Futures trading points to early share market gains despite a wildly mixed end to the week on Wall Street and declines in key commodities.
ASX futures bounced 29 points or 0.44 per cent, signalling a tentative rebound from Friday's three-and-a-half week closing low. The S&P/ASX 200 dived 161 points or 2.35 per cent on Friday as a promising month ended with a bloodbath.
US stock closed mixed. Iron ore edged higher. Oil, gold and copper declined. The dollar steadied just above 77 US cents.
A week of sharp divergences continued in the US with a rebound in the Nasdaq and declines in the Dow and S&P 500. A drop in bond yields triggered a reversal in last week's dominant theme: rotation from debt-dependent growth stocks into cyclicals. The S&P 500 Growth Index rose 0.3 per cent, versus a 1.3 per cent decline in the Value Index.
The Nasdaq Composite held onto a gain of 73 points or 0.56 per cent despite a late end-of-month sell-off that affected all three indices. The tech-heavy index fell as low as 0.7 per cent and rose as high as 1.9 per cent during a volatile session. Tech giants Amazon, Microsoft and Facebook rebounded at least 1 per cent. Apple and Alphabet also edged higher.
The Dow Jones Industrial Average faded 470 points or 1.5 per cent, closing near its session low. The S&P 500 shed 18 points or 0.48 per cent.
The yield on ten-year US treasuries fell 10 basis points to 1.415 per cent, relieving some of the pressure on growth stocks after yields hit 1.6 per cent on Thursday. Surging yields fuelled a stock market sell-off last week amid inflation fears.
“If the market begins to believe that the Fed has somehow lost control of where the bond market is going, all that idea of a taper tantrum will show up,” Art Cashin, Director of Floor Operations at UBS, told CNBC. (A taper tantrum is when markets react negatively to the threat of a reduction or "tapering" of stimulus spending.)
Inflation concerns persisted despite data showing price pressure remained subdued. The personal consumption expenditures price index gained 0.3 per cent for the month, but was in line with expectations at 1.5 per cent for the year. The Federal Reserve has said inflation would have to run above 2 per cent for some time before it will raise rates.
The S&P/ASX 200 looks set for early relief following its worst session since September. Whether the index can retain or build on those gains is highly uncertain. The first session of new months tend to be positive, but this is a nervous market. While Friday's US trade saw a rebound in tech stocks, it was another session of extraordinary volatility.
Bond yields are suddenly the key driver of global stock market sentiment. Why do they matter? ThinkMarkets analyst Carl Capolingua offered a neat potted summary at the end of last week:
"Rising yields increase borrowing costs and this hurts company profits. Also, it impacts the rate that many institutional investors use to value stocks. They use that rate to discount cashflows, so ultimately, higher rates lead to lower stock valuations. It's a double whammy, lower profits, and lower tolerance of investors to higher stock prices," he said.
The yield on ten-year US bonds declined by more than ten basis points on Friday, easing pressure on equities. The Australian ten-year yield hit 1.9 per cent on Friday and put on 50 basis points last week alone - the equivalent of the RBA lifting the cash rate by 0.5 per cent.
Capolingua remained optimistic about the outlook. "Things will settle down, and historically, rates are still going to be very low. That's supportive of economic growth," he said. "Once we find a top in yields, and things settle down, the stock market is going to find its footing again."
Tech was the best of the US sectors on Friday, rising 0.6 per cent, Consumer discretionary and communication services also advanced. Energy stocks slumped 2.3 per cent, financials 2 per cent and materials 1.3 per cent.
A quieter week coming up on the corporate front. The end of the interim earnings season means dividend payments start to flow into bank accounts. Mining investors can expect record dividends this week from BHP, Rio Tinto and Fortescue Metals, thanks to the run on iron ore. CSL, Aurizon and Treasury Wine Estates are also among the 25 ASX 200 companies due to return funds to investors.
The Reserve Bank meets tomorrow, but is not expected to tweak its policy settings. The main interest will be commentary on the rise in bond yields. A busy week for economic data includes job ads (today), building approvals (tomorrow), GDP (Wednesday) and retail sales and trade figures (Thursday).
The dollar firmed 0.2 per cent this morning to 77.12 US cents.
Strength in the greenback helped drag oil sharply lower on Friday ahead of an OPEC+ meeting this week. Brent crude settled $1.69 or 2.6 per cent in the red at US$64.42 a barrel. The OPEC oil cartel will discuss whether to retain production caps that have underpinned a recovery in prices.
Gold dropped for a fourth straight session, sealing its worst monthly loss since 2016. Gold for April delivery settled $46.60 or 2.6 per cent at lower at US$1,728.80 an ounce. The decline extended the yellow metal's monthly loss to around 6.6 per cent.
“Rising bond yields have been the number one obstacle for gold, since they increase the opportunity cost of holding assets that pay no interest or dividends,” Fawad Razaqzada, market analyst at ThinkMarkets, told MarketWatch. “Gold has also been undermined by the recent reflationary trade, with investors opting for more racier assets.”
Copper reeled back from Wednesday's decade high. May copper dived 4 per cent to US$4.0925 a pound.
An up-tick in iron ore proved no defence for BHP and Rio Tinto against heavy selling overseas in mining stocks. BHP's US-listed stock fell 2.73 per cent and its UK-listed stock 3.43 per cent. Rio Tinto shed 3.03 per cent in the US and 4.52 per cent in the UK. The spot price for iron ore landed in China rose $2.35 or 1.3 per cent to US$176.65 a tonne.