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Global Market Report - 05 May

Lewis Jackson  |  05 May 2022Text size  Decrease  Increase  |  
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Australia

Australian shares are set to rise after US stocks surged to their best performance in over two years as the US Federal Reserve raised rates but assuaged markets that a jumbo 0.75% rate hike was off the table.

ASX futures were up 31 points or 0.4% at 7303 as of 8.00am on Thursday, suggesting a positive start to trading after being lower several hours earlier.

The Dow Jones Industrial Average finishing up 2.8%, marking its biggest one-day gain since November 2020. The S&P 500 jumped 3% for its best day since May 2020, while the Nasdaq Composite added 3.2%. All three indexes had been down earlier in the day.

Major indexes were at first little changed on Wednesday after the Fed announced it would raise interest rates by half a percentage point and begin to shrink its $9 trillion asset portfolio next month. Investors had widely expected both decisions heading into the conclusion of the central bank's policy meeting.

What caught some by surprise was Mr. Powell saying the Fed wasn't "actively considering" raising interest rates by 0.75 percentage point at a future meeting. Federal-funds futures, which traders use to track interest-rate expectations, had previously shown the market pricing in an 95% chance of the Fed making such a move in June.

"There's a sense of relief," said Christopher Smart, chief global strategist and head of the Barings Investment Institute.

Locally, the S&P/ASX 200 closed 0.2% lower at 7304.7, posting a third consecutive fall on weakness in real-estate, tech and consumer stocks.

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The benchmark index opened higher following a positive lead from US equities but faded through the session as traders sold shares of companies that look negatively exposed to Tuesday's larger-than-expected rise in Australian interest rates.

Real estate was again the worst-performing sector, dropping 1.5%.

EML Payments, Block and Tyro gave up between 3.5% and 5.8% as the tech sector fell 1.0%, although Computershare added 1.8% after Macquarie analysts hailed the likely benefit of higher rates to its margin income.

Energy companies were the biggest gainers, collectively rising 0.8 per cent as natural gas prices hit their highest level since September 2008. Santos was up 1.1% and Viva Energy Group rose 1.8%, although Woodside dipped 0.1%.

Prices were pushed up by the possibility of more European Union sanctions against Russian gas, as well as Moscow last week cutting off shipments to Poland and Bulgaria.

Financials were up 0.7%, with all four of the big banks advancing after lifting their variable rate loans following Tuesday's hike in the cash rate.

In commodity markets, gold futures lost 0.1% to $US1868.80 an ounce; Brent crude oil jumped 4.9% to $US110.13 a barrel as the European Union released plans for a ban on Russian oil imports; iron ore rose 0.4% to US$142.90 a tonne.

Australian bonds continued to dip as investors reacted to the Reserve Bank’s larger-than-expected Tuesday rate hike. The yield on the Australian 2 Year government bond hit 2.85% while the 10 Year leapt to 3.54%. Overseas, US bonds rallied and yields on US Treasury 2 Years dipped to 2.64%, while the 10 Year eased to 2.93%.

The Australian dollar rose sharply, buying 72.49 US cents as of 7.00am AEST, up from the previous close of 70.94. The Wall Street Journal Dollar Index, which tracks the US dollar against 16 other currencies, fell to 94.83.

Asia

Mainland Chinese share markets were closed for the Labor Day holidays.

Hong Kong stocks ended the session lower, extending a muted trading momentum so far this week, as mainland markets remain closed for holidays. The benchmark Hang Seng Index edged down by 1.1% to settle at 20869.52. Chinese tech giants led losses, as the sector continued to decline from a sharp rise late last week, when policy signals turned more favorable for the industry. The rebound momentum dissipated Tuesday, and the sector further extended losses today. Alibaba Health slumped 7.5%, Meituan shed 4.6% and JD.com was down by 4.1%.

Japanese share markets were closed for a public holiday.

Europe

European stocks closed lower as investors turned cautious ahead of the Federal Reserve's policy decision later on Wednesday and after the EU proposed a ban on all oil imports from Russia by year end.

