Global Market Report - 14 September

Australia

Australian shares are set to edge lower after Wall Street was hammered by higher-than-expected inflation data. As a result now, most investors expect the US Federal Reserve to continue hiking interest rates, and as a result stocks, bonds, oil and gold are all down.

ASX futures were down 161 points or 2.3% at 6848 as of 7:00am on Wednesday, pointing to a slip at the open.

US stocks suffered their worst day in more than two years after hotter-than-expected inflation data dashed investors' hopes that cooling price pressures would prompt the Federal Reserve to moderate its campaign of interest-rate increases.

The Dow Jones Industrial Average fell 3.9%, or nearly 1300 points, and the S&P 500 declined 4.3%, while the Nasdaq Composite slid 5.2% as rate-sensitive technology stocks took a heavy beating. All three indexes posted their steepest one-day losses since June 11, 2020.

Investors had eagerly anticipated Tuesday's release of the consumer-price index, which provided a last major look at inflation before the central bank's interest-rate-setting committee meets next week. Expectations for the path of monetary policy have held sway over the markets as investors factor higher rates into asset prices and try to project how well the economy will hold up as rates rise.

"It increases the probability of recession if the Fed has to move more significantly to address inflation," said Chris Shipley, chief investment strategist for North America at Northern Trust Asset Management.

In commodity markets, Brent crude oil slipped 0.66% to $US98.38 a barrel, gold edged down 1.3% to US$1,702.29.

In local bond markets, the yield on Australian 2 Year government bonds dropped to 2.92% while the 10 Year fell to 3.97%. Overseas, the yield on 2 Year US Treasury notes rose to 3.74% and the yield on the 10 Year US Treasury notes was up at 2.41%.

The Australian dollar hit 67.30 US cents down from the previous close of 68.86. The Wall Street Journal Dollar Index, which tracks the US dollar against 16 other currencies edged up to 101.65.

Asia

China stocks ended the trading session slightly higher as the market resumed trading after Monday's Mid-Autumn Festival holiday. The benchmark Shanghai Composite Index edged 0.1% higher to settle at 3263.80, while the Shenzhen Composite Index rose 0.3% to 2125.05. The tech-heavy ChiNext Price Index gained 0.1% to end at 2550.63. Consumer goods and services companies led the upturn as analysts expect higher demand into the peak holiday season toward the year-end. Beer maker Tsingtao added 3.5% and restaurant operator Tongqinglou jumped 10%.

Hong Kong's Hang Seng Index rose 0.3% to 19421.34 following a holiday, supported by gains in auto and energy stocks. Developments relating to China's economic policies are in focus. "Given ongoing signs of slowing growth, there are growing expectations that the government will do more by way of stimulus, either leading up to or after the Party Congress which begins on 16 October," Commerzbank analysts said in a note.

Japanese stocks end higher, led by gains in railway and airline stocks, on continued hopes that the government will ease Covid-19-related border rules to attract foreign visitors. The Nikkei Stock Average rose 0.3% to 28614.63.

Europe

European stocks fell as US inflation worries spread across the pond. The pan-European Stoxx Europe 600 is down 6.62 points or 1.55% to 421.13, the German DAX is down 213.32 points or 1.59% to 13188.95, while the French CAC 40 index is down 7.90 points or 1.39% to 6245.69.

In London, the FTSE 100 closed down 1.2% Tuesday as data showed business sentiment in Germany and the European Union more broadly deteriorating in September, CMC Markets U.K. analyst Michael Hewson says in a note.

Furthermore, despite U.S. inflation numbers pointing toward a peak, the rise in core prices means inflation looks likely to be a lot stickier than markets had perhaps been pricing in, Hewson says.

"This means that while the narrative of peak inflation may well be still valid, getting it down from these levels is likely to be a much tougher battle, requiring a continuation of more aggressive rate hikes in the months ahead, starting with 75 basis points next week," he says.

Ocado was the day's biggest faller, down 15%, followed by Scottish Mortgage Investment Trust and IAG, down 5% and 4.4% respectively.

North America

US stocks suffered their worst day in more than two years after hotter-than-expected inflation data dashed investors' hopes that cooling price pressures would prompt the Federal Reserve to moderate its campaign of interest-rate increases.

Investors sold everything from stocks and bonds to oil and gold. All 30 stocks in the blue-chip average declined, as did all 11 sectors in the S&P 500. Only four stocks in the broad benchmark were in the green in recent trading. Facebook parent Meta Platforms dropped 9.4%, BlackRock declined 7.5% and Boeing fell 7.2%.

The Dow industrials fell 3.9%, or nearly 1300 points, and the S&P 500 declined 4.3%, while the Nasdaq Composite slid 5.2% as rate-sensitive technology stocks took a heavy beating. All three indexes posted their steepest one-day losses since June 11, 2020.

Investors had eagerly anticipated Tuesday's release of the consumer-price index, which provided a last major look at inflation before the central bank's interest-rate-setting committee meets next week. Expectations for the path of monetary policy have held sway over the markets as investors factor higher rates into asset prices and try to project how well the economy will hold up as rates rise.

"It increases the probability of recession if the Fed has to move more significantly to address inflation," said Chris Shipley, chief investment strategist for North America at Northern Trust Asset Management.

The new data showed the consumer-price index rose 8.3% in August from the same month a year ago. That was down from 8.5% in July and 9.1% in June -- the highest inflation rate in four decades.

The figures show inflation is easing, but at a slower pace than investors and economists had anticipated. Economists surveyed by The Wall Street Journal had been expecting consumer prices to rise 8% annually in August.

Analysts had hoped that officials would consider easing their pace of interest-rate increases if data continued to show inflation subsiding. The data undercut those hopes, seeming to settle the case for the Fed to raise rates by at least 0.75 percentage point next week. After the release, stock futures fell, bond yields rose and the dollar rallied.

Traders began to consider the possibility that the central bank will raise interest rates by a full percentage point next week.

As of Tuesday afternoon, they assigned a 28% probability to a 1-percentage-point increase at that meeting, up from a 0% chance a day earlier, according to CME Group's FedWatch Tool. The market-based probability of a half-percentage-point increase, by contrast, fell to 0% from 9% on Monday, according to the CME data.

The most likely scenario remained an increase of 0.75 percentage point.

Beyond next week, the suggestion that inflation is sticking around raises the possibility that the Fed might ultimately raise rates higher than markets had been anticipating.

Fed Chairman Jerome Powell said earlier this month that the central bank is squarely focused on bringing down high inflation to prevent it from becoming entrenched as it did in the 1970s.

The reaction to the new inflation reading could be seen across asset classes.
The communication services, technology and consumer discretionary sectors of the S&P 500 all fell more than 4.5%. Semiconductor stocks were particularly hard hit: Western Digital, Nvidia, Advanced Micro Devices and Micron Technology declined more than 7%.