A week dominated by interest rate decisions looks set for a strong start following the Dow’s best week since May.
US stocks surged on Friday as economic data did nothing to alter expectations the Federal Reserve may downshift towards smaller rate hikes after this week’s meeting.
The S&P/ASX 200 is set to open at a seven-week high, according to futures action. The SPI 200 rallied 92 points or 1.36 per cent on Saturday morning despite pressure on iron ore and other major Australian exports. The Reserve Bank meets tomorrow.
Iron ore tumbled to a fresh two-and-a-half year low in Singapore. Oil, gas, gold and most industrial metals also fell. The dollar was this morning trading just below 64 US cents.
Wall Street
US stocks closed out a strong week with further gains as economic data bolstered the case for a rates slowdown, while strong earnings from Apple, Intel and oil companies offset a miss from Amazon.
The Dow Jones Industrial Average soared 8.29 points or 2.59 per cent to a sixth straight gain. The S&P 500 put on 94 points or 2.46 per cent. The Nasdaq Composite advanced 310 points or 2.87 per cent.
The Dow’s longest daily winning streak since May lifted it 5.7 per cent last week amid growing conviction the worst of this year’s bear market has passed. The blue-chip average has risen for four straight weeks, setting it on course for its best month since 1976 and possibly its best October of all time.
“This has been one of the best months (so far) in the history of the Dow, suggesting the bear market likely ended,” Ryan Detrick, chief market strategist at Carson Group, wrote. “Big monthly moves historically happen at the end of bear markets.”
Data on Friday showed wage growth slowed in the third quarter, easing inflationary pressures on the economy. The Employment Cost Index increased by 1.2 per cent, down from 1.3 per cent in the June quarter. Private-sector wages rose 1.2 per cent, down from 1.6 per cent the previous quarter.
Consumer spending increased 0.6 per cent last month, in line with expectations. Collectively, the data helped firm up hopes the Fed may take its foot off the accelerator after this week’s meeting. The central bank starts a two-day meeting tomorrow and is expected to announce another 75 basis point rate hike on Thursday morning, Australian time.
“Basically, the market is starting to price in a pause, not a pivot, but maybe a pause. The end is in sight,” Brad Conger, deputy CIO at Hirtle, Callaghan & Co, said.
The Dow outperformed the other major indices last week because it was light on megacap Big Tech stocks during a week of earnings disappointments. The S&P 500 gained around 4 per cent for the week. The Nasdaq added about 2.2 per cent.
Amazon slumped 6.8 per cent on Friday, joining Microsoft, Alphabet and Meta Platforms in the earnings doghouse. Those high-profile misses have overshadowed a broadly positive Q3 season. On average, S&P 500 companies have beaten earnings forecasts by 3.8 per cent, according to Refinitiv.
Apple rallied 7.56 per cent on Friday after topping revenue and earnings targets. Intel gained 10.66 per cent, Exxon Mobil 2.93 per cent, Chevron 1.17 per cent and Pinterest 13.75 per cent.
Australian outlook
The prospect of a slowdown in global interest rate increases looks likely to get the S&P/ASX 200 off to a flier this morning. Optimism has returned to equity markets as investors anticipate the top of the current interest rate cycle may come sooner and lower than previously forecast.
Wall Street has also drawn confidence from signs businesses have yet to see as much damage from this year’s inflationary and rates headwinds as analysts initially predicted. On Friday a rebound in some of last week’s worst performers lifted the tech sector 4.52 per cent and communication services (Alphabet) 2.98 per cent.
Financials gained 2.49 per cent. Industrials firmed 2.38 per cent. The materials sector improved 1.03 per cent and energy 0.66 per cent despite declines in metals and crude. However, Australian heavyweights BHP and Rio Tinto logged solid falls in US trade (more below).
Agribusinesses will be in the spotlight today following weekend news that Russia is backing out of a deal to keep grain flowing from Ukraine. The UN-brokered deal helped bring food prices down after the initial price shock from the Russian invasion.
The broader market tone this week is likely to be set by central bank meetings. The RBA meets tomorrow and the Federal Reserve starts a two-day meeting tomorrow night. The Bank of England also meets this week.
