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The share market’s positive start to 2023 looked set to continue after optimism about cooling inflation fuelled Wall Street’s biggest rally of the new year.
US stocks broke a four-week losing streak as the major indices all gained at least 2.1 per cent on Friday.
Iron ore and industrial metals were boosted by fresh support for China’s struggling property sector. Gold logged a third straight winning week. Oil was little changed. The Australian dollar neared 69 US cents.
The S&P/ASX 200 will open 70 points or 1 per cent higher this morning, according to futures action. The Australian benchmark climbed 0.65 per cent on Friday to extend its weekly advance to around 1 per cent.
Wall Street
US stocks jumped after slowdowns in wage growth and services-sector activity encouraged hopes of smaller interest rate increases. The reports came as employment data indicated the labour market remained strong.
The S&P 500 surged 87 points or 2.28 per cent. The Dow Jones Industrial Average added 701 points or 2.13 per cent. The Nasdaq Composite put on 264 points or 2.56 per cent.
Investors were cheered by signs wage increases were slowing, easing one of the main drivers of inflation over the last year. Wages grew by 0.3 per cent last month, lower than an expected 0.4 per cent increase.
The economy created 223,000 jobs in December, above an anticipated 200,000 new jobs, but down from the 256,000 created in November. While higher than expected, the monthly increase was the smallest in two years.
“Today’s payrolls report was nirvana for the bulls,” David Russell, vice president of market intelligence at TradeStation Group, told Reuters.
“The Fed’s latest worry has been the wage-price spiral, but this report shows just the opposite… We could be looking right now at a soft landing.”
Hopes for a rates slowdown were further sharpened by signs last year’s hikes were taking a toll on services sector activity. The Institute for Supply Management’s services index dropped to 49.6 from 56.5 in November. Readings under 50 indicate the sector is contracting. The December reading was the first negative result since May 2020.
“We got good news on the inflation front with wage gains that are slowing. We got participation rates pick up again and yet we’re still creating jobs. It’s a kind of a win-win for the economy. And on the other side the ISM services report was really weak,” Megan Horneman, chief investment officer at Verdence Capital Management, told Reuters.
“That’s basically making people think the Fed is nearing the end of what’s been one of the most aggressive tightening cycles we’ve seen in decades. That’s why the markets are taking off.”
The rally helped the S&P 500 and Nasdaq seal their first weekly advances in five weeks. The S&P 500 gained around 1.45 per cent for the first week of 2023. The Nasdaq added 0.98 per cent and the Dow 1.46 per cent.
Europe’s benchmark closed at a seven-month high following its best week since March. The pan-European Stoxx 600 index rallied 1.16 per cent on Friday to extend its tally for the week to around 4.6 per cent. Miners and energy producers led the advance.
Australian outlook
A ripper of an end to the US trading week points to a fourth straight advance for Australian stocks. The S&P/ASX 200 has not managed a four-session win run since the first week of November.
The new year is off to a strong start as China scrambles to shore up its economy in the face of a massive wave of Covid infections. Talk of easing restrictions on property developers helped lift the ASX 200 to a return of 0.65 per cent on Friday and inspired strong gains in US-listed miners later that night.
The US materials sector charged up 3.44 per cent on Friday. That should support another up-leg here this session. BHP and Rio Tinto soared in overseas trade. The ‘Big Australian’ put on 4.28 per cent in US action and 2.6 per cent in the UK. Rio added 2.95 per cent in New York and 1.99 per cent in London.
A sharp retreat in the cost of borrowing in the US helped lift the technology sector 2.99 per cent and real estate 2.86 per cent. The yield on ten-year US treasuries dived around 15 basis points in anticipation of a lower terminal rate this year.
All 11 US sectors booked gains. Health and energy were weakest with advances of 0.89 and 1.68 per cent, respectively.
The Australian dollar pushed up 0.1 per cent this morning to 68.85 US cents. The Aussie is knocking on the door of 69 US cents for the first time since September.
Stock market participation should start to improve this week from seasonal lows as traders return to their desks. Last week saw a modest improvement in volumes from the Christmas doldrums.
Wednesday’s December inflation report is this week’s big-ticket item on the domestic economic calendar. The market tentatively anticipates two more interest rate hikes this year. A surprise inflation reading would shift expectations, whether hot or cold.
Also scheduled this week: December building approvals (11.30 am AEDT today); weekly consumer confidence (Tuesday); November retail sales (Wednesday); and November trade figures (Thursday).
A new quarterly US earnings season gets underway in earnest late this week with reports from several of the big banks. Bank of America, Wells Fargo, JPMorgan Chase and Citigroup all report on Friday, along with UnitedHealth and BlackRock.
The US economic calendar is lighter than last week. Potential highlights include a panel discussion involving Fed Chair Powell (Tuesday); consumer inflation (Thursday); and consumer sentiment (Friday).
IPOs: rare earths miner VHM Limited was scheduled to list at 12.30 pm AEDT today. The company’s flagship project is the Goschen rare earths and mineral sands deposit in north-west Victoria.
Other listings pencilled in for this week include Acusensus (Thursday); and Gold Hydrogen and Patagonia Lithium (Friday).
Companies trading ex-dividend this week include Perpetual (today); Premier Investments (Tuesday); and Centuria Capital, Tower and Turners Automotive Group (Wednesday).
Commodities
The prospect of looser restrictions on property developers helped lift iron ore prices on Friday. Bloomberg reported Beijing plans to relax the “three red lines” policy that has been accused of exacerbating a recent collapse in property prices. The rules on debt and cash reserves were introduced in 2020 as several major developers teetered on the verge of collapse.
The most-traded May ore on China’s Dalian Commodity Exchange ended daytime trading 1.9 per cent ahead at 855 yuan per metric ton (US$124.72).
The prospect of improved Chinese demand lifted copper and other base metals. Benchmark copper on the London Metal Exchange climbed 2.57 per cent to US$8,589.50 a tonne. Aluminium gained 1.77 per cent, nickel 1.19 per cent, zinc 0.62 per cent and tin 1.65 per cent. Lead declined 0.77 per cent.
Oil steadied at the end of a losing week. Brent crude settled 12 US cents or 0.2 per cent lower at US$78.57 a barrel. For the week, the international benchmark lost 8.5 per cent.
Crude prices sank last week as traders weighed the demand hit from a wave of Covid infections in China and mild winter weather in the northern hemisphere.
“The price slide was sparked by demand concerns amid the latest wave of COVID infections in China following the abrupt lifting of coronavirus restrictions. However, we do not believe that this will set the course for the year as a whole and expect that the oil market will tighten noticeably from midyear at the latest,” Barbara Lambrecht, commodity analyst at Commerzbank, wrote.
Gold sealed a third straight weekly advance following a sharp decline in the greenback and US treasury yields. Gold for February delivery settled US$29.10 or 1.6 per cent higher at US$1,869.70 an ounce. The NYSE Arca Gold Bugs Index lifted 1.88 per cent.
