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Australian stocks looked set to open under pressure for a second day following falls on Wall Street and a mixed session on commodity markets as traders factored in higher interest rates.
The S&P/ASX 200 was poised to open 24 points or 0.35 per cent lower, according to futures action.
The fallout from Wednesday’s Federal Reserve meeting continued to drive investor sentiment. Treasury yields spiked, pushing the S&P 500 and Nasdaq to their fourth straight losses. The Dow briefly turned positive before falling away once more.
On commodity markets, iron ore, aluminium and lead rebounded. Copper and crude oil declined. Gold sank to its lowest in two and a half years. The dollar dropped back under 63 US cents.
Wall Street
US stocks added to Wednesday’s losses in the wake of Fed Chair Jerome Powell’s assertion the top of this interest rate cycle may be higher than the bank’s own projection. The yield on two-year treasury notes jumped to its highest in 15 years, pressuring corners of the market that depend on short-term borrowing to fund operations.
The S&P 500 shed 40 points or 1.06 per cent. The Nasdaq Composite lost 182 points or 1.73 per cent. The Dow Jones Industrial Average trimmed a 420-point fall to 148 points or 0.46 per cent by the close.
“The post-Fed hangover continues to keep pressure on U.S. stocks as the impact from the first round of hikes is finally being felt,” Oanda’s senior market analyst Ed Moya said. “Stocks aren’t going to have a painful death here, but they will soften until markets price in a little more Fed hawkishness.”
Powell blindsided markets on Wednesday by declaring interest rates might have to go higher than the central bank itself indicated in its own projections. He also said it was “very premature” to talk of a pause in hikes to assess their impact. His comments in a press conference overshadowed a hint of a slowdown in the pace of increases contained within the bank’s rates statement.
“Powell’s message of a higher terminal rate caught the markets off-guard,” Gary Pzegeo, head of fixed income at CIBC Private Wealth US, said.
Market pricing showed the expected top or “terminal rate” of this rates cycle rose to 5 per cent from a previous target of 4.5-4.75 per cent. The current federal funds target rate is 3.75-4 per cent.
The prospect of higher rates for longer boosted the US dollar and treasury yields. The US dollar index jumped more than 1.3 per cent overnight, pressuring dollar-denominated commodity prices. The two-year treasury yield lurched up 15 basis points to its highest since 2007. The ten-year yield climbed eight points to its highest in more than a week.
Big Tech led the move lower. The market’s megacap tech stocks are seen as vulnerable to higher rates because of their extended earnings multiples and comparatively modest dividend payments. Higher borrowing costs increase corporate expenses and undermine consumer demand.
Apple fell 4.24 per cent, Alphabet 4.07 per cent, Microsoft 2.66 per cent and Amazon 3.06 per cent.
Australian outlook
The clouds cast by an unexpectedly hawkish Fed meeting look likely to weigh on financial markets for some time. The subsequent bond sell-off will pressure growth stocks, REITs and other heavily-geared pockets of the market. A strengthening US dollar will weigh on commodity prices. Ultimately, the Reserve Bank may be forced to reassess its own rates path if it finds itself wildly out of sync with the Fed.
The dollar looks destined to go significantly lower as the interest rate gap widens. The Aussie slid 0.7 per cent overnight to 62.94 US cents.
The prospects for today’s trade brightened briefly overnight as the Dow turned positive mid-session. Apple’s late fade helped dash those hopes.
The S&P/ASX 200 took a heavy hit yesterday, tumbling 1.84 per cent to its heaviest loss since mid-September. The index should fare better today, supported by rebounds in overseas trade in mining megacaps BHP and Rio Tinto (more below).
Aside from gold miners, resource stocks may offer a haven today. The US materials sector bounced 0.78 per cent. Also strong were energy +2.04 per cent, industrials +1.04 per cent (big rally in Boeing) and utilities +0.45 per cent.
Gold miners were flogged for a second night as the yellow metal slumped to its weakest since April 2020. The NYSE Arca Gold Bugs Index skidded 3.39 per cent.
Banks, tech stocks, consumer staples and healthcare sold off. The tech sector shed 3 per cent, financials 1.07 per cent and health 0.44 per cent.
Back home, the Reserve Bank releases a quarterly monetary policy statement at 11.30 am AEDT that may shed more light on the outlook for interest rates. September retail sales figures are released separately at the same time. The Australian Industry Group drops October construction data at 8.30 am.
CSR releases interim earnings today. Takeover target Pendal releases its full-year result.
Qantas, Spark New Zealand and Integral Diagnostics hold annual general meetings.
IPOs: Taiton Resources (ASX code: T88) is scheduled to list at 12 pm AEDT. The company has gold projects in WA and SA, and a polymetallic project in SA.
Commodities
Australian mining giants BHP and Rio Tinto rallied in overseas action after iron ore rose for a third day. Gains this week have been fuelled by supportive comments from the head of China’s central bank and by ongoing speculation China might loosen its zero-Covid policy. An anonymous social media post asserting the establishment of a “Reopening Committee” has not been confirmed by official sources.
The most-traded January ore contract on China’s Dalian Commodity Exchange climbed 1.1 per cent to 634.50 yuan (US$86.85) a tonne.
BHP‘s US-traded depositary receipts bounced 0.5 per cent after the miner’s UK listing gained 0.63 per cent. Rio Tinto improved 0.47 per cent in the US and 1.4 per cent in the UK.
Gold fell to its weakest close since April 2020 as the prospect of higher rates for longer lifted the greenback and US treasury yields. Gold for December delivery settled US$19.10 or 1.2 per cent lower at US$1,630.90 an ounce.
“The Fed aftermath is leading to pain for bullion as Fed Chair Powell has signaled rates will be much higher,” Oanda’s Ed Moya said.
Oil fell with other risk assets as traders factored in the possible demand hit from higher rates and a weaker economy. Brent crude settled US$1.49 or 1.6 per cent lower at US$94.67 a barrel.
“The Fed-induced selloff in broader risk assets certainly limited the upside appetite in oil,” Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said.
Copper, the industrial metal most closely aligned with global growth expectations, led a retreat on the London Metal Exchange. Benchmark LME copper dropped 0.9 per cent to US$7,596 a tonne.
Nickel lost 5.7 per cent, zinc 1 per cent and tin 1.1 per cent. Aluminium and lead resisted the downtrend, rising 0.6 and 0.2 per cent, respectively.
