Global Markets Report - 28 September

Australia

Australian shares are positioned to open lower following a mixed day of trading in the US, as investors struggle to interpret the strength of the economy, impact of rising oil prices and potential government shutdown.

ASX futures were down 13 points or 0.18% at 7055 as of 8:00am on Thursday, pointing to a slip at the open.

US stocks ended narrowly mixed after a rebound in the last hour of trade, while the dollar continued to strengthen and the 10-year Treasury yield having risen above 4.6%.

The Dow Jones Industrial Average ended 68 points lower, or 0.2%, finishing near 33,550, according to preliminary FactSet data. The S&P 500 index eked out a less than 0.1% gain, energy stocks were by far the strongest sector, adding 2.5% as oil prices hit a 13-month high following a sizable decline in weekly supply data.

Utilities and consumer staples were again the weakest segments on worries about the strength of the economy and competition from rising bond yields. Durable goods orders were stronger than expected, and attention shifted to tomorrow's weekly jobless claims data and the third estimate of 2Q GDP. The Nasdaq Composite Index gained 0.2%.

Stocks have broadly fallen since last week's Federal Reserve meeting, when central bankers raised their interest-rate forecasts for next year. Investors are also weighing the impact of higher energy prices on inflation, which the Fed's interest-rate increases this year have sought to tame, and a potential government shutdown.

In commodity markets, Brent crude oil rose 2.76% to $US96.50 a barrel, Gold fell by 0.10% to US$1,876.62 and Iron ore gained 1.2% to $US116.35 a tonne.

In local bond markets, yields on Australian 2 Year government bonds remained relatively flat at 4.04% and similarly the 10 Year gained fell marginally to 4.37%. Overseas, the yield on 2 Year US Treasury notes was unchanged at 5.14% and similarly, the yield on the 10 Year US Treasury notes rose slightly to 4.61%.

The Australian dollar slid to 63.50 US cents from its previous close of 63.95 US cents. The Wall Street Journal Dollar Index, which tracks the US dollar against 16 other currencies was flat at 100.59.

Asia

Chinese shares closed higher after the People's Bank of China vowed to step up policy support. The central bank said it would make monetary policy "precise and forceful" to expand demand and boost confidence, as the Chinese economy faces severe external challenges and weakening domestic demand. Pharmaceutical and semiconductor stocks led gains. Jiangsu Hengrui Medicine rose 1.4% and WuXi AppTec surged 7.5%. LONGi Green Energy Technology added 6.1% and Tongwei increased 4.0%. Banks fell broadly, with Industrial & Commercial Bank of China down 1.1% and Agricultural Bank of China dropping 1.7%. The benchmark Shanghai Composite Index ended 0.2% higher at 3107.32, the Shenzhen Composite Index rose 0.4% and the tech-heavy ChiNext Price Index was up 0.8%.

Hong Kong shares closed higher, led by health tech stocks. The mood was likely lifted by the Chinese central bank's continued pledges of economic support. Goldman Sachs expects the central bank to increase the use of structural monetary-policy tools such as relending to boost credit markets and promote economic growth, analysts said in a note. Among the top gainers was Hansoh Pharmaceutical, up 4.3%, and Wuxi Biologics (Cayman), up 3.7%. Mainland property stocks were broadly lower. China Evergrande plunged 19% after news reports said its chairman was placed under police control. Shimao Group shed 7.6%. The benchmark Hang Seng Index ended 0.8% higher at 17611.87, while the Hang Seng Tech Index rose 0.4%.

Japanese stocks ended higher, led by gains in pharmaceutical and real-estate stocks following recent weakness driven by concerns about policy tightening and higher borrowing costs. Chugai Pharmaceutical gained 4.1% and Daiichi Sankyo climbed 3.5% while Daito Trust Construction advanced 2.2% and Sumitomo Realty & Development added 1.5%. The Nikkei Stock Average rose 0.2% to 32371.90. The 10-year Japanese government bond yield stays flat at 0.740%. Investors are focusing on economic data and their policy implications.

Indian shares closed higher, retracing intraday losses. Sentiment was damped earlier by concerns over policy tightening by central banks and its impact on the global economy. Larsen & Toubro and ITC were among the top gainers, rising 1.7% and 1.5%, respectively. Financial services and bank stocks were mixed. Federal Bank advanced 1.8% and Axis Bank increased 1.2%, while State Bank of India dropped 0.8% and HDFC Bank lost 0.7%. Meanwhile, Titan Co. led losses, falling 1.2%. The benchmark Sensex rose 0.3% to 66118.69.

