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A rebound on Wall Street from two-month lows signals relief for Australian investors following a 4.1 per cent decline across four sessions on the S&P/ASX 200.
US stocks kicked higher in late trade to break a two-session losing run. Oil and other commodities steadied with the improvement in risk appetite after Wall Street’s worst week in three months. The Australian dollar retested yesterday’s two-year low before regaining 67 US cents.
ASX futures rallied 55 points or 0.82 per cent to 6776. The S&P/ASX 200 sagged 19 points or 0.23 per cent yesterday to a two-month low as investors braced for another jumbo US rate hike.
Wall Street
US stocks rallied ahead of a two-day Federal Reserve meeting that is expected to conclude with a rate increase of at least three-quarters of a percentage point. Dip-buyers took advantage of the cheapest stock prices since July.
The S&P 500 overcame early pressure to advance 27 points or 0.69 per cent. The Dow Jones Industrial Average flipped an opening loss of 263 points into a gain of 197 points or 0.64 per cent.
The Nasdaq Composite put on 87 points or 0.76 per cent. The tech index was down as much as 0.9 per cent at the open.
The market opened under pressure as treasury yields hit a decade high. The yield on the ten-year government treasury topped 3.51 per cent for the first time in 11 years.
The rise came as investors steel for another huge step up in borrowing costs. The Fed is expected to raise the target federal funds rate by 75 basis points to a range of 3 – 3.25 per cent when this week’s meeting concludes on Thursday morning, Australian time. A larger increase of a full percentage point is also possible following grim inflation data earlier this month.
At least as important as the new target range are the central bank’s projections, which will indicate how high rates may go to bring down inflation from two-decade highs. The market consensus is that benchmark rates will end the year two percentage points above current levels (2.25 – 2.5 per cent).
“This is all about what’s going to happen on Wednesday, and what comes out of the Fed’s hands on Wednesday, so I think people are just going to wait and see until then,” Josh Markman, partner at Bel Air Investment Advisors, told Reuters.
Wall Street’s main indices fell to two-month lows on Friday after economic bellwether FedEx scrapped its full-year guidance, citing the risk of a global recession. The major benchmarks have fallen for four of the last five weeks, shedding between 4.1 and 5.5 per cent last week.
Once this week’s Fed meeting passes, attention will swing to next month’s quarterly reporting season. Earnings expectations have fallen steadily in recent months as post-pandemic tailwinds abate and costs increase.
Australian outlook
Unexpected relief ahead after Australian investors were wrong-footed once again by US futures action. Negative S&P 500 futures yesterday afternoon helped drag the S&P/ASX 200 to a two-month low. The index should recoup some of its 4.1 per cent loss over the last four sessions.
The question for investors now is whether a 75 bp US rate hike is “baked in” to current share prices? In other words, is it safe to buy the dip?
US sector action contained plenty for Australian bulls. Basic materials topped sector gains with a rise of 1.63 per cent. ASX heavyweights BHP and Rio Tinto both rose in US trade. Gold miners rallied even as the metal price declined.
Financials, the ASX’s other major driver, rallied 1.12 per cent. Also strong were consumer discretionary +1.34 per cent, industrials +1.33 per cent and utilities +1.32 per cent.
The healthcare sector fell 0.54 per cent after President Joe Biden declared the pandemic “over”. Real estate was the only other laggard, falling 0.21 per cent.
The minutes from this month’s RBA monetary policy meeting, due for release at 11.30 am AEST, should shed some light on the outlook for interest rates. Investors will seek evidence the central bank is considering slowing the current aggressive pace of hikes after four straight increases of half a percentage point.
Coal miner New Hope releases earnings today.
The dollar traded as low as 66.72 US cents before steadying at 67.28 US cents. The Aussie hit 66.68 US cents earlier this week, a level last seen in May 2020.
Commodities
Oil overcame early weakness as the mood on financial markets improved. Brent crude dipped below US$90 a barrel for the first time in more than a week.
The international benchmark fell to US$88.50 before settling 65 US cents or 0.7 per cent ahead at US$92 a barrel. The US benchmark, West Texas Intermediate, finished more than US$3 above its session low at US$85.73.
Iron ore gave up early gains as traders fretted about the risk of further Covid lockdowns before next month’s annual Communist Party congress in China. Analysts say the government is unlikely to relax the zero-Covid policy until after the event.
Ore prices rose as much as 1.8 per cent on the Dalian Commodity Exchange yesterday morning before caution reasserted. Prices ended daytime trade 1.4 per cent lower at 705.50 yuan (US$100.61) a tonne. The spot price for ore landed in China eased 43 US cents or 0.4 per cent to US$98.63 a tonne.
BHP‘s US-traded depositary receipts rallied 1.84 per cent. Earlier, the miner’s UK listing fell 0.69 per cent. Rio Tinto bounced 2.07 per cent in the US and 0.32 per cent in the UK.
US gold miners rallied even as the yellow metal fell back towards two-year lows. Gold for December delivery settled US$5.30 or 0.3 per cent lower at US$1,678.20 an ounce. The NYSE Arca Gold Bugs Index rose 2.63 per cent.
“Gold is stabilizing here as selling pressure has exhausted itself and will likely need to wait for the [Federal Open Market Committee] decision,” Ed Moya, senior market analyst at Oanda, said.
Industrial metals rose in Asian trade while the London Metal Exchange closed for the queen’s funeral. The most-traded October copper contract climbed 0.9 per cent on the Shanghai Futures Exchange. Nickel improved 3.3 per cent and tin 1.2 per cent. Aluminium declined 0.9 per cent.
Copper eased 0.1 per cent in US trade to US$3.5125 per pound.