The pan-European Stoxx Europe 600 dropped 1.1%, the German DAX shed 0.5% and the French CAC 40 decreased 1.2%. London’s FTSE closed down 0.9%.

"The Fed's rate hike move might be broadly priced in, but markets are clearly nervous that an even more hawkish FOMC might prompt a surge in volatility that could push indices back below last week's lows," IG analyst Chris Beauchamp says in a note.

North America

US stocks rallied, scoring their biggest one-day gain since 2020, after Federal Reserve Chairman Jerome Powell put to rest investors' fears that the central bank might be considering bigger interest-rate increases in the coming months.

Major indexes were at first little changed Wednesday after the Fed announced it would raise interest rates by half a percentage point and begin to shrink its $9 trillion asset portfolio next month. Investors had widely expected both decisions heading into the conclusion of the central bank's policy meeting.

What caught some by surprise was Mr. Powell saying the Fed wasn't "actively considering" raising interest rates by 0.75 percentage point at a future meeting. Federal-funds futures, which traders use to track interest-rate expectations, had previously shown the market pricing in an 95% chance of the Fed making such a move in June.

Stocks soared after Mr. Powell's remarks, with the Dow Jones Industrial Average finishing up 2.8%, marking its biggest one-day gain since November 2020. The S&P 500 jumped 3% for its best day since May 2020, while the Nasdaq Composite added 3.2%.

All three indexes had been down earlier in the day.

"There's a sense of relief," said Christopher Smart, chief global strategist and head of the Barings Investment Institute.

With stocks and bonds on shaky footing as of late, many investors had been worried that the pace at which the Fed tightens monetary policy would trip up markets. Others have been grappling with fears that the central bank, which is raising rates swiftly to try to tamp down inflation, may inadvertently tip the economy into recession.

The Fed's messaging, however, helped put investor anxiety at ease, according to Mr. Smart.

"There's a feeling they're heading into the right direction," he said. The central bank, he said, has shown it is taking inflation seriously, but not giving the impression that it will surprise investors with the size of subsequent rate increases.

Stocks rose across the board, with all 11 sectors of the S&P 500 finishing higher.

Exxon Mobil and Chevron rose more than 3% apiece, boosted by a rally in oil prices.

Meanwhile, technology and consumer-discretionary shares, which had been among the market's biggest decliners earlier Wednesday, flew higher. The group had taken a hit earlier as investors facing higher interest rates shied away from companies with higher valuations. It staged a rebound alongside bond prices, though, after Mr. Powell's comments.

Alphabet and Facebook parent Meta Platforms rose more than 4% each.

Corporate earnings also spurred volatility in the market Wednesday.

Airbnb shares rose $11.18, or 7.7%, to $156.18 after the company said it expects to post its first full-year net profit this year. Starbucks added $7.31, or 9.8%, to $81.64 after the coffee chain said profits and sales grew in the most recent quarter.

As stocks climbed, Treasury prices rose, too.

The bond market had been hit by its worst rout in decades as investors grappled with accelerating inflation and the prospect of rapid interest-rate increases by the Fed. The swift rise in bond yields added to the turmoil across the stock market this year.

Yet Mr. Powell's comments appeared to ease the selling pressure on Treasurys Wednesday. The yield on the benchmark 10-year Treasury note settled at 2.93%, compared with 2.957% Tuesday. Bond yields fall as prices rise.

The yield on the two-year Treasury note, which tends to be especially sensitive to changes to the outlook for monetary policy, also fell. It ended at 2.64%, down from 2.768% Tuesday.

Earlier Wednesday, other officials expressed confidence in the economic picture. The US economy remains strong despite the fact that it shrank in the first quarter of this year, Treasury Secretary Janet Yellen said at The Wall Street Journal's CEO Council Summit in London.

is a reporter and data journalist with Morningstar. Tweet him @lewjackk or get in touch via email

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