ASX set to slide as Fed preaches rates patience

While the Fed did effectively downgrade its inflation forecasts, and dropped the interest on excess reserves to 2.35 per cent, Fed Chair Jerome Powell went to lengths to implore in his press conference that the Fed remains truly patient. That is: interest rates could move either higher or lower from where they are now.

3. Markets sell-off on Powell’s neutral tone: After somewhat of a tussle, intraday price action suggests a market that has bought into Fed Chair Powell’s words. Having eked out another small gain to its all-time highs, touching 2954 in early North American trade, the S&P500 has sold of post-Fed meeting, to have shed in the realm of 0.7 per cent in the final two hours of the Wall Street session.

Predictably, the US Dollar has rallied as traders unwind some of their bets on interest rate cuts from the Fed this year, leading to a lift in US Treasury yields at the front end of the US yield curve.

4. Weak US economic data compounded sell-off: As it stands right now – and this reflects the knee jerk nature of the price response – markets have an implied probability of 19 basis points of cuts from the Fed by year end.

It’s worth noting, that although the Fed was the primary concern for markets last night, econo-watchers were taken aback by some poor US economic data early in the session’s trade, and probably compounded the impacts of the Fed’s “neutral surprise”. US ISM Manufacturing PMI numbers were released, and showed a significant miss: it printed at 52.8, versus expectations of 55.0 – the lowest print of this measure in 2-and-half years.

5. US earnings lose some of their shine: The Fed, and to a lesser extent the ISM PMI numbers, have taken the steam out of what has been an otherwise solid earnings season. For one, US futures had been priming market participants for a bullish day on the market yesterday, after market bellwether Apple exceeded expectations in its earnings.

Overall, US earnings have been positive, at least in relation to what has been priced in by the market leading into reporting season. But the little retracement in US equities last night betrays how much this market still relies on cheap money, and favourable discount rates, to sustain itself.

6. ASX to follow Wall Street: Taking Wall Street’s lead: the ASX200 ought to shed 30 points this morning. The ASX is in the throes of its own earnings season; and thus far, it too has provided investors plentiful information. But for the index trader, this reporting season centres around the banks, and how their earnings drive bullishness of bearishness in the overall ASX200.

And so far, after the ANZ reported yesterday, the impact has proven the former. Likely owing to a bit of “buy the rumour sell the fact” activity, the financials sector lifted the overall ASX200 yesterday, adding 30 points to the index.

7. The banks in the bigger picture: For macro watchers and traders, despite the short-term lift in bank shares yesterday, the question regarding the banks pertains to whether what was revealed could spark a turnaround in trend in their share prices.

The answer to this, which will be further illuminated when NAB reports today, isn’t compelling: in the big picture, the banks have traded lower for several years in-line with credit growth and property prices — two things the ANZ in its half-year results said it expects to be a challenge for the bank, and by extension the Australian economy, going forward.

8. Market watch:

ASX futures down 30 points or 0.5 per cent near 7.15am AEST

  • AUD -0.5% to 70.15 US cents
  • On Wall St at 4pm: Dow -0.6%, S&P 500 -0.8%, Nasdaq -0.6%
  • In New York, BHP -2%, Rio -1.6%, Atlassian -1.4%, Apple +5.1%
  • In Europe: Stoxx 50 flat, FTSE -0.3%, CAC closed, DAX closed
  • Spot gold -0.1% to $US1282.75 an ounce at 1.35pm New York
  • Brent crude -0.4% to $US71.77 a barrel
  • US oil -1% to $US63.28 a barrel
  • Iron ore closed
  • Dalian iron ore closed
  • LME aluminium +1% to $US1815 a tonne
  • LME copper -2.8% to $US6235 a tonne
  • 2-year yield: US 2.31%, Australia 1.31%
  • 5-year yield: US 2.30%, Australia 1.37%
  • 10-year yield: US 2.50%, Australia 1.78%, Germany 0.01%
  • 10-year US/Australia yield gap: 72 basis points

This column was produced in commercial partnership
between The Sydney Morning Herald, The Age and IG


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