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Aussie stocks were poised to open lower following a volatile session in the US as investors assessed mixed earnings from retailers and the likelihood of another jumbo interest rate hike next month.
The Dow’s five-session win streak ended after the Federal Reserve said it saw little evidence inflation was easing. The S&P 500 and Nasdaq also declined.
Reports of steel mill shutdowns in China weighed on iron ore. The dollar slumped back under 70 US cents. Oil rose for the first time in four sessions. Gold fell to a two-week low.
ASX futures retreated 13 points or 0.18 per cent. The S&P/ASX 200 is on a three-session winning run after swinging to a gain of 0.3 per cent yesterday.
Full-year earnings reports are due today from Origin Energy, toll road operator Transurban, Treasury Wine Estates and Blackmores (more below).
Wall Street
US stocks fell as a weak trading update from Target took some of the steam out of this week’s rally in retailers. The major indices briefly pared their losses as some investors interpreted the minutes from last month’s Fed meeting as less hawkish than expected.
The Dow Jones Industrial Average turned positive following the Fed minutes before fading to a loss of 172 points or 0.5 per cent. The S&P 500 shed 31 points or 0.72 per cent. The Nasdaq Composite declined 164 points or 1.25 per cent as rising treasury yields weighed on growth stocks.
The Fed indicated it was committed to raising rates again next month because inflation remained unacceptably high.
“Participants agreed that there was little evidence to date that inflation pressures were subsiding,” the minutes said.
“Participants continued to anticipate that ongoing increases in the target range for the federal funds rate would be appropriate to achieve the Committee’s objectives,” the central bank added. “With inflation remaining well above the Committee’s objective, participants judged that moving to a restrictive stance of policy was required to meet the Committee’s legislative mandate to promote maximum employment and price stability.”
Stocks temporarily arrested their decline as some investors seized on hopes the bank may soon temper the current pace of rate increases. The bank raised the federal funds rate target last month by 75 basis points to a range of 2.25-2.5 per cent. The odds on another 75 bp hike next month fell to 40 per cent following the release of the minutes.
“Participants judged that, as the stance of monetary policy tightened further, it likely would become appropriate at some point to slow the pace of policy rate increases while assessing the effects of cumulative policy adjustments on economic activity and inflation,” the minutes said.
The consumer discretionary sector dropped 1.12 per cent after Target missed earnings expectations by a wide margin. Profits contracted by 90 per cent as shoppers cut spending on non-essentials. The retailer’s shares dropped 2.69 per cent.
Australian outlook
Wall Street’s golden run ended after the S&P 500 stalled at technical resistance. Both the US benchmark and the S&P/ASX 200 face overhead resistance from their 200-day moving averages. A pause is possible here before the indices mount a genuine attempt to break through.
Stocks were already under pressure before the release of the Fed minutes. A retrace was underway following five days of gains.
“No surprise to see the market take a breather from the summer rally it’s been riding,” Chris Larkin, managing director of trading at E-Trade Financial, said. “Investors should remain nimble and continue to expect volatility as we may not be out the woods just yet,” he added.
Ten of eleven US sectors declined. Energy was the exception, bouncing 0.81 per cent following supportive US data (more below).
Basic materials sagged 1.4 per cent as a resurgent greenback weighed on commodity prices. Big Tech and industrials were also notably weak.
The rising US dollar drove the Australian unit back under 70 US cents. The Aussie dived 1.25 per cent to 69.32 US cents.
Back home, another huge day of corporate earnings brings updates from Transurban, Blackmores, Origin Energy, Treasury Wine Estates, ASX Ltd, Iress, Evolution Mining, Orora, Medibank, Ridley Corp, IPH, Pro Medicus, Telix Pharmaceuticals, AV Jennings, HomeCo Daily Needs REIT, Humm, HT&E, Nuix and Auckland International Airport (sources: CommSec, Australian Financial Review).
July employment data at 11.30 am AEST could make an impact if it surprises. Economists expect the jobless rate to hold steady at 3.5 per cent after the economy created around 26,500 jobs. An upside surprise would intensify pressure on the RBA to hike official rates aggressively; a downside surprise would be a welcome release.
Commodities
Iron ore fell as a heatwave sweeping parts of China triggered power shortages, prompting authorities to ration electricity. Reuters reported almost 20 steel mills in the south-west of the country have been forced to suspend production.
Analysts at JPMorgan said the rationing would likely only affect a few parts of the country.
“Our base case is that the power rationing this time around should be milder than that seen last year in terms of duration and scale,” they wrote.
The spot price for ore landed in China dropped US$2.04 or 1.9 per cent to US$104.59 a tonne. The most-traded contract on the Dalian Commodity Exchange slumped as much as 4.4 per cent.
BHP‘s US-traded depositary receipts declined 2.45 per cent. The miner’s UK listing eased 0.59 per cent. Rio Tinto gave up 2.16 per cent in the US and 0.6 per cent in the UK.
Oil booked its first rise in four sessions after data showed US stockpiles fell by seven million barrels last week. Traders also kept a wary eye on negotiations for a new Iran nuclear deal that could bring fresh crude supply online if sanctions were lifted.
Brent crude settled US$1.31 or 1.4 per cent higher at US$93.65 a barrel. The US benchmark rose 1.8 per cent to US$88.11.
Gold retreated for a third session, settling at a two-week low as strength in the greenback and US treasury yields sapped demand for alternative stores of wealth. Metal for December delivery settled US$13 or 0.7 per cent lower at US$1,776.70 an ounce. The NYSE Arca Gold Bugs Index slid 3.5 per cent.
Aluminium rallied on news surging power prices prompted the closure of a European smelter. Norsk Hydro announced it will close its facility in Slovakia by the end of September.
“This development highlights the fact that this market is not only demand driven, but supply driven and increasingly challenged by these punitively high energy prices,” Ole Hansen, head of commodity strategy at Saxo Bank, said.
Benchmark aluminium on the London Metal Exchange rallied 0.9 per cent to US$2,409 a tonne. Copper declined 0.6 per cent, nickel 1.6 per cent, lead 2.1 per cent and zinc 4.7 per cent. Tin firmed 0.2 per cent.
