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Australian shares looked set to open little changed as a weaker dollar helps offset declines in US equities after red-hot inflation data overshadowed the start of earnings season.

ASX futures edged up four points or 0.06 per cent, suggesting a tentatively positive start following yesterday’s fade-session. The S&P/ASX 200 finished flat as traders reduced exposure ahead of last night’s “risk events” in the US.

Overnight, oil and gold rallied. Iron ore declined. The dollar fell almost half a percentage point as the greenback surged.

Wall Street

US stocks retreated from record levels following the strongest rise in core consumer prices in 30 years. Bonds markets sold off, sending yields higher. The dollar jumped as forex traders bet the data added to pressures on the Federal Reserve to tighten monetary policy.

The S&P 500 fell 15 points or 0.35 per cent. The Dow Jones Industrial Average shed 107 points or 0.31 per cent. The Nasdaq Composite lost 56 points or 0.38 per cent.

The inflationary worries that have dogged markets this year re-emerged after the Labour Department reported the core consumer price index jumped 4.5 per cent last month from a year ago, well above the Wall Street consensus of 3.8 per cent. The rise was the largest since September 1991.

Base CPI (which includes energy and food prices) increased by 5.4 per cent, also above expectations for a reading around 5 per cent. That increase was the largest in 13 years.

“A white-hot June CPI print has the markets jittery,” Cliff Hodge, chief investment officer at Cornerstone Wealth, told CNBC. “Moving forward we expect these inflation numbers to begin to cool. June 2020 was the absolute low for Core CPI during the pandemic shutdown, so the comparisons get tougher from here.”

The yield on ten-year US treasuries jumped almost six basis points to 1.424 per cent after an auction of 30-year treasuries attracted less interest than expected. However, movements in equities suggested the rise in yields had minimal impact on asset allocation. The Russell 1000 Growth Index (stocks supposedly most vulnerable to increased borrowing costs) fell a modest 0.18 per cent, versus a 0.77 per cent decline in the Value Index (cyclical stocks less vulnerable to fluctuations in yields).

Banks sold off even as reporting season got off to a positive start. Goldman Sachs’s Q2 earnings beat expectations but its shares fell 1.19 per cent. Similarly, JPMorgan Chase exceeded analyst estimates but saw its share price drop 1.49 per cent. Analysts warned on the eve of this season that last quarter might be as good as it gets for the pandemic rebound.

A big week for market-moving events continues tonight with congressional testimony from Federal Reserve Chair Jerome Powell, data on producer prices and earnings reports from Wells Fargo, Bank of America and Citigroup.

Australian outlook

A mildly positive start looks to be coming up, but traders may be reluctant to push the market too far following a nervy session in the US. There were plenty of negatives in the overnight action. Strong inflation is a headwind for equity markets. Australian yields will follow their US counterparts higher this session. Strong US corporate earnings were met with a shrug and profit-taking, suggesting companies will struggle to meet elevated expectations this season.   

The two sectors that matter most on the ASX logged solid declines in the US: financials fell 1.06 per cent; materials lost 0.95 per cent.

So what are the positives? US tech climbed 0.44 per cent in a counter-intuitive move that suggests traders are not deeply concerned about inflation – or at least, not yet. The dollar fell 0.42 per cent to 74.46 US cents. A weaker currency is broadly positive for Australia’s export-driven economy. Commodity markets largely shrugged off a jump in the greenback. Oil and gold firmed, while any weakness was modest (see below for more).

The S&P/ASX 200 touched a three-week high yesterday before surrendering all of its gains in a session-long fade. The market has settled into a sideways trading range since the start of the Greater Sydney lockdown. Yesterday brought a decline in new local cases, but daily tallies remain high enough that a prolonged lockdown appears inevitable.

The session ahead brings the monthly update on consumer sentiment and quarterly figures on building activity.

IPOs: Balkan Mining and Minerals is set to list at 1pm. The company has lithium projects in Serbia.

Commodities

Oil rallied ahead of US inventory data. Stockpiles are expected to decline for an eighth straight week as demand continues to outstrip supply. Brent crude settled US$1.33 or 1.8 per cent higher at US$76.49 a barrel.

“We are seeing a material shortage in physical supply, which is drawing from inventories to meet demand,” Manish Raj, chief financial officer at Velandera Energy, told MarketWatch.

Gold benefitted from its traditional role as a hedge against inflation. Metal for August delivery settled US$4 or 0.2 per cent higher at US$1,809.90 an ounce. The NYSE Arca Gold Bugs Index climbed 1.22 per cent.

Mining giants BHP and Rio Tinto declined in overseas trade as iron ore weakened. BHP’s US-listed stock dropped 0.43 per cent, matching a 0.44 per cent drop in its UK-listed stock. Rio Tinto shed 0.99 per cent in the US and 0.39 per cent in the UK. The spot price for iron ore landed in China eased 60 US cents or 0.3 per cent to US$217.85 a tonne.

A mixed night on industrial metal markets saw copper finish flat in UK trade, then fall 0.2 per cent in the US to US$4.31 a pound. Benchmark copper on the London Metal Exchange was steady at US$9,375.25 a tonne. Aluminium gained 2 per cent, nickel 0.5 per cent and tin 1 per cent. Lead dropped 1 per cent and zinc 0.4 per cent.

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