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A relief rally on Wall Street points to a positive start to Australian trade after the Federal Reserve announced the largest rate increase since 1994.

US stocks surged after the Fed indicated it was committed to bringing down inflation quickly without triggering a recession.

ASX futures rallied 16 points or 0.24 per cent, signalling the first positive open to Australian trade in five sessions. The S&P/ASX 200 sank almost 1.3 per cent yesterday.

Overnight, the dollar climbed back above 70 US cents. Gold and industrial metals rose. Oil fell to a two-week low. Iron ore retreated.

Wall Street

US stocks closed firmly higher in volatile trade after the Fed showed it was serious about controlling inflation. The central bank raised its target interest rate by 75 basis points and indicated it may raise by the same amount next month.  

The S&P 500 rallied 55 points or 1.46 per cent to its first gain in six sessions. The Dow Jones Industrial Average bounced 304 points or 1 per cent. The Nasdaq Composite gained 271 points or 2.5 per cent.

The increase in the short term federal funds rate to a range of 1.5-1.75 per cent was largely expected in light of last week’s sizzling inflation report. Stocks have been in freefall for the last week amid concerns central banks have let inflationary pressures run out of control.

Stocks hit their highs after Chair Jerome Powell told reporters the central bank needed to “frontload” hikes to get rates to a neutral level quickly.

“Either a 50 basis point or a 75 basis point increase seems most likely at our next meeting,” he said.

Projections showed the bank expects official rates to reach 3.4 per cent by year-end and 3.8 per cent next year. As recently as March, the bank was still projecting rates would go no higher than 1.9 per cent this year.

“Today’s announcement confirms the Fed’s commitment to fight the inflation battle more aggressively despite the potential aftermath from raising rates at such a rapid pace,” Allianz Investment Management portfolio manager Charlie Ripley said.

“Overall, Fed policy rates have been out of sync with the inflation story for some time and the aggressive hikes from the Fed should appease markets for the time being.”

Apple gained 2.01 per cent after securing the rights to show Major League Soccer. Boeing soared 9.46 per cent on signs its troubled 737 MAX could soon return to Chinese skies. China Southern Airlines conducted test flights this week.

Australian outlook

Futures action suggests cautious early relief for Australian investors, but not much. The Australian economy faces its own challenges, regardless of how Wall Street performs.

A rebound in the dollar will likely crimp gains. The Aussie bounced 1.7 per cent to 70.04 US cents, delivering overseas investors in Australian equities a welcome bonus.

US stocks finished solidly ahead but off session highs. Elevated volatility suggested the market had not yet reached a definite consensus about this morning’s hike and projections. Tonight’s action should give a truer picture.

The S&P/ASX 200 sank 1.27 per cent yesterday to a fourth straight loss. Surging borrowing rates, a collapse in consumer confidence to recessionary levels and an increase to the minimum wage added to down-pressures. The Reserve Bank warned Australians to prepare for much higher rates.

A big 24 hours for financial markets continues this morning with the Australian May employment report at 11.30 am AEST. Economists expect the jobless rate to tick down to 3.8 per cent from 3.9 per cent in April as the economy added around 25,000 jobs.

A round of central bank activity continues with rates decisions tonight in the UK and Switzerland, and Japan tomorrow.

The relief rally on Wall Street lifted ten of eleven sectors. The three sectors dominated by Big Tech (I.T., consumer discretionary, communication services) provided three of the top four performers.

Real estate bounced 2.33 per cent, financials 1.24 per cent and healthcare 1.02 per cent.

Energy was the night’s only loser, falling 2.13 per cent. BHP and Rio Tinto outperformed as the materials sector finished little changed (more below).

Commodities

A mixed night on commodity markets saw industrial metals lifted by upbeat Chinese economic data, while iron ore and oil retreated. Factory output in China unexpectedly expanded last month despite the impact of Covid lockdowns.

“We’re seeing some of the Chinese numbers improving and I think the worst is over. We could see some volatility, but overall the broad trend is geared towards recovery,” Xiao Fu, head of commodity market strategy at Bank of China International, told Reuters.

Aluminium bounced 1 per cent off a seven-month low on the London Metal Exchange. Benchmark copper firmed 0.1 per cent to US$9,224.50 a tonne. Nickel gained 2.4 per cent, lead 0.2 per cent, zinc 1.9 per cent and tin 4.2 per cent.

Iron ore continued to lose ground amid reports of weak steel sales and predicted production cuts. The spot price for ore landed in China declined US$2.79 or 2 per cent to US$135.47 a tonne. The most-traded contract on the Dalian Commodity Exchange dropped 3.83 per cent.

BHP and Rio Tinto rebounded in US and UK trade. BHP‘s US-traded depositary receipts rallied 3.3 per cent. The miner’s UK listing improved 1.72 per cent. Rio Tinto added 3.11 per cent in the US and 1.44 per cent in the UK.

A second straight weekly increase in US crude stockpiles helped push oil to a two-week low. Brent crude settled US$2.66 or 2.2 per cent lower at US$118.51 a barrel.

“A stronger tightening of monetary policy could have negative effects on oil demand,” Carsten Fritsch, commodity analyst at Commerzbank, said.

Gold rallied as the US dollar faded in the wake of the Fed’s jumbo rate hike. Metal for August delivery settled US$6.10 or 0.3 per cent ahead at US$1,819.60 an ounce.

The yellow metal increased its gain to US$22.60 or 1.25 per cent at US$1,836.10 in recent trade. The NYSE Arca Gold Bugs Index rose 0.93 per cent.

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