Investors will look for confirmation this year’s frantic rush to raise interest rates to crush inflation is easing. Rates are expected to continue to rise, just not as quickly.
Much of last week’s bumper gains on the ASX and Wall Street were predicated on the idea banks are ready to take their foot off the accelerator. The Reserve Bank could upset that narrative if it raises the cash rate target by more than 25 basis points tomorrow. While a majority of economists expect a second-straight 25 bp increase, a handful, including Westpac, predict a 50 bp increase.
The Fed is widely expected to increase the target federal funds rate by 75 basis points. The main interest when the bank announces on Thursday morning is the outlook for December. The Wall Street Journal suggested earlier this month that the bank will flag smaller increases from the December meeting.
The domestic economic calendar also brings reports this week on retail sales and private sector credit (today); building approvals, manufacturing (Wednesday); trade (Thursday); and construction (Friday).
China releases various measures of manufacturing and services sector updates today, tomorrow and Thursday. Wall Street has another big week of corporate earnings, as well as various reports on the labour market leading up to Friday night’s non-farm employment update.
Gold miners provided some of last week’s best returns as a pullback in the greenback brought relief for precious metals. Ramelius jumped 19.4 per cent, Evolution Mining 15.5 per cent and Gold Road Resources 12.4 per cent. The index’s other star turns were Novonix +21.7 per cent and Boral +13.3 per cent.
Last week’s biggest losers were BrainChip -23 per cent (revenue disappointment), Medibank -20.4 per cent (cyber-attack) and New Hope -15.6 per cent (coal prices off recent highs).
AGM season continues this week with meetings for shareholders in Domino’s Pizza, Cedar Woods Properties and Sky Network Television (Wednesday); Zip Co, Boral, Downer EDI, Estia Health, Tassal Group and Deterra Royalties (Thursday); and Qantas, Spark New Zealand and Integral Diagnostics (Friday). (Source: ASA.)
Quarterly trading updates are due this week from IGO Ltd (today) and Woolworths and Afterpay’s US parent company Block (Thursday).
CSR announces its interim profit on Friday. Pendal releases its full-year result the same day.
IPOs: the deep freeze in new listings seems to be slowly thawing. The ASX has three potential new listings pencilled in for the week ahead. They are: Source Certain International (Wednesday); Nightingale Intelligent Systems (Thursday); and Taiton Resources (Friday).
The dollar bounced 0.41 per cent this morning to 63.97 US cents.
Commodities
Iron ore prices continued to unravel on Friday as traders factored in reduced expectations for Chinese demand as property prices decline and the government targets social good over economic growth.
Prices on China’s Dalian Commodity Exchange sank for a third week. The most active January ore contract dropped 4.9 per cent to 624.50 yuan (US$86.31) a tonne.
Ore on the Singapore Exchange hit a fresh two-and-a-half year low at US$78.80 a tonne before paring its fall. Prices on the exchange have more than halved since April.
BHP‘s US-traded depositary receipts dived 4.75 per cent. Earlier, the miner’s UK listing slumped 4.91 per cent. Rio Tinto gave up 3.51 per cent in the US and 3.82 per cent in the UK.
Strength in the US dollar and worries about expanding Covid restrictions in China pushed industrial metals lower. Benchmark copper on the London Metal Exchange slid 2.8 per cent to US$7,619 a tonne. Aluminium dropped 3.4 per cent, nickel 1.1 per cent, zinc 4.3 per cent and tin 3.2 per cent.
“We have seen COVID-zero policies drowning out positivity from the onshore equities market,” Marex analyst Zenon Ho told Reuters.
Lead surged 7.1 per cent after Bloomberg announced plans to add the metal to its benchmark commodity index.
Oil retreated as creeping Covid restrictions in China cast a pall over energy demand. China’s fourth-largest city tightened restrictions as Covid outbreaks continued last week.
Brent crude settled US$1.19 or 1.2 per cent lower at US$95.77 a barrel. Prices improved 2.4 per cent across the week, bolstered by a wider improvement in risk appetite.
Gold eased for a second session as caution set in ahead of this week’s Fed meeting. Gold for December delivery settled US$20.80 or 1.3 per cent lower at US$1,644.60 an ounce. The NYSE Arca Gold Bugs Index eased 0.67 per cent.
