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Australian shares were set for a positive open for the first time in three sessions after Wall Street edged higher ahead of tonight’s Federal Reserve rates announcement.

ASX futures rallied 43 points or 0.59 per cent, signalling early relief after yesterday’s rates surprise. The S&P/ASX 200 fell 0.42 per cent after the Reserve Bank raised the cash rate target by a larger-than-expected 25 basis points.

Overnight, US stocks scratched out slim gains in choppy trade as the Fed began a two-day meeting. Oil, iron ore and industrial metals retreated amid demand worries as China tightened Covid restrictions. Gold recovered some of Monday night’s heavy fall.

Wall Street

Banking and commodity stocks outperformed as US stocks rose for a second session. As on Monday night, the main indices seesawed in and out of negative territory as bulls and bears battled for control.

The S&P 500 was strongest of the major benchmarks with a rise of 20 points or 0.48 per cent. The Dow Jones Industrial Average gained 67 points or 0.2 per cent. The Nasdaq Composite added 28 points or 0.22 per cent.

“For the first time in several days, sellers appear exhausted, and shorts are a bit nervous than longs,” Adam Crisafulli of Vital Knowledge told clients.  

The Federal Reserve gathered for a policy meeting that is expected to conclude tonight with an increase in the official target range of 50 basis points. CME’s FedWatch Tool placed the odds on that hike at 99.9 per cent. Fed Chair Jerome Powell will face reporters after the announcement to explain the Fed’s outlook.

“The number one driver of all the market volatility over the last several months has been the Fed and the Fed hawkish rhetoric, so getting an update from them at a Powell press conference is a major catalyst and I think the market now is kind of just in waiting mode,” Ross Mayfield, investment strategist at Baird, told Reuters.

Stocks have steadied this week after a horror month. The Nasdaq Composite skidded 13.3 per cent in April, its heaviest monthly loss since 2008. The Dow and S&P 500 suffered their worst months since the initial pandemic sell-off in March 2020.

Overnight, the cost of long-term borrowing backed off a three-and-a-half-year high. The yield on ten-year US treasuries eased to 2.968 per cent after trading briefly above 3 per cent on Monday.

Growth stocks were subdued, but lenders continued to advance on expectations for margin expansion under higher rates. Citigroup gained 2.85 per cent, Bank of America 2.74 per cent and JPMorgan Chase 2.14 per cent.

Energy was another pocket of strength. BP jumped 8.04 per cent on positive earnings news. Exxon Mobil put on 2.06 per cent, Chevron 1.72 per cent and Occidental Petroleum 1.61 per cent.   

Australian outlook

The market looks eager to move on after putting the first of this week’s major risk events behind it. The S&P/ASX 200 slid 31 points or 0.42 per cent after the RBA sprung a mild surprise yesterday afternoon by raising the cash rate by 25 basis points, rather than the 15 basis points most economists predicted.

The fall extended the benchmark’s loss for the week to 119 points. That allows room for a rebound today after two nights of gains in the US.  

The second of the week’s major risk events follows tonight. This week’s Wall Street action suggests a 50-basis point hike is largely factored into current share prices. The risk lies in the outlook from Jay Powell.

Most of the night’s best-performing US sectors appeared counter-intuitive. The energy sector rallied 2.87 per cent as crude oil declined. Financials rose 1.26 per cent as lending rates contracted. The materials sector firmed 1.12 per cent as iron ore and base metals fell.

Just two sectors closed in the red: consumer staples -0.24 per cent and consumer discretionary -0.29 per cent.

Back home, the Australian Bureau of Statistics releases March retail sales data at 11.30 am AEST. The Australian Industry Group’s April Construction Index lands at 8.30 am.

IPOs: the busiest week for new listings in several months continues with Koba Resources at 11 am AEST. Koba is being spun out of New World Resources to house the firm’s cobalt assets.

The dollar hovered just below 71 US cents after rising as high as 71.48 US cents yesterday. The Aussie was lately up 0.71 per cent at 70.97 US cents.

Commodities

Iron ore and industrial metals logged solid falls as trade resumed following Labour Day holidays in the shadow of widening Covid restrictions in China. The coal mining hub of Zhengzou went into lockdown yesterday. Case numbers increased in Beijing, but the capital continued to avoid a major lockdown.

The spot price for ore landed in China dropped US$2.74 or 1.9 per cent to US$143.56 a tonne.

Benchmark copper on the London Metal Exchange slumped 3.7 per cent to US$9,405.75 a tonne, its weakest level since January. Aluminium skidded 5.2 per cent, nickel 2.6 per cent, lead 0.5 per cent, zinc 3.9 per cent and tin 0.2 per cent.

“The Fed is about to embark on an aggressive rate hike tangent at a time when both China and EU economies are set to struggle, which is not great for copper prices especially with China expected to be in a protracted lockdown,” Stephen Innes, managing partner at SPI Asset Management, said.

BHP‘s US-traded depositary receipts rallied 0.71 per cent. The Big Australian’s UK-traded stock edged up 0.09 per cent. Rio Tinto bounced 0.24 per cent in the US after losing 1.07 per cent in the UK.

Oil retreated amid reports authorities in Beijing were readying hospitals for a spike in Covid cases. Traders also questioned whether a European Union ban on Russian crude would eventuate. Brent crude settled US$2.61 or 2.4 per cent lower at US$104.97 a barrel.

“Crude prices are declining as Beijing tightens up their COVID controls and as tanker-tracker data showed Russian crude flows increased,” Edward Moya, senior market analyst at Oanda, wrote. ”Energy traders are not convinced that the EU will be able to move forward with an embargo on Russian oil.“

Gold clawed back some of Monday night’s loss, the heaviest in two months. Metal for June delivery settled US$7 or 0.4 per cent higher at US$1,870.60 an ounce. The NYSE Arca Gold Bugs Index bounced 1.79 per cent. The yellow metal shed 2.5 per cent on Monday.

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