After two days of gains, the ASX is set to open lower today after US stocks fell sharply.
The seesawing battle in investors’ minds over the state of the economy and consumer confidence amid rising inflation was on the downswing overnight, causing the Dow Jones Industrial Average to drop around 490 points to close about 1.6% lower. The S&P 500 dropped about 2% and the Nasdaq tumbled around 3%.
According to The Conference Board, its consumer confidence index dropped in June to the lowest level since February 2021 on concerns over inflation, particularly rising prices of food and gas.
The only sector to make gains yesterday, was Energy, climbing sharply as oil prices rose on supply fears.
However, the S&P 500 looked set for its worst start to the year in more than 50 years, with declines of more than 19% so far.
ASX futures were down 79 points or 1.2% to 6597 points near 5am AEST.
Here’s what we saw (source Commsec):
- The Euro fell from highs near US$1.0602 to lows near US$1.0504 and was near US$1.0520 at the US close.
- The Aussie dollar fell from highs near US69.63 cents to lows near US69.05 cents and was near US69.10 cents at the US close.
- The Japanese yen eased from 135.36 yen per US dollar to JPY136.36 and was near JPY136.20 at the US close.
- Global oil prices rose by more than 2% as major producers Saudi Arabia and the United Arab Emirates looked unlikely to be able to boost output significantly. Group of Seven (G7) leaders also agreed to explore ways to cap the price of Russian oil.
- The Brent crude price rose by US$2.89 or 2.5% to US$117.98 a barrel.
- The US Nymex crude price lifted by US$2.19 or 2.0% to US$111.76 a barrel.
- Base metal prices were mostly lower. Copper lost 0.7% with lead down 2.1% but nickel rose by 1.2% and zinc was up 0.2%.
- The gold futures price fell by US$3.60 or 0.2% to US$1,821.20 an ounce. Spot gold was trading near US$1,819 an ounce at the US close.
- The iron ore futures price rose by US60 cents or 0.5% to US$130.28 a tonne after China eased its strict virus quarantine rules.
China eases COVID restrictions
What may work in the market’s favour towards the end of the week is China’s response to falling COVID numbers.
Chinese PMI data expected later today could show a rebound in economic activity due to an easing of restrictions and COVID-19 lockdown recovery.
“The collapse in the seven‑day average of new COVID cases in China suggests additional unwinding in COVID‑related restrictions are likely and supports the case that China’s economic slowdown is bottoming out,” the Commonwealth Bank stated.
“Indeed, China’s PMIs are expected to recover in June above the 50 boom/bust threshold [Wednesday]. But as long as China sticks to its COVID-zero goal, further domestic economic disruptions cannot be ruled out.”
China on the nose with NATO
Despite its perceived recovery, China is on the nose with NATO due to its relationship with Russia.
It has been reported that NATO will formally classify China as a challenge to its interests, security and values. This comes as it moves toward a war footing in Europe to combat Russia.
Our own Prime Minister Anthony Albanese has called for calm and asked European leaders to hold their nerve but as Turkey backflips on its decision to veto Sweden and Finland from joining NATO, it is likely tensions in the region will continue to rise.
US President Joe Biden has pledged to increase military support in Europe over the long term.
NATO is currently formulating a 10-year doctrine to replace the 12-year-old 'Strategic Concept' that described Russia as a strategic partner and had no mention of China.
“This Strategic Concept will describe in stark terms the threat that Russia poses and the way in which it has shattered peace in Europe,” said US national security adviser Jake Sullivan.
“It will speak very directly and in a clear-eyed way to the multifaceted challenge posed by the People’s Republic of China.”
When G7 leaders met in Germany recently, it came with a strong condemnation of China.
“As Russia is waging its unjustifiable, unprovoked and illegal war against Ukraine, we call on China to press Russia to immediately comply with the legally binding order of the International Court of Justice of March 16, 2022, and to abide by the relevant resolutions of the UN General Assembly and stop its military aggression – and immediately and unconditionally withdraw its troops from Ukraine,” the G7 leaders demanded.
The G7 had demanded China drop its “expansive maritime claims” in the South China Sea and pressure Russia to cease its war in Ukraine.
Australia has sided with NATO in its fight against Ukraine, which has ramifications for its relations with China.
“Some have questioned why Australia has made such a sustained contribution, even though we are so far away,” Albanese said.
“The reason is that Australia shares a common purpose with NATO members in supporting democracy, peace and security and upholding the rule of law, whether it is in this region or ours.
“By supporting peace and sovereignty in Europe, we are underscoring our iron-clad commitment to these norms in our own region, the Indo-Pacific.
“We recognise there is strategic competition in our region and Australia is not afraid to stand up with all the countries of our region for an open, inclusive and prosperous Indo-Pacific.”
“By engaging with NATO and by strengthening our global partnerships, we are steadfast in fighting for our core values of fairness and for the sovereignty of all states, big and small. Not just in the Indo-Pacific, but around the world.”
Albanese echoed the thoughts of other world leaders that despite the economic hardship the war is causing, NATO and other allies must stay the cause in the fight against Russia.
“If we do not do that, the consequences for the international world and the relationship between nation states, which is sovereign and with each other, in terms of Europe, are dire indeed,” he said.
The good news is that despite China’s alliance with Russia, NATO has only labelled it as a challenger and not an adversary.
“We are disappointed by the fact that China has not been able to condemn the Russian invasion of Ukraine and is spreading false narratives about NATO and the west,” NATO secretary-general Jens Stoltenberg said.
If the relationship were to worsen and China was considered an adversary, the markets would likely suffer even more pain.
US markets
The downbeat sentiment over consumer confidence had wide-ranging effects.
Quarterly rebalancing of portfolios also fuelled volatility. Shares of technology heavyweights Amazon.com crashed by 5.1%, Tesla Inc (NASDAQ:TSLA) lost 5.0%, while Microsoft at -3.2% and Apple at -3.0% were the biggest drags on indexes.
On the Treasury side, US Federal Reserve policymakers Mary Daly and John Williams promised further rapid interest rate hikes to bring down high inflation. They did, however, push back against growing fears among investors that sharply higher borrowing costs will trigger a steep US economic downturn.
US 10-year yields fell by 1 point to near 3.18% but US 2-year yields rose by 1 point to near 3.12%.
European markets
Bucked the trend.
The pan-European STOXX 600 index rose by 0.3% with energy stocks up 2.0% as oil prices lifted. The German Dax index added 0.4% and the UK FTSE index gained 0.9%.
In London trade, shares of Rio Tinto rose by 2.0% and BHP shares added 1.6%.