Join our daily newsletter At The Bell to receive exclusive market insights
Australian stocks were poised to open firmly higher after Wall Street embraced Federal Reserve plans to dial back support for the economy and raise interest rates up to three times next year.
US stocks reversed losses as this morning’s policy update ended weeks of uncertainty about the outlook for monetary policy.
ASX futures climbed 40 points or 0.55 per cent. Gains were kept in check by a bounce in the dollar and declines in several commodities following yesterday’s weak Chinese economic update.
Wall Street
US stocks finished at session highs after the Fed left its key rate at a record low, but outlined plans to wind up its asset-buying program by March and raise interest rates shortly after. The announcement was broadly in line with market expectations.
The S&P 500 was underwater ahead of the 6 am AEDT announcement, but built steadily to a final gain of 76 points or 1.63 per cent. The Dow Jones Industrial Average put on 383 points or 1.08 per cent. The Nasdaq Composite added 328 points or 2.15 per cent.
The Federal Open Market Committee announced it will double the pace of its bond taper from US$15 billion per month to US$30 billion next month. The central bank will buy US$60 billion in January, down from US$90 billion this month. That rate of reduction puts the bank on track to end its emergency asset-buying program in March, clearing the way for rate hikes.
“The Fed didn’t throw any curve balls. This is widely as expected,” Ryan Detrick, chief market strategist at LPL Financial, told Reuters.
The bank is scrambling to adjust policy to tackle the biggest surge in inflation in almost 40 years. Chair Jerome Powell said he expected inflation to run above the central bank’s 2 per cent goal well into next year.
Futures markets priced in a 90 per cent chance of a rate hike in April and a 50 per cent chance in March, despite Powell explicitly ruling out a March increase. The Fed’s “dot plot” indicated a majority of committee members expect three increases of a quarter of a percentage point next year and three more in 2023.
“Now I have seen how high rates are going and how fast it’s going to happen, the uncertainty is removed from the market,” Jim Caron, chief strategist on the global fixed income team at Morgan Stanley Investment Management, told CNBC.
“It’s kind of a sigh of relief to the equities market who thought it might be much more aggressive. It’s kind of what we were thinking anyway,” he added.
Australian outlook
A positive start coming up after Wall Street got the clarity it desired on next year’s rates outlook. US stocks built steadily to strong closing gains.
The reaction on the Australian futures market was constrained by a jump in the dollar and perceptions yesterday’s weak Chinese economic data holds negative demand implications for Australian exports. BHP and Rio Tinto struggled for much of the night in overseas trade (more below).
The US dollar fell in a sign some traders had bet on more aggressive tightening next year. The US dollar index fell 0.17 per cent, boosting the Australian dollar almost 1 per cent to 71.72 US cents. A rising Aussie dollar is a headwind for exporters and other companies that generate income overseas.
Ten of eleven US sectors rallied. Growth stocks and bond proxies led. The tech sector gained 2.75 per cent, health 2.11 per cent and utilities 1.68 per cent.
The two sectors with the heaviest weighting on the ASX finished near the bottom. US financials edged up 0.31 per cent and materials 0.28 per cent. The energy sector dropped 0.45 per cent.
The S&P/ASX 200 declined 0.7 per cent yesterday to its lowest close in more than a week. The index needs to gain 26 points today to move back into positive territory for the week.
The highlight of a busy day of domestic economic action is the November jobs report at 11.30 am AEDT. Economists expect the jobless rate to retreat from 5.2 per cent to 5 per cent after the economy added around 203,000 new positions.
Also due are preliminary readings on manufacturing and services sector activity (9 am) and a speech by RBA Governor Philip Lowe (10.30 am).
Companies holding annual general meetings today include ANZ, Orica and Elders.
IPOs: a huge day ahead with four companies slated to list, according to the ASX. AVADA Group at 10.30 am provides traffic management to government and the civil infrastructure sector. Qualitas at 11 am is a real estate investment manager.
XPON Technologies Group at 12 pm specialises in cloud-based marketing. Ronin Resources at 1.30 pm is an explorer with a coal project and a gold-copper project, both in Colombia.
Commodities
Gold bounced off a two-week low as the greenback sagged following the Fed announcement. Metal for February delivery settled US$7.80 or 0.4 per cent lower at US$1,764.50 an ounce ahead of the news, then jumped to US$1,778.60 in recent action. The NYSE Arca Gold Bugs Index fell 1.72 per cent.
Oil settled higher ahead of the announcement and added to gains in the aftermath as risk assets rallied. Brent crude settled 18 US cents or 0.2 per cent ahead at US$73.88 a barrel and was lately up another 63 cents or 0.85 per cent to US$74.51.
“Oil is benefiting from hopes for continuing demand growth,” Rob Haworth, senior investment strategist at US Bank Wealth Management, told MarketWatch. “The Fed attention on inflation should help the economy continue to grow, benefiting cyclical assets.”
Copper faded in the wake of data yesterday showing leading consumer China continued to lose momentum last month, undermining the demand outlook for industrial metals. March copper declined 1.8 per cent to US$4.183 a pound on Comex.
“The demand backdrop for metals is unlikely to improve, at least in the short term,” Julius Baer analyst Carsten Menke told Reuters.
Iron ore prices shrugged off the data disappointment, but BHP and Rio Tinto struggled in overseas action. The spot price for ore landed in China rose US$1.45 or 1.3 per cent to US$109.70 a tonne.
BHP‘s US-listed stock bounced 0.33 per cent after its UK-listed stock sank 1.75 per cent. Rio Tinto shed 0.23 per cent in the US and 2.25 per cent in the UK.
