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The S&P/ASX 200 looked set to open below 6700 for the first time in three weeks following a broadly negative end to last week on overseas markets.

US stocks closed mixed but mostly lower as bond yields jagged around. Iron ore slumped 3.5 per cent. Oil, gold and copper rallied.

ASX futures declined 14 points or 0.21 per cent to 6662. The ASX 200 closed at a three-week low on Friday on the back of three straight losses.  

Wall Street

Bank stocks led Friday’s US sell-off after the Federal Reserve said a pandemic-era rule on capital buffers will be allowed to expire at the end of the month, as scheduled. Financial stocks sold off amid fears lenders will be forced to sell bonds to meet capital requirements, exacerbating a sharp increase in yields that has unsettled equity markets. (Yields move inversely to bond prices.)

The Dow Jones Industrial Average fell 234 points or 0.71 per cent as JPMorgan Chase shed 1.6 per cent and Goldman Sachs 1.1 per cent. Losses blew out in the final minutes of a “quadruple witching” session as institutional traders closed positions in four types of index and equity derivatives.   

The S&P 500 dipped two points or 0.06 per cent. The Nasdaq Composite gained 99 points or 0.76 per cent as growth stocks outperformed value sectors.

The Fed said a temporary relaxation of the Supplementary Leverage Ratio (SLR) would be allowed to expire on March 31. The ratio determines the amount of capital lenders are required to maintain against their holdings. Wall Street had reportedly lobbied heavily for the temporary measure to continue. The S&P 500 banks index dropped 1.6 per cent.

“This is a disappointment to investors that the Fed decided not to extend it,” Jimmy Chang, chief investment officer at Rockefeller Global Family Office, told  CNBC. “There was a lot of expectation, at least a few weeks ago, that the Fed would extend to relieve SLR for the big banks given the need to absorb so much Treasury issuance.”

Bond yields rallied after the announcement, nearing a 14-month high before paring gains. A sharp recovery in yields has unsettled equity markets in recent weeks, briefly pushing the Nasdaq into a bear market. The growth-heavy index shed 0.8 per cent last week, its fourth weekly decline in five weeks. Friday’s falls sealed weekly falls of 0.5 per cent for the Dow and 0.8 per cent for the S&P 500.

Tech stocks picked up some buying as yields came off session highs. Facebook, Amazon and Alphabet advanced.

Australian outlook

Futures trading suggests another soft start this morning. The S&P/ASX 200 is on a three-session losing run and mired in a sideways trading band. While the Dow and S&P 500 scaled fresh peaks last week, the Australian benchmark last recorded a pandemic-era high more than a month ago.

Some of the ASX’s recent under-performance may be down to fears about the effect on the economy when JobKeeper payments cease at the end of this week. The scheme finishes on Sunday. Unemployment tumbled last month, but will be a source of anxiety for the next few months.

Bond markets remain a source of concern after the US ten-year yield hit a 14-month high last week. The ten-year Australian yield touched its highest level in almost two years at the end of February. Growth stocks and bond proxies are particularly vulnerable to further rises in yields. The Australian ten-year yield finished last week at around 1.82 per cent. A break above 1.92 per cent would set alarm bells ringing.

Covid re-emerged late last week as a potential headwind for financial markets, including commodities. Oil plunged after much of France went back into lockdown for four weeks. However, the impact of that lockdown should be transitory unless it turns out to be a harbinger for a wider problem in Europe. The Australian outlook improved over the weekend after the Therapeutics Goods Administration approved domestic production of the Oxford-AstraZeneca vaccine.  

A big week ahead for dividend payments. More than $12 billion will flow into accounts this week, according to CommSec – much of it to investors in BHP, Fortescue and Telstra. Others paying out this week include Newcrest, Santos, Woodside, Coles and AGL.

The domestic economic calendar is light for the last week of the month. Wednesday brings manufacturing and services reports, plus trade figures. On Wall Street, this week’s potential market-moving events are Wednesday’s durable goods update, Friday’s inflation report and congressional testimony from Federal Reserve Chair Jerome Powell on Tuesday and Wednesday.

The dollar edged up 0.04 per cent this morning to 77.38 US cents.

Commodities

Iron ore prices continued to retreat as pollution controls depressed Chinese steel prices. The spot price for ore landed in China dropped $5.80 or 3.5 per cent on Friday to US$160.20 a tonne.

“Iron ore futures extended recent declines, with traders remaining concerned that China will continue to crack down on steel mills violating pollution curbs,” according to ANZ Bank analyts.

BHP‘s US-listed stock declined 1.52 per cent and its UK-listed stock 2.02 per cent. Rio Tinto shed 1.3 per cent in the US and 1.57 per cent in the UK.

Gold climbed to a three-week high as bond yields steadied. Gold for April delivery settled $9.20 or 0.5 per cent ahead at US$1,741.70 an ounce. The NYSE Arca Gold Bugs Index rose 0.7 per cent.

Oil bounced for the first time in six sessions as tensions in the Middle East offset demand worries after much of France returned to lockdown. A Saudi oil facility reportedly came under drone attack. Brent crude settled $1.42 or 2.4 per cent ahead at US$61.42 a barrel.

Copper inched higher to finish broadly flat for the week. Benchmark copper on the London Metal Exchange rose 0.1 per cent to US$9,072.50 a tonne. Aluminium gained 2.4 per cent, nickel and zinc 1.6 per cent, and lead 1.7 per cent. Tin fell 1.4 per cent.

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