Global Markets Report - 6 January

Australia

Australian shares are expected to open slightly today despite poor performance by US indices. Minutes released Wednesday from a US Federal Reserve meeting confirmed the central bank’s intention to keep interest rates high into 2023. Strong December employment data also stresses the need for continued efforts to cool inflation.

ASX futures added 8 points or 0.11% at 7082 as of 7:00am on Friday, indicating a gain at the open.

US stocks fell Thursday, while the dollar advanced and bond yields rose, as strong labor market data bolstered the case for the Federal Reserve to remain tough.

The S&P 500 fell 1.2%, while the Dow Jones Industrial Average dropped 1%, or 340 points. The tech-focused Nasdaq Composite Index declined 1.5%.

US indices had risen on Wednesday, despite the release of Federal Reserve meeting minutes in which officials stressed their resolve in seeking to tame inflation.

Investors have started the year skittish about whether central banks can bring inflation back under control without inflicting too much damage on the global economy. Both inflation and economic growth have shown signs of slowing, lifting hopes that the Fed and other central banks could soon moderate or end their programs of lifting interest rates. Still, Fed officials, in minutes released Wednesday, cautioned investors that rates would have to remain high for some time.

In commodity markets, Brent crude oil regained some of yesterday’s losses by adding 1.01% to trade at US$78.63 a barrel. Gold, on the other hand, shed 1.07% to US$1,834.66.

In local bond markets, the yield on Australian 2 Year government bonds was unchanged at 3.37% while the 10 Year dipped to 3.83%. Overseas, the yield on 2 Year US Treasury notes climbed to 4.45% and the yield on 10 Year US Treasury notes increased to 3.71%.

The Australian dollar dipped to 67.69 US cents down from the previous close of 68.37. The Wall Street Journal Dollar Index, which tracks the US dollar against 16 other currencies, rose to 97.62.

Asia

Chinese shares ended higher on hopes for a strong economic recovery in 2023 after the country emerges from the pandemic. Most sectors rallied with liquor producers and auto makers leading the gainers. Index heavyweight Kweichow Moutai increased 4.4%, reversing its losses in the past three sessions, and Wuliangye Yibin rose 5.8%. Battery maker CATL rose 6.1% and BYD Co. increased 2.3%. Among the losers were the financial and energy sectors, which retreated slightly from the previous sessions' gains. The Shanghai Composite Index ended 1.0% higher at 3155.22, the Shenzhen Composite Index rose 1.6% and the ChiNext Price Index added 2.8%.

Hong Kong stocks ended the session higher as the market kept up its bullish start to 2023. The benchmark Hang Seng Index gained 1.2% to settle at 21052.17, the highest closing since July. Consumer goods and services companies continued their recent reopening-driven rally. Luxury car dealer Zhongsheng jumped 7.7%, while beer maker China Resources Beer advanced 5.3%. Food delivery company Meituan rose 5.2% and restaurant operator Haidilao was up by 4.3%.

The Nikkei Stock Average closed 0.4% higher at 25820.80 as gains in electronics and tech shares helped offset losses in financial stocks. Tokyo Electron gained 4.0% and Recruit Holdings climbed 3.1%. Meanwhile, Dai-ichi Life Holdings fell 3.0% and Resona Holdings lost 3.3% as domestic bond yields dropped across the curve.

Europe

European stocks traded mixed following mostly positive Asia trading and ahead of an expected slightly higher US open. The pan-European Stoxx Europe 600 dipped 0.15%, the French CAC 40 shed 0.22%, and the DAX lost 0.38%. The British FTSE 100 gained 0.64%.

The FTSE 100 outperformed its peers on Thursday thanks to a rally in the retail sector and a weaker pound, chief market analyst at CMC Markets UK Michael Hewson said in a note. Next shares rose 6.9% and lead the blue-chip index as investors welcomed its quarterly update, in which it said that full-price sales grew by 4.8% in the nine weeks preceding the end of December and increased full-year pre-tax profit guidance. Standard Chartered Bank was also among the gainers with a 6.8% increase, reaching its highest levels since early 2018 after reports that First Abu Dhabi National Bank takeover bid talks were no longer taking place, Hewson noted. Among the losers were Pearson, which fell 5.9%, as well as Croda International and Haleon, down 3.3% and 3.0% respectively.

