The ASX is up 1.22% in morning trade and is likely to ride a positive wave this morning.
If it keeps going, it will go against Wall Street’s overnight grain.
US stocks fell yesterday after Federal Reserve Chairman Jerome Powell said interest rates could rise by more than a quarter of a percentage point in future meetings, with the inflation battle being the key driver.
Powell said inflation was already running too high before the Russia-Ukraine war pushed up commodity prices.
The Dow Jones Industrial Average lost around 202 points, or 0.6%, near 34,553, according to preliminary figures, after falling more than 400 points at its session low. The S&P 500 finished around 2 points lower, a loss of less than 0.1%, near 4,461, while the Nasdaq Composite shed around 55 points, or 0.4%, to close near 13,838.
Here’s what we saw (source Commsec):
- The Euro fell from highs near US$1.1065 to lows near US$1.1010 and was near US$1.1015 at the US close.
- The Aussie dollar rose from lows near US73.73 cents to highs near US74.20 cents and was near US74.00 cents at the US close.
- Global oil prices rose 7.1% on Monday as Commsec’s Craig James reports “European leaders considered a ban on Russian oil imports. Further supporting prices was news of weekend attacks by Yemen's Iran-aligned Houthi group that caused a temporary drop in output at a Saudi Aramco joint venture in Yanbu.”
- The Brent crude price rose by US$7.69 a barrel or 7.1% to US$115.62 a barrel.
- The US Nymex crude price rose by US$7.42 or 7.1% to US$112.12 a barrel.
- Base metal prices were mixed on Monday. Nickel fell 14.9% with tin and copper down as much as 1.3%. Other metals rose by up to 3.3%, led by aluminium.
- The gold futures price rose by US20 cents to US$1,929.50 an ounce.
- Spot gold was trading near US$1,935 an ounce at the US close.
- The iron ore futures price fell by US$1.12 or 0.7% to US$150.23 a tonne.
Australian markets
Consumer confidence has taken a dive, according to the weekly ANZ-Roy Morgan Consumer Confidence reading.
Confidence has fallen to its lowest level since early September 2020 on the back of soaring inflation hitting Australian hip pockets.
A neutral reading is 100 points, however, confidence has dipped 4.8% in the week to come in at 91.2.
This is a country-wide phenomenon, falling from the ANZ reported average of 112.4, where it has sat since 1990.
Weekly inflation expectations rose 0.4 percentage points (ppt) to 6% as petrol prices hit fresh record highs in the past week. Its four-week moving average rose 0.2ppt to 5.5%.
ANZ head of Australian economics David Plank said, "Increasing petrol prices have had a sharp impact on households’ confidence for both ‘current’ and ‘future financial conditions’ with the two sub-indices dropping 10.3% and 8.4% respectively over the last two weeks.
"We noted last week that the weakness in consumer sentiment is at odds with the strength in employment and reflects pressure on household budgets as nominal wage growth lags the jump in inflation."
US markets
Aggressive interest rate rises
The Federal Reserve could be more aggressive than the 25 basis point interest rate increases expected.
The Fed is raising interest rates to combat inflation, although it has said the economy is strong enough to avoid a recession.
“We will take the necessary steps to ensure a return to price stability. In particular, if we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so,” Powell said in a speech to the National Association for Business Economics.
Rates could be raised high enough to restrict growth if needed, following the initial 25 basis points rise last week.
The Fed sees its policy rate reaching 1.9% this year and 2.8% in 2023.
“I believe that these policy actions and those to come will help bring inflation down near 2% over the next three years,” Powell said,
The story that inflation would peak in the first quarter had “fallen apart,” he said. Over the coming year, the Fed would not base policy on forecasts of progress on inflation, but would want to see “actual progress,” he said.
There are grounds for optimism though as the Fed forecasts that it can raise its benchmark policy rate to 2.8% by 2023, and inflation will subside over the next three years, while the unemployment rate remains low. Economists call this a soft-landing.
“Some have argued that history stacks the odds against achieving a soft landing,” Powell said in a speech to the National Association for Business Economics.
“I believe that the historical record provides some grounds for optimism,” he said.
“Soft, or at least soft-ish, landings have been relatively common in US monetary history,” he argued.
The Fed raised its policy rates significantly in three episodes — in 1965, 1984, and 1994 — without precipitating a recession.
Powell said the US economy was also in a much better position to handle the oil price shock from the war in Ukraine compared to the 1970s as it is now the world’s second-largest oil producer.
“Today, a rise in oil prices has mixed effects on the economy, lowering real household incomes and thus demand, but raising investment in drilling over time and benefiting oil-producing areas more generally,” he said.
“On net, oil shocks tend to weigh on output in the U.S. economy, but by far less than in the 1970s,” he added.
Watch out for cyber attacks
US President Joe Biden has warned of the growing threat of a Russian cyberattack and urged US businesses to “immediately” prepare defences.
“If you have not already done so, I urge our private sector partners to harden your cyber defences immediately,” he said in a statement.
Biden cited “evolving intelligence that the Russian government is exploring options for potential cyberattacks,” for his comments.
Any Russian attack would be in response to Western sanctions over Moscow’s launching of the war in Ukraine.
“It’s part of Russia’s playbook,” he said.
Biden said the government would “continue to use every tool to deter, disrupt, and if necessary, respond to cyberattacks against critical infrastructure.”
“Owners and operators must accelerate efforts to lock their digital doors,” he said.
European markets
European stocks finished flat yesterday, with the Stoxx Europe 600 index XX:SXXP closing at 454.79.
The FTSE 100 index UK:UKX gained 0.51% to 7,442.39, the French CAC 40 index FR:PX1 declined 0.57% to 6,582.33 and the German DAX DX:DAX fell 0.60% to 14,326.97.
Motor vehicle parts company Rheinmetall AG saw the largest increase of 9.1%, while shares of aluminium firm Norsk Hydro ASA and non-ferrous metals company Antofagasta PLC (LSE:ANTO) added 8.2% and 8.1%, respectively.
Boliden AB, a non-ferrous metals company, and general mining company Anglo American PLC (LSE:AAL) added 7.6% and 6.1%, respectively to round out the top five stocks on the Stoxx 600.
Investors balanced a lift in oil prices with ongoing fighting in the Ukraine war. European leaders mulled an oil embargo with Russia, ahead of talks with the US President.
The UK FTSE index lifted 0.5%, underpinned by gains in oil producers.
Shares in BP and Shell each gained 4.1%.
In London trade, shares in Rio Tinto rose by 3.3% and BHP shares gained 5.0%.