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The share market’s bright start to the week faces headwinds following a mixed finish on Wall Street as surging bond yields weighed on growth stocks.  

The S&P/ASX 200 looked set to unwind yesterday’s gains after the S&P 500 and Nasdaq Composite declined. ASX futures sank 42 points or 0.57 per cent. 

Iron ore rallied almost eight per cent to a fourth straight gain. Oil neared US$80 a barrel for the first time in almost three years.

Wall Street

US stocks closed mixed but broadly lower as rate-sensitive tech stocks weighed. Cyclical sectors, including energy, materials and financials, outperformed. Investors were reluctant to place major bets ahead of congressional testimony tonight from Federal Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen.

The tech-heavy Nasdaq Composite fell 78 points or 0.52 per cent. The S&P 500 dropped 12 points or 0.28 per cent. Gains in Chevron, Caterpillar, JPMorgan Chase and Goldman Sachs helped the Dow Jones Industrial Average rise 71 points or 0.21 per cent.

The major indices diverged into winners and losers from a surge in treasury yields. The yield on ten-year US treasuries briefly reached 1.5 per cent overnight for the first time since June. Yields were below 1.3 per cent as recently as last month.

Yields have risen amid growing concern the Federal Reserve will have to raise official rates sooner than expected to contain stubbornly high inflation. The cost of raw materials has remained elevated, due in part to supply-chain issues in Asia.

“New COVID-19 outbreaks have shut factories in Vietnam and China, adding to higher year-over-year raw materials and shipping costs, and ongoing U.S. port delays unloading shipping containers,” DA Davidson said. “In the U.S., labor shortages are pressuring both the shipping and trucking segments, causing additional delays.”

Tech stocks were the biggest weight on the market. Nvidia lost 1.91 per cent, Microsoft 1.73 per cent, Apple 1.05 per cent and Alphabet 0.8 per cent. The sector is particularly vulnerable to rising yields because higher borrowing rates affect expectations for future cash flows. Bond proxies also declined.

Bank stocks benefit from higher rates. Bank of America put on 2.66 per cent, JPMorgan Chase 2.42 per cent and Goldman Sachs 2.29 per cent.

Optimism over the economy was boosted by strong August orders for durable goods. Total orders increased 1.8 per cent, three times the growth expected by economists polled by Dow Jones, and the largest increase since May.

Investors in cyclical sectors were also cheered by declining Covid cases. The daily average in the US fell to 120,000 last week from a seven-day average of  more than 166,000 earlier this month. Airlines and cruise companies rose for a second day.  

Australian outlook

The domestic market appeared to get ahead of itself yesterday and will have to give some back after Wall Street failed to live up to the promise of upbeat futures during yesterday’s Australian session. The ASX 200 put on 42 points or 0.57 per cent yesterday and looks likely to surrender most, if not all.

Bond markets are once again dictating fund flows on equity markets. Falling bond prices can be interpreted as a sign of optimism over the economy and also concern over inflation.  

Wall Street provided a clear blueprint for winners and losers under rising yields. Winners: energy +3.43 per cent, financials +1.31 per cent and materials +0.78 per cent. Losers: real estate -1.71 per cent, health -1.43 per cent, utilities -1.21 per cent and technology -1.01 per cent.

Back home, monthly retail sales data are scheduled for 11.30 am AEST, but seem likely to have minimal impact now investors are positioning for the reopening of the locked-down eastern states.

IPOs: a busy session coming up, with three companies due to debut. Li-S Energy, listing at 11 am AEST,  has developed a new, longer-lasting lithium-sulphur battery. Dalaroo Metals, listing at 11.30 am, is a base metals explorer with two projects in WA with potential for nickel, copper, lead and zinc. Koonenberry Gold follows at 1.30 pm. This gold explorer has a greenfields project north-east of Broken Hill in NSW.

The dollar firmed 0.26 per cent to 72.84 US cents.

Commodities

Oil settled at its highest in almost three years, buoyed by a steady drawdown in US inventories with production constrained by the impact of Hurricane Ida. Brent crude settled US$1.77 or 1.8 per cent ahead at US$79.53 a barrel. Goldman Sachs raised its end-of-year price target to US$90 a barrel.

Iron ore rallied for a fourth session. The spot price for ore landed in China jumped US$8.50 or 7.7 per cent to US$118.65 a tonne.

BHP’s US-listed stock gained 0.99 per cent and its UK-listed stock 0.51 per cent. Rio Tinto gained 1.15 per cent in the US after losing 0.57 per cent in the UK.

Gold inched higher for a second session. Metal for December delivery settled 30 US cents or less than 0.1 per cent ahead at US$1,752 an ounce. The NYSE Arca Gold Bugs Index finished near flat, up 0.05 per cent.

“With downside momentum seemingly slowing, gold could see some reprieve in the near term but the broader outlook isn’t great,” Craig Erlam, senior market analyst at Oanda, said. “Inflation is typically part of the bullish case for gold, but it’s very much working against it at the moment as it pushes central banks towards the stimulus exit doors.”

A 12-year low in Shanghai warehouse inventories lifted copper during a mixed night on the London Metal Exchange. Benchmark copper rose 0.3 per cent to US$9,372.50 a tonne. Lead gained 0.6 per cent. Aluminium declined 1.2 per cent, nickel 2.3 per cent, zinc 2.1 per cent and tin 4.4 per cent.

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