Europe

European stocks fell and Wall Street retracted as better-than-expected US durable goods orders spark fresh interest-rate jitters. "Good data is very much 'bad news' for stocks right now, as it means there's no pressure on the Fed or other central banks to think about loosening policy," IG analyst Chris Beauchamp writes. The Pan-continental Stoxx Europe 600 and German DAX retreated about 0.25% and the French CAC 40 traded flat. Brent crude gained 2% to $94.30 a barrel, boosting oil stocks. The Dow fell 0.8%. Elsewhere, ASOS shares recovered following a downbeat reaction to the online fashion retailer's trading update and rose 1.6% following fresh media speculation about a potential takeover by Sports Direct founder Mike Ashley or other major shareholders.

The FTSE 100 closed Wednesday down 0.43%, having fluctuated between positive and negative territory. The worst performers could be found in commercial real estate, while Ocado traded sharply lower on reports that AQR Capital Management was the latest to take out a short position against the business, CMC Markets UK chief market analyst Michael Hewson said in a research note. "As we come to the end of the week, the month and the quarter there remains a great deal of uncertainty as to what sort of economy we will see in the fourth quarter, and whether the determination of central banks to keep rates high will change if we see further deterioration in the economic outlook over the next few months," Hewson said.

"The FTSE 100 was pretty much unchanged early on Wednesday but there's no doubt an air of uneasiness continues to pervade the markets, visible in the recent surge in the VIX index of volatility," AJ Bell investment director Russ Mould said in a note. Engineering firm IMI plc was the biggest gainer up 4.9% while Hikma Pharmaceuticals rose 2.0% after recovering from Tuesday's decline. Energy services provider Centrica fell 3.8% after Morgan Stanley reportedly downgraded the stock to equal weight.

North America

US stocks ended narrowly mixed after a rebound in the last hour of trade, while the dollar continued to strengthen and the 10-year Treasury yield having risen above 4.6%.

The Dow Jones Industrial Average ended 68 points lower, or 0.2%, finishing near 33,550, according to preliminary FactSet data. The S&P 500 index eked out a less than 0.1% gain, energy stocks were by far the strongest sector, adding 2.5% as oil prices hit a 13-month high following a sizable decline in weekly supply data.

Utilities and consumer staples were again the weakest segments on worries about the strength of the economy and competition from rising bond yields. Durable goods orders were stronger than expected today, and attention shifts to tomorrow's weekly jobless claims data and the third estimate of 2Q GDP. The Nasdaq Composite Index gained 0.2%.

Stocks have broadly fallen since last week's Federal Reserve meeting, when central bankers raised their interest-rate forecasts for next year. Investors are also weighing the impact of higher energy prices on inflation, which the Fed's interest-rate increases this year have sought to tame, and a potential government shutdown.

"There might be a bit of sellers' exhaustion," said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance. "We do believe that this pullback is a temporary thing."
A stronger-than-expected US economy has led some investors to bet that the Fed will leave interest rates elevated, either to keep fighting inflation or because it sees no pressing need to take them much lower. That has helped push bond yields higher. The 10-year Treasury yield ticked up to 4.625%, its highest level since October 2007, and up from 4.558% Tuesday.

"We had been expecting this bumpiness," said Gina Bolvin, president of Bolvin Wealth Management. "It's still all about the Fed and what they're going to say, and that's all about inflation and rates being higher for longer."

Higher yields mean higher borrowing costs for businesses and consumers, making investors nervous about how long the economy can keep expanding. Higher yields have also boosted the dollar, thereby threatening companies that generate substantial revenue outside the US The WSJ Dollar Index, which measures the greenback against a basket of currencies, has been strengthening since last week.

Stocks have been under pressure as Treasury yields punch higher and investors gauge if the Federal Reserve will make good on its revised forecast to keep interest rates higher for longer than earlier anticipated. The 10-year Treasury yield (BX:TMUBMUSD10Y) rose 6.7 basis points to 4.625%, the highest since October 2007, while the 30-year Treasury yield (BX:TMUBMUSD30Y) climbed to 4.731%, putting long Treasury bonds closer to the 5% mark. Short-term Treasury bills have been at 5% yields for some time. Oil prices also continued to march toward $100 a barrel, with US crude futures (CL00) settling at $93.68 a barrel.

Energy companies led gains in the S&P 500, with the sector rising 2.5%. Brent crude, the international benchmark for oil, also gained. The Energy Information Administration reported that US crude inventories fell by more than expected last week, to their lowest level of the year.