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The ASX looked set to reverse most of yesterday’s gains after a costs warning from Ford compounded inflation worries as investors brace for another large US rate hike.
Wall Street’s main indices shed around 1 per cent ahead of tonight’s Federal Reserve rates announcement. Oil settled at a two-week low. Iron ore, gold and most base metals declined. The dollar fell back under 67 US cents.
ASX futures sank 77 points or 1.13 per cent. A fall of that scale would erase most of yesterday’s 86.5-point bounce on the S&P/ASX 200, pushing the index back towards two-month lows.
Wall Street
US stocks slumped as a surge in bond yields to multi-year highs underscored recession worries. Expectations for next month’s earnings season took a hit from Ford’s warning that inflation and supply-chain issues will add US$1 billion to costs this quarter.
The S&P 500 sank 44 points or 1.13 per cent. The Dow Jones Industrial Average shed 313 points or 1.01 per cent. The Nasdaq Composite gave up 110 points or 0.95 per cent.
Treasury yields marched higher into tonight’s rates announcement. The yield on two-year government treasuries hit a 15-year high. The ten-year yield touched its highest since 2011. The curve between the two notes remained sharply inverted, a classic signal of possible recession within the next two years.
The Fed began a two-day meeting that is expected to conclude tonight with an increase to the target federal funds rate of at least 75 basis points. Markets were this morning pricing in a 17 per cent chance of a 100 bp increase.
Stocks have fallen sharply over the last few weeks after the Fed warned rates would have to go significantly higher to bring inflation down from 40-year highs. Markets are nervous that tonight’s projections will show the central bank expects to raise more in the months ahead than the market has priced in.
“Investors have pretty well digested the 75 basis point hike tomorrow but perhaps there’s some concern that the rhetoric at the press conference could be still extremely hawkish,” Jack Ablin, chief investment officer at Cresset Capital, said.
Car-maker Ford added to market worries with an unexpected announcement that costs will jump US$1 billion above guidance this quarter due to inflation and supply delays. Up to 45,000 vehicles will be unable to be completed to schedule due to missing parts.
The warning compounded concerns about the outlook for multinational earnings in the wake of a similar message from FedEx last week. Ford’s shares tumbled 12.32 per cent. Rival General Motors slid 5.63 per cent.
“We have seen some bellwethers talk about the pressures they are facing, so we could see some margin compression and some softening in the topline numbers in the third-quarter earnings,” Greg Boutle, head of US equity & derivative strategy at BNP Paribas, told Reuters.
Australian outlook
The S&P/ASX 200 looks set to enter tomorrow’s public holiday in retreat following another overnight reversal on Wall Street. With Wall Street set to trade twice before the ASX reopens on Friday, short-term traders may feel reluctant to hold their positions.
However, market-watchers will note US stocks have had the happy habit of rallying every time the Fed has raised rates this year. Gains on announcement days have ranged from 1.5 per cent up to 3 per cent. Will the trend continue tonight?
US stocks closed near two-month lows with all 11 sectors in the red. Rates-sensitive real estate investment trusts slumped 2.57 per cent as borrowing costs scaled fresh multi-year highs.
Materials shed 1.9 per cent as commodity markets came under pressure. Financials shed 1.45 per cent, industrials 1.23 per cent and tech 0.51 per cent.
The dollar was once again collateral damage to the risk-off tone. The Aussie slid 0.63 per cent to 66.9 US cents.
RBA Deputy Governor Michele Bullock is due to address an event in Sydney at 12 pm AEST.
Washington H. Soul Pattinson and Brickworks release earnings today. Cochlear, Cash Converters, Cleanaway Waste, Adbri and Atlas Arteria trade ex-dividend.
IPOs: Australia Sunny Glass Group is scheduled to list at 12 pm. The company manufactures and supplies glass products for buildings.
Commodities
Oil closed at a two-week low as traders exercised caution ahead of tonight’s US rates announcement. Crude prices have fallen over the last few months amid fears of demand destruction as rising interest rates slow economic growth.
“A hawkish Fed this week could further stoke fears of a hard landing and spur a continued rally in the dollar, which would surely see the recent lows near $80/barrel tested into the weekend,” analysts at Sevens Report Research wrote.
Brent crude settled US$1.38 or 1.5 per cent lower at US$90.62 a barrel, its lowest close since September 8. The US benchmark also shed 1.5 per cent, settling at US$84.45.
Iron ore retreated after China’s main steel production centre, Tangshan, was hit by a snap Covid lockdown. The news overshadowed positive demand signals from increased steel output and falling inventories as the government takes measures to stoke the economy.
The most-traded ore contract on the Dalian Commodity Exchange fell almost 3.1 per cent to 696 yuan. The spot price for ore landed in China eased 30 US cents or 0.3 per cent to US$98.33 a tonne.
BHP‘s US-traded depositary receipts fell 0.85 per cent. Earlier, the miner’s UK listing firmed 1.03 per cent. Rio Tinto dropped 2.13 per cent in the US and 0.87 per cent in the UK.
Gold miners declined after the precious metal logged its weakest finish since April 2020. Gold for December delivery settled US$7.10 or 0.4 per cent lower at US$1,671.10 an ounce. The NYSE Arca Gold Bugs Index shed 2.96 per cent.
“Gold’s ‘September swoon’ could get uglier if the inflation fighting Fed decides not to blink at the risk of sending the economy into a recession,” Ed Moya, chief market analyst at OANDA, said.
Copper finished flat as rising inventories and strength in the US dollar dulled buying interest. Benchmark copper on the London Metal Exchange dipped 50 US cents or less than 0.1 per cent to US$7,826 a tonne.
Aluminium gave up 0.5 per cent, lead 0.2 per cent and zinc 0.7 per cent. Nickel improved 1.5 per cent and tin 1.1 per cent.
