s what’s triggering this ongoing rally in risk equities.”
Commodities
Energy was the best-performing sector in the US, rising 1.9 per cent despite a fairly flat session in crude markets after Hurricane Laura made landfall without damaging facilities on the Gulf Coast. Brent crude settled four cents or 0.1 per cent weaker at US$45.05 a barrel. The US benchmark dipped seven cents or 0.2 per cent to US$42.97.
BHP and Rio Tinto benefitted from a 1.1 rise in the US materials sector as iron ore pared a losing week. BHP’s US-listed stock put on 1.44 per cent after its UK-listed stock gained 0.59 per cent. Rio Tinto added 1.26 per cent in the US and 0.55 per cent in the UK. The spot price for iron ore landed in China bounced $2.05 or 1.7 per cent to US$123.25 a tonne on Friday but lost 2.7 per cent for the week.
The NYSE Arca Gold Bugs Index jumped 4.1 per cent as gold belatedly responded positively to the Fed’s policy change on inflation. Gold for December delivery settled $42.30 or 2.2 per cent ahead at US$1,974.90 an ounce for a weekly gain of 1.4 per cent. Silver climbed 2.2 per cent for a weekly tally of almost 4 per cent.
