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The trading week looked set for a cautious start following a mixed session on Wall Street and declines in key commodities.

The Dow notched a fifth straight record as US cyclical sectors outperformed. The Nasdaq retreated as rising bond yields weighed on growth stocks. ASX futures eased three points or 0.04 per cent

Iron ore prices slumped more than 3 per cent. Crude oil and gold declined. Copper edged higher. The dollar rose 0.12 per cent this morning to 77.65 US cents.

Wall Street

Optimism over the reopening of the economy lifted both cyclical sectors and borrowing costs on Friday. A measure of consumer sentiment climbed to its highest level in a year. Stimulus payments from President Joe Biden’s US$1.9 trillion Covid relief package were expected to reach bank accounts this week.

The Dow Jones Industrial Average climbed 293 points or 0.9 per cent to complete a week-long run of record closes. The financial sector climbed 1.1 per cent as the yield on ten-year treasuries spiked ten basis points to a 13-month peak of 1.64 per cent.

The yield-sensitive Nasdaq Composite slumped 79 points or 0.59 per cent. The S&P 500 eked out a gain of four points or 0.1 per cent.

“Higher rates, less dovish central banks are now considered to be the single biggest threat for risk assets,” Ralf Preusser, Bank of America rates strategist, wrote.

The Dow put on 4 per cent last week as the prospects for an accelerating recovery lifted battered cyclical sectors. The Nasdaq Composite rebounded out of a technical correction during the week, but retreated on Friday as borrowing costs surged afresh. Despite Friday’s setback, the tech index gained 3 per cent for the week. Tech companies are particularly vulnerable to higher borrowing costs because their valuations are generally based on future earnings that get downgraded when costs rise.

“I think the story is becoming very, very clear in the tech sector. We have incredibly high valuations and yields that have tripled from the low last year,” Robert Conzo, CEO of The Wealth Alliance, told CNBC. “You are going to see a lot of volatility in the tech sector. There’s a better trade out there in the cyclicals.”

The pandemic’s biggest losers have turned into some of this year’s best performers. On Friday, Boeing surged 6.8 per cent and Caterpillar 4.2 per cent. Bank stocks, which benefit from rising  rates, also advanced. High-flying tech giants Apple, Facebook, Amazon, Microsoft and Alphabet all declined.

Australian outlook

A choppy, uncertain performance last week has left investors uncertain where the domestic market goes from here. Higher with the blue chips of the Dow, or do we continue to bounce around with the Nasdaq?

The S&P/ASX 200 underperformed Wall Street last week (+0.8 per cent, versus 2.6 per cent for the S&P 500 and 4 per cent for the Dow) and has plenty of upside from here if it is the former. Our heavily-weighted banks should benefit from the steady recovery in borrowing costs. The US financial sector put on 1.1 per cent on Friday. The domestic sector should follow suit if Australian yields follow US leads.

The outlook for the miners today is less favourable. The US materials sector edged up 0.2 per cent, but iron ore turned sharply lower. The US tech sector fell 0.9 per cent.  

A busy week ahead for the Reserve Bank, with potential implications for equities and the dollar. Governor Philip Lowe is due to address an online conference this morning at 10.15 am AEDT. The minutes from this month’s policy meeting are due tomorrow. Assistant Governor Christopher Kent is due to deliver a speech at an online event on Wednesday. The US Federal Reserve, Bank of England and Bank of Japan hold monthly meetings this week.

The highlight of the domestic economic calendar is the February jobs report on Thursday. The unemployment rate is expected to tick down to 6.3 per cent from 6.4 per cent as the economy adds around 31,500 jobs.

China drops its monthly data dump at 1pm today: industrial production, retail sales, unemployment and fixed asset investments. Wall Street has retail sales tomorrow night, a Fed policy statement on Wednesday and benefits claims on Thursday. Daylight Saving started in the US on the weekend, which means Wall Street closes an hour earlier from this week at 8am AEDT.

Commodities

A Chinese crackdown on pollution continued to depress iron ore prices. The spot price for ore landed in China sank $5.35 or 3.1 per cent on Friday to US$165.70 a tonne after the environment ministry called on regional administrators to enforce pollution controls. Ore prices declined 5.1 per cent last week.

Rio Tinto dropped 1.49 per cent in the US and 0.62 per cent in the UK. BHP‘s US-listed stock put on 0.65 per cent and its UK-listed stock 0.25 per cent.

Gold faded to its first loss in four sessions as rising bond yields dulled demand. Gold for April delivery settled $2.80 or 0.2 per cent lower at US$1,719.80 an ounce. The NYSE Arca Gold Bugs Index edged up 0.4 per cent.

A modest loss on Friday brought an end to oil‘s seven-week winning run. Brent crude settled 41 cents or 0.6 per cent lower at US$69.22 a barrel, enough for a 0.2 per cent loss for the week.

Copper rose amid optimism about US infrastructure spending following the passage of the Biden stimulus package. Benchmark copper on the London Metal Exchange climbed 0.4 per cent to US$9,103.50 a tonne. Lead added 1.1 per cent. Aluminium fell 0.3 per cent, nickel 1.4 per cent, zinc 0.6 per cent and tin 6.9 per cent.

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