After a week of gains, the ASX experienced a 0.7% fall this morning. The S&P/ASX 200 was down 0.5% to 7255.1 at 10.19am AEDT.
This follows Wall Street’s drop after it was reported that US inflation had hit a 40-year high.
In the US, stocks fell sharply after the January consumer-price index showed a much hotter-than-expected 7.5% year over year jump.
Equities were hit hard after Federal Reserve Bank President James Bullard told Bloomberg that he would like to see the central bank deliver 100 basis points, or 1 percentage point, worth of rate increases over its next three meetings.
The Dow Jones Industrial Average lost around 526 points, or 1.5%, to close near 35,242. The S&P 500 fell around 83 points, or 1.8%, to close near 4,504. The Nasdaq Composite tumbled around 304 points, or 2.1%, ending near 14,186.
Here’s what we saw (source Commsec):
- The Aussie dollar rose from near US71.50 cents to US72.47 cents and was near US71.60 cents in afternoon US trade.
- Global oil prices retraced from earlier gains of more than 1%. In OPEC’s monthly report, it said world oil demand might rise even more steeply this year as the global economy posts a strong recovery from the pandemic.
- Brent crude price dropped US14 cents or 0.2% to US$91.41 a barrel.
- US Nymex crude price gained US22 cents or 0.2% to US$89.88 a barrel.
- Base metal prices were firmer by 1.3-2.5% with tin up the most.
- Aluminium fell by 0.5%.
- The gold futures price rose by US80 cents or less than 0.1% to US$1,837.40 an ounce.
- Spot gold was trading near US$1,827 an ounce in late US trade.
- Iron ore rose by US$7.00 or 4.8% to US$153.75 a tonne.
Australian market
Reserve Bank of Australia governor Phillip Lowe is currently addressing the House of Reps and has warned of the impact of other countries raising interest rates quicker than expected in response to inflation.
“A broader uncertainty is the extent to which other central banks will have to increase interest rates to return inflation to lower rates. Central banks and financial markets expect that a decline in inflation to target can be achieved without real policy interest rates returned to positive territory.
“It’s entirely possible that countries with higher inflation rates will need a bigger adjustment in interest rates than currently anticipated. And if so, this could result in abrupt changes in financial conditions around the world including here in Australia.”
Lowe said that the sharp rise in inflation in the US came as a surprise.
“The sharp pickup inflation in parts of the world, especially in the United States, has come as a surprise, and it’s an additional source of uncertainty about the outlook.
“For the first time in several decades, inflation has become a major issue in the global economy.”
However, Lowe did say that Australia will continue its cautious approach and rebuked bond market hawks who have priced in five rate rises in 2022.
"I recognise that there is a risk to waiting but there is also a risk to moving too early. We have the opportunity to secure a lower rate of unemployment than was thought possible just a short while ago.
"Moving too early could put this at risk."
Investor warning
Russel Chesler has warned that due to rising inflation, investors need to be careful when allocating assets in their portfolios.
Chesler, VanEck’s head of investments and capital markets said investors should look at assets that are better at protecting against the corrosive effect of rising prices.
“Companies with good earnings growth, for example, should be able to maintain their margins and profits by raising their prices. Value companies tend to be more mature and often enjoy pricing power, and therefore, are more resilient in the face of rising inflation," Chesler said.
“Also, energy companies and commodity companies such as the iron ore miners could do well over the year as they are linked to the economic recovery from the Covid-19 pandemic and rising commodity prices."
Gold miners could offer value.
“In this environment, investors should follow a prudent investment strategy focussing on the fundamentals and value and quality assets rather than chase visionary growth companies many of whom are not profitable, and may experience further losses this year."
US markets
With inflation jumping to a four-decade high and concerns over how the Federal Reserve may move on interest rate, the US market turned down.
US consumer prices rose by 7.5% over the last 12 months – levels not seen since February 1982.
A 50 point basis hike is now on the table.
“The market isn’t just concerned about inflation, it is also concerned about the Fed’s response to inflation,” TD Ameritrade (NASDAQ:AMTD) chief market strategist JJ Kinahan said.
The CPI data released by the Labor Department yesterday has defied hopes by President Joe Biden’s administration that the wave of price increases would decelerate in January.
Biden acknowledged that inflation “is elevated” but “forecasters continue to project inflation easing substantially by the end of 2022”.
“And fortunately, we saw positive real wage growth last month, and moderation in auto prices, which have made up about a quarter of headline inflation over the last year,” he said.
Driving up inflation are the Fed’s pandemic money policies, supply chain issues, component shortages and robust demand from American consumers.
Twitter earnings
Twitter announced its first earnings report under its new CEO. Here is eToro analyst Josh Gilbert’s take.
"Twitter announced its Q4 earnings today of US$0.33 per share on revenue of US$1.57 billion, compared to analyst expectations of US$0.32 per share on revenue of US$1.58 billion.
"This was Twitter’s first quarterly report under the command of its new CEO, Parag Agrawal, and it was a pretty modest one, with strong user growth but weaker advertising revenue than Wall Street analysts expected. However, the good news for investors is that Twitter’s sales haven’t been hurt by Apple’s privacy changes.
"Twitter’s user-engagement trends are building momentum, with Daily Active Users climbing 13% year-over-year. The company has also experienced growth from Q3 of 211 million to 217 million, something its rival Facebook couldn’t achieve in its Q4 earnings. This number has continued to be a focus for investors, as accelerated growth has historically been a main drawcard for advertisers.
"The company has positioned itself well for emerging trends such as NFTs and crypto, after it recently launched NFT profile verification and bitcoin tip payments on the platform. In addition, Twitter continues to benefit from indirect exposure to both industries through influencers that have seemingly settled with Twitter as the platform of choice. As a result, this has organically drawn new users to the site, and it's expected that Twitter’s management will look to explore ways to capitalise on these growing trends.
"For the meantime, investors will be focused on how Twitter’s new CEO will improve monetisation on the platform, given its growing popularity and US$7.5 billion revenue goal by the end of 2023. Parag Agrawal is also looking to address its lofty valuation with the announcement of its US$4 billion share buyback program, up from the US$2 billion it announced a few years ago."
European markets
Were mixed yesterday.
In response to rising bond yields, technology stocks fell 1.1%.
Mining stocks rose in response to higher metal and iron ore prices.
Travel & leisure and chemicals sectors rose over 1%.
The pan-European STOXX 600 index fell by 0.2%.
The German Dax index rose by 0.1% and the UK FTSE index lifted by 0.4%.
In London trade, shares in Rio Tinto rose by 2.4% while BHP rose by 2.6%.