U.S. equities declined on Monday with sentiment weighed by uncertainties around China’s COVID restrictions, as well as comments by Federal Reserve officials.
United States
On Monday, St. Louis Fed President James Bullard said that markets may be underestimating the likelihood of higher rates while John Williams of the New York Fed said the central bank has more to do in order to curb inflation. Finally, Vice Chair Lael Brainard said supply shocks were keeping inflation risks elevated. This comes ahead of a speech by Jerome Powell on Wednesday where analysts expect him to suggest the Fed will slow the pace of rate increases next month, while likely suggesting rates still have further to go.
The S&500 declined -1.57% along with the Dow Jones -1.45%, Nasdaq Composite -1.58% and Russell 2000 -2.06% with the VIX climbing 8.24% to 22.19. While the aforementioned themes likely weighed on investor sentiment on Monday, a 15% rally from the October lows had left prices looking stretched and vulnerable to a pullback, a healthy part of market movements. Adding to the potential for a “Santa Clause Rally” into year-end, market internals remain strong with improving breadth as the number of S&P500 members trading above their 50 and 200-day moving averages has surpassed levels associated with the August peak. The improving internals suggests that the market has the potential for further upside from current levels, although longer-term risks remain including the potential for a deep recession as well as inflation remaining elevated.
Europe
Protests over COVID restrictions in China weighed on European equities on Monday with the Euro Stoxx 600 down -0.65% along with the DAX -1.09%, CAC -0.70%, and FTSE100 -0.17%. Also weighing on sentiment were comments from ECB President Christine Lagarde who noted that borrowing costs will continue to rise even as economic activity slows in the face of high inflation ahead of German inflation data for November tonight expected to show prices rose 10.4% over the 12 months. Similar to the U.S., a recent rally that saw prices climb as much as 20%, meeting the common definition of a bull market has left prices looking stretched in the short term. However, market internals in Europe is also improving with the percentage of members above their 50 and 200-day moving average also surpassing the August peak, highlighting the relative strength of recent gains and suggesting the