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Australian stocks were set to open firmly higher after the long-awaited launch of the Federal Reserve bond “taper” lifted US stocks to fresh highs.
ASX futures rallied 37 points or 0.5 per cent as Wall Street welcomed a well-telegraphed announcement that the Fed will start to reduce support for the economy this month.
The major share benchmarks in the US were underwater before the announcement, but quickly climbed to new records.
Wall Street
Stocks took wing after the Fed outlined plans to wind back its bond-buying program, as expected, but talked down the threat of rate rises any time soon.
“The Fed did not rock the boat on this one,” Ryan Detrick, chief market strategist at LPL Financial, told Reuters. “It was fairly well-telegraphed what the Fed might do and they did what most people expected.”
The S&P 500 climbed 30 points or 0.65 per cent to a new closing high. The Dow Jones Industrial Average flipped a decline of 160 points into a final gain of 105 points or 0.29 per cent. The Nasdaq Composite added 162 points or 1.04 per cent. All three indices closed at records for a fourth straight night.
The Fed announced it will reduce emergency support measures for the economy in stages starting this month. The central bank will trim its monthly purchases of treasuries and mortgage-backed securities by US$15 billion per month from their current level of US$120 billion a month.
The reduction in support came “in light of the substantial further progress the economy has made toward the Committee’s goals since last December”. The bank stressed that it could adjust the timeline if the economic outlook changed.
Stocks surged as Chair Jerome Powell downplayed any need to raise rates. The bank insisted inflationary pressures this year were “transitory”, suggesting the mood within the Open Market Committee remained dovish.
“We don’t think it’s a good time to raise interest rates because we want to see the labour market heal further,” Powell told the post-meeting press conference. “We have very good reason to think that that will happen as the Delta variant declines.”
Rate-sensitive growth stocks rallied even as US treasury yields ticked higher. Apple, Amazon, Microsoft and Alphabet all advanced. Growth stocks are seen as particularly vulnerable to higher rates because their valuations depend on future earnings.
The energy sector was among the biggest weights ahead of tonight’s meeting of the Organization of the Petroleum Exporting Counties and allies. Crude prices sank to their lowest in around four weeks (more below).
Australian outlook
The path to higher levels appears clear after the Federal Reserve gave the Reserve Bank an object lesson in how to manage market expectations. Wall Street took the start of the taper in its stride after the Fed communicated its intentions clearly in advance and then executed well.
The RBA, on the other hand, abandoned its bond yield target last week before informing the market, fuelling a surge in yields, then issued a policy statement on Tuesday that did the bare minimum to clarify its rates intentions. The result was a decline in equities.
The S&P/ASX 200 began the repairwork yesterday, rising 68 points or 0.93 per cent. The market should make further headway today, but once again finds itself working just to get back to where it sat a week ago.
Consumer discretionary and materials were the best of the US sectors. Growth stocks and bond proxies also rallied after Powell talked down the threat of near-term rate increases.
Reports on retail sales and trade are due at 11.30 am AEDT.
Today’s annual general meetings include Myer, Z1p Co, NIB Holdings, Domain Group, Credit Corp, Inghams and Downer EDI.
IPOs: Vulcan Steel is scheduled to list at 12pm AEDT. The company is a metals distributor with 29 warehouses and manufacturing and distribution facilities in Australia and New Zealand.
The dollar firmed 0.26 per cent overnight to 74.53 US cents.
Commodities
Oil fell to its lowest finish in almost a month as US inventories rose for a second week and talks over Iran’s nuclear program looked set to resume. US crude stockpiles increased by 3.3 million barrels last week, more than analysts expected. An Iranian source said negotiations would resume on November 29, raising the prospect of increased production reaching the market if a US blockade is lifted.
Brent crude settled US$2.73 or 3.2 per cent lower at US$81.99 a barrel, the lowest finish since October 7. The US benchmark fell 3.6 per cent to US$80.86, the weakest close since October 13.
LNG rose for a second day in the US, rising 2.3 per cent to US$5.67 per million British thermal units.
Gold retreated sharply before the Fed announcement and regained only a portion of its initial fall in the aftermath. Gold for December delivery settled US$25.50 or 1.4 per cent lower at US$1,763.90 an ounce. In recent trade, the yellow metal trimmed its fall to US$16.60 or 0.93 per cent at US$1,772.80. The NYSE Arca Gold Bugs Index gained 1.03 per cent.
BHP and Rio Tinto rebounded from 11-month lows after iron ore regained roughly half of Tuesday’s heavy fall. The spot price for ore landed in China bounced US$3.25 or 3.4 per cent to US$99.70 a tonne.
BHP‘s US-listed stock rallied 1.17 per cent and its UK-listed stock gained 0.77 per cent. Rio Tinto put on 0.27 per cent in the US and 0.01 per cent in the UK.
Most industrial metals retreated ahead of the Fed announcement amid on-going worries about faltering Chinese demand. Benchmark copper on the London Metal Exchange declined 1.2 per cent to US$9,648.50 a tonne. Aluminium dropped 1.4 per cent, nickel 2.3 per cent and zinc 1 per cent. Lead gained 0.3 per cent and tin 1.1 per cent.
