The Wall St rally could be over.
While stocks have had a decidedly good run since the June lows, they have now run into stiff resistance at a key moving average for the S&P 500. Analysts say that if the resistance proves too strong, there will be a near-term giveback and the Northern Hemisphere summer rally would be a bear-market bounce.
Speaking of the S&P 500’s 0.72% drop, Arbeter Investments president Mark Arbeter said, “The index hit its slightly falling 200-day average yesterday to the penny and the machines turned off their buying and hit the sell button. As we said, there is a cluster of resistance which started at the 200-day, and went up to 4,367, which is a 61.8% retrace of the bear market.”
The Dow Jones Industrial Average dropped 171.69 points, or 0.5%, and the Nasdaq Composite lost 1.3%.
“Need I remind all you market historians that the ‘500’ failed at its 200-day in November 2000 and May 2008, which were both last gasp attempts by the bulls before the real downside started,” Arbeter wrote. “We do not think this is another one of those periods but one must always keep an open mind.”
As for the ASX, it is expected to follow the downward trend.
ASX Futures (SPI 200) imply the ASX 200 will open 13 points lower, down -0.19%.
Here’s what we saw (source Commsec):
- The Euro rose from lows near US$1.0145 to highs near US$1.0202 and was near US$1.0175 at the US close.
- The Aussie dollar fell from highs near US70.25 cents to lows near US69.10 cents and was near US69.35 cents at the US close.
- The Japanese yen eased from 134.11 yen per US dollar to JPY135.49 and was near JPY135.07 at the US close.
- Global oil prices rose by around 1.5% on Wednesday. Reuters noted "a steeper-than-expected drawdown in US crude stocks outweighed concerns over rising Russian output and exports as well as recession fears."
- The Brent crude price rose by US$1.31 or 1.4% to US$93.65 a barrel.
- The US Nymex crude price rose by US$1.58 or 1.8% to US$88.11 a barrel.
- Base metal prices were mixed on Wednesday. Aluminium and tin rose by as much as 0.9% and other metals fell with zinc down 4.7%.
- The gold futures price fell by US$13.00 an ounce or 0.7% to US$1,776.70 an ounce.
- Spot gold was trading near US$1,764 an ounce at the US close.
- Iron ore futures fell by US$2.04 or 1.9% to US$104.59 a tonne.
Rate hikes continue across continents
The Bank of England (BoE) is expected to hit a 10% inflation spike, with a recession now looming large.
The British Consumer Prices Index accelerated from its four decade high of 9.4% in June.
The BoE warned UK inflation could climb to 13%, the highest level since 1980 and projected the country would plunge into recession by the end of the year and not come out of it until late 2023.
"I understand that times are tough, and people are worried about increases in prices that countries around the world are facing," finance minister Nadhim Zahawi said following the latest CPI data.
"Getting inflation under control is my top priority,” he said.
The current government has pledged to bring energy costs under control for the coming winter as the economy continues to deteriorate, a mess that will be inherited by either foreign secretary Liz Truss or former finance minister Rishi Sunak.
The BoE is continuing to hike rates to bring down inflation, with another 50-basis point rise expected in September.
"Today’s data leaves the Bank of England stuck in a bit of a quandary, with multi-decade high inflation accompanied by an economy expected to enter into a deep recession in 2023,” noted Matthew Ryan, head of market strategy at global financial services firm Ebury.
Meanwhile the US is also bracing for further rate hikes, however there is now talk of slowing down the pace of the hikes.
Officials have expressed their concern that the Federal Reserve could go too far as it tries to lower prices.
So far this year, the Fed has raised rates four times, with further hikes expected. The move seems to have worked, with consumer prices slowing in July to 8.5%. Soaring gas prices have also fallen.
Caution, however, is still the name of the game.
Closer to home, New Zealand’s central bank delivered its seventh straight interest rate hike and signalled a more hawkish tightening path over coming months to rein in stubbornly high inflation.
It was an aggressive move by the bank, which has signalled future hikes could be brought forward.
The RBNZ raised the official cash rate (OCR) by 50 basis points to 3.0% -- the highest it has been since September 2015. Rates are expected to hit 4.0% by early next year, compared to a previous projection of 3.7%.
"The committee agreed that domestic inflationary pressures had increased since May and to further bring forward the timing of OCR increases," the central bank said in a statement.
"The statement was suitably hawkish, and highlighted the need to maintain pressure on the economy to demand," said Jarrod Kerr, chief economist at Kiwibank.
"It's hawkish compared to expectations, in both raising the OCR track and the tone," said Imre Speizer, head of NZ Markets Strategy at Westpac.
"They're more worried about the labour market, that's sticking out. They put a new sentence in there to say inflation remains too high and the labour market remains too tight."
As for Australia, a leading economist has predicted the massive hikes could soon start to ease.
Former Bank of America Merrill Lynch chief economist (Australia and New Zealand) and independent economist Saul Eslake believes rates won’t go as high as expected.
I think the Reserve Bank is of a mind to get it (interest rates) up to about 2.5% by the end of the year. That could be either 2.35% or 2.6%,” he told NCA NewsWire.
“Then they will be able to pause to assess the impact of what they by then will have done.
“In my view, that may well be enough to slow the economy sufficiently.”
Eslake believes pushing the cash rate to 2.35 or 2.6% should be enough to achieve the RBA’s goal of slowing slow down
“As customers do have to start paying for the rate increases that have been announced, you should see spending slow quite a bit,” he said.
“The other part of the answer is that there is now starting to be some evidence to suggest that the global sources of inflationary pressure have peaked.”
ANZ economists say Australians can expect four further hikes and they will be large.
“Our expectation is that the RBA will deliver this via four more successive 50 basis point rate hikes in August, September, October and November,” ANZ’s head of Australian economics, David Plank, wrote in July.
“This 200 basis points of additional tightening sees the cash rate target at 3.35% by November.”
The CBA forecasts the cash rate will sit at 2.60 percentage points by November.
In Europe
Shares were lower while bond yields rose after data showed that UK inflation hit 10.1% in July, the highest in 40 years.
Investors fear that global interest rates will need to keep rising to control inflation.
The pan-European STOXX 600 index fell by 0.9%. The German Dax index lost 2.0% on news that 20 ships are stuck in traffic on the Rhine after a vessel's engine failure closed part of the waterway. The Rhine is Germany's main commercial artery.
The UK FTSE index fell by 0.3%.
In London trade, shares of Rio Tinto and BHP shares both fell by 0.6%.