Global Markets Report - 12 December

Australia

Australian shares are set to edge lower following a dip on Wall Street due to better-than-expected PPI data. Investors are anxious that the Federal Reserve's aggressive interest rate tightening will continue for a longer period.

ASX futures were down 9 points or 0.1% at 7209 as of 7:00am on Saturday, pointing to a slip at the open.

Stocks edged lower after producer-price data came in hotter than expected, disappointing investors who had hoped for signs of easing inflation before the Federal Reserve's meeting next week.

The S&P 500 was down 0.5% Friday after wavering for much of the day, while the Dow Jones Industrial Average was down 0.6%, or 209 points. The technology-focused Nasdaq Composite slipped 0.3%.

Data releases over the last week have served as a reminder of just how difficult it is to predict when inflation will ease, which will allow the Fed to pump the brakes on its policy tightening. Investors had been hopeful that Friday's inflation reading would offer evidence that price pressures in the US are abating and would help solidify a smaller interest rate increase next week.

The Fed will make its next interest rate decision on Wednesday, and the PPI data -- combined with consumer-price data Tuesday -- are expected to factor heavily into the trajectory of interest rates over the coming months.

In recent days, investors have grown increasingly worried that elevated inflation will force the Fed to keep lifting rates to higher levels than once expected, potentially pushing the US economy into a recession.

In commodity markets, Brent crude oil rose 0.3% to $US76.38 a barrel and gold gained 0.56% to US$1,799.07.

In local bond markets, the yield on Australian 2 Year government bonds dropped to 3.03% while the 10 Year fell to 3.29%. Overseas, the yield on 2 Year US Treasury notes declined to 4.32% and the yield on the 10 Year US Treasury notes was down at 3.56%.

The Australian dollar hit 68.01 US cents up from the previous close of 67.67. The Wall Street Journal Dollar Index, which tracks the US dollar against 16 other currencies, declined to 97.67.

Asia

Chinese stocks ended higher, reversing losses in morning trade and finishing the week with a 1.6% rise, as property companies and food producers led gains. Shares of Chinese real estate companies rallied as Hong Kong-listed Sunac China Holdings unveiled progress in restructuring its debt, giving hope for other highly leveraged private developers. Shanghai-listed developer Seazen Holdings rose 6.7% and Gemdale Crop increased 4.5%. High-end liquor producer Kweichow Moutai increased 2.6%. The transportation sector led declines, with Beijing Shanghai High Speed Railway dropping 6.4%, after the company lost its place in the SEE 180 Index. The Shanghai Composite Index ended 0.3% higher at 3206.95, the Shenzhen Composite Index rose 0.6% and the ChiNext Price Index added 0.4%.

Hong Kong shares gained, supported by the consumer services sector, while property related industries weakened. Casino stocks advanced after news that gambling venues in Macau will be allowed to reopen Saturday. Sands China added 3.8% and Galaxy Entertainment climbed 1.1%. China's property downturn continued to weigh on developers, with Country Garden and China Resources Land down 1.3% and 1.8%, respectively. Construction material companies also came under pressure. China National Building Material slid 7.4% and Anhui Conch Cement retreated 5.3%. The benchmark Hang Seng Index rose 0.2% to 20609.14, taking weekly gains to 1.5%.

Japanese stocks ended higher, led by gains in chip and other electronics shares, as concerns eased about higher costs of fuel and borrowing. Advantest gained 5.8% and Lasertec climbed 5.2%. Japan’s Nikkei Stock Average Index rose 1.2% to 27901.01. Economic data are in focus, including US producer-price index and consumer sentiment data due later in the day.

Europe

European stocks rose as investors stayed upbeat after US PPI data. The pan-European Stoxx Europe 600 gained 0.8%, the British FTSE 100 edged 0.1% higher, the French CAC 40 advanced 0.5%, and the German DAX climbed 0.7%.

"While US factory-gate inflation points towards the need for still more rate rises, stocks can now scent the potential for a rally into the end of the month," IG analyst Chris Beauchamp writes. "The PPI data failed to have much of a negative impact, although it does set us up for another hot CPI figure and hawkish Fed next week, which might be much harder for markets to navigate successfully."

North America

Stocks edged lower after producer-price data came in hotter than expected, disappointing investors who had hoped for signs of easing inflation before the Federal Reserve's meeting next week.

The S&P 500 was down 0.5% Friday after wavering for much of the day, while the Dow Jones Industrial Average was down 0.6%, or 209 points. The technology-focused Nasdaq Composite slipped 0.3%.

Data releases over the last week have served as a reminder of just how difficult it is to predict when inflation will ease, which will allow the Fed to pump the brakes on its policy tightening. Investors had been hopeful that Friday's inflation reading would offer evidence that price pressures in the US are abating and would help solidify a smaller interest rate increase next week.

The Fed will make its next interest rate decision on Wednesday, and the PPI data -- combined with consumer-price data Tuesday -- are expected to factor heavily into the trajectory of interest rates over the coming months.

In recent days, investors have grown increasingly worried that elevated inflation will force the Fed to keep lifting rates to higher levels than once expected, potentially pushing the US economy into a recession.

"Even though the market sometimes seems to ignore Powell, thinking he's bluffing, he keeps reiterating that he will put this economy into a recession if he has to," said Eric Sterner, referring to US Federal Reserve chairman Jerome Powell.

Mr. Sterner, chief investment officer at Apollon Wealth Management, said he expects markets could retest their recent lows in the first and second quarter of next year.

"We're stuck in this rut right now waiting for inflation to normalize and it may take all of next year for that to happen," he said.

Those concerns about how high interest rates might go -- and how they will affect the economy -- have led to choppy trading in US stocks recently and interrupted a rally that began in October. All three major US indices are on pace to end the week with losses, breaking a two-week winning streak. As of Thursday, the S&P 500 had fallen 2.7% for the week.