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Australian stocks look set for a soft start after Wall Street struggled to sustain fresh highs amid a surge in bond yields.
ASX futures eased 20 points or 0.29 per cent, signalling early pressure following a bright start to the week. The S&P/ASX 200 put on 111 points or around 1.6 per cent since Monday while Wall Street was closed for the President’s Day long weekend.
Overnight, gold slumped below US$1,800 an ounce. Oil inched higher. Copper hovered near a nine-year high. The dollar fell back under 78 US cents.
Wall Street
The three major US indices hit records overnight, but only the Dow was able to retain any gains. The blue-chip average finished 63 points or 0.2 per cent ahead after rising as much as 150 points. The S&P 500 faded to a loss of two points or 0.06 per cent. The Nasdaq Composite shed 48 points or 0.34 per cent as a rotation from growth sectors into value stocks with better exposure to an economic recovery continued.
Gains were kept in check by a 12-month high in bond yields. The yield on ten-year US treasuries has more than doubled in six months, creating an increasing headwind for companies whose business models rely heavily on cheap debt. Bond surrogates such as REITs and utilities also lose some appeal when yields are strong.
“Higher yields, while good for banks, are hitting the bond surrogate sectors like REIT’s, Utilities and Staples,” Art Hogan, National Securities chief market strategist, told CNBC. “The market can digest rising yields, especially when they are going up for the right reason, but not when they go up in a linear fashion.”
The real estate, utilities and heath sectors all declined by at least 1 per cent. Financials, which stand to benefit from higher interest rates through increased margins, rallied 1.8 per cent. Energy was the best of the sectors, rising 2.3 per cent as a cold snap in the US triggered higher demand while impacting domestic production. The post-pandemic recovery in energy prices has been one of the factors fuelling inflation concerns and driving bond yields higher.
Value stocks such as banks, oil companies and industrials outperformed this month as Covid rates tumbled in the US and the vaccination effort gathered pace. The S&P value index has risen 6 per cent, outpacing growth stocks that weathered the pandemic best but have less upside as the economy recovers.
US stocks have continued to make fresh highs this month, but the size and pace of the advances have shrunk after last year’s extraordinary recovery.
“It has been a bit of parabolic run up here so we may be due for a correction but it is hard to see a catalyst for that at the moment just because there is so much stimulus, both monetary and fiscal and the anticipation of more fiscal measures,” Tony Bedikian, head of global markets at Citizens Bank, told Reuters.
Australian outlook
The local market may have got a little ahead of itself this week following two days of strong gains. Futures action suggests mild down-pressure, with declines in bond surrogates likely to outweigh potential gains in financials and energy stocks.
Earnings reports will once again have a big say in how the session develops. Today brings updates from heavyweights Rio Tinto and Coles. Also scheduled to report are Vicinity Centres, Webjet, Whitehaven Coal, Treasury Wine Estates, St Barbara, Carsales.com, Bapcor, Domino’s Pizza, Evolution Mining, Netwealth and Tabcorp (sources: CommSec, Bell Direct). Westpac is due to give a quarterly update.
The S&P/ASX 200 rallied 48 points or 0.7 per cent yesterday after BHP declared a record half-year dividend, continuing a trend of dividend recovery after last year’s crunch. The benchmark hit a 50-week high yesterday as the market continued to rumble higher during the month-long reporting season.
A bounce in the greenback drove the Australian dollar back below 78 US cents. The Aussie retreated 0.29 per cent to 77.61 US cents.
Commodities
Gold fell below US$1,800 an ounce for the first time in a week as bond markets sucked up haven fund flow. Gold for April delivery settled $24.20 or 1.3 per cent lower at US$1,799 an ounce. The NYSE Arca Gold Bugs Index slid almost 2.5 per cent.
BHP‘s US-listing surged to catch up with gains in its UK and Australian listings over the President’s Day holiday. The company’s US stock put on 7.22 per cent and its UK-listed stock 1.46 per cent. Rio Tinto added 4.79 per cent in the US and 1.2 per cent in the UK. Chinese iron ore markets remained closed for Lunar New Year holidays.
US oil outpaced the global benchmark as North America shivered through sub-zero temperatures. West Texas Intermediate crude climbed 58 cents or 1 per cent to US$60.05 a barrel. Brent crude settled five cents or 0.1 per cent ahead at US$63.35 a barrel.
Copper for March delivery climbed 1.2 per cent to US$3.834 a pound in the US.