IG futures data showed the Dow opening at 33285 compared with Wednesday's close of 33270. Asian stocks had yet another good session, continuing the theme of ex-US indices making progress in 2023, as IG said. "While the Caixin services PMI remained in contraction territory, it rose more than expected," IG analysts wrote. "Thursday marks the beginning of a focus on US employment, with initial claims and the ADP report, before Friday's big nonfarm payroll number."

North America

US stocks fell Thursday, after strong labor-market data bolstered the case for the Federal Reserve to remain tough.

The S&P 500 dropped 44.87 points or 1.2% to 3808.10. The Dow Jones Industrial Average declined 339.69 points, or 1%, to 32930.08. The Nasdaq Composite fell 153.52 points, or 1.5%, to 10305.24. All the indexes had notched gains on Wednesday.

Of the S&P 500's 11 sectors, only energy stocks ended the day higher, gaining 2%. Real estate, utilities and information technology stocks were the biggest losers.

Investors have started the year skittish about whether central banks can bring inflation back under control without inflicting too much damage on the global economy. Many investors are betting on a mild recession this year.

Fed officials, in the minutes released Wednesday, cautioned investors that rates would have to remain high for some time.

Both inflation and economic growth have shown signs of slowing, lifting hopes that the Fed and other central banks could soon moderate or end their programs of lifting interest rates. Some investors, however, worry that inflation won't be returning to the Fed's target of 2% soon. Consumer prices rose by 7.1% in November from the year before, down sharply from 7.7% in October.

"Inflation has clearly rolled over. I don't think, however, it's on its way to 2% anytime soon," said Nancy Tengler, chief executive at Laffer Tengler Investments. Ms. Tengler said companies could keep prices for finished products higher for better margins despite lower prices for raw materials.

Still, investors are hopeful that the Fed will pivot to pausing rates, which could ultimately boost equities.

"Unless there is a shock from left field, we should see growth continue to be soft, inflation should decline and at some point, central banks are going to stop raising interest rates," said Charles Diebel, head of fixed income at Mediolanum International Funds. "This year is all about when, not if."

David Bailin, chief investment officer at Citi Global Wealth, said he expects that unemployment will rise in 2023 and that the Fed will have its first rate cut toward the end of the year.

US weekly jobless claims fell by 19,000 to 204,000 in the final week of 2022. Economists surveyed by The Wall Street Journal had expected 223,000 claims. Meanwhile, ADP data showed private-sector hiring accelerated in December.

Both readouts suggest the labor market remains resilient despite interest-rate increases, and come a day ahead of the keenly watched monthly jobs report. A strong labor market has been a source of concern for Fed officials as they attempt to cool inflation.

"Fed pivot in my mind is going to occur when the data is bad, not when the market feels the Fed has tightened enough," said Robert Stimpson, co-chief investment officer at Oak Associates.

Mr. Stimpson said that investors should be ready for more bear-market rallies this year. The S&P 500 and Nasdaq are still in bear-market territory, but the Dow is in bull-market territory.

Shares of Silvergate Capital fell $9.38, or 43%, to $12.57 after the Journal reported that the collapse of crypto exchange FTX forced the bank to sell assets at a steep loss to cover about $8.1 billion in withdrawals.

Walgreens Boots Alliance shares fell $2.30, or 6.1%, to $35.19 after the pharmacy reported sales and adjusted earnings that topped Wall Street expectations but held its profit forecast in place.

Conagra's stock rose $1.32, or 3.4%, to $39.97. The food company said it expects higher sales and earnings this year while reporting a revenue increase.

A major unknown for markets in 2023: how China's reopening from Covid-19 lockdowns proceeds. Investors hope Beijing can return its economy to full steam without sparking a dangerous new virus wave. It is unclear, however, whether the reopening would reduce inflation as logistical bottlenecks ease or propel it higher as Chinese consumers spend more.

"China's reopening is the most obvious curveball at the moment" for investors, Mr. Diebel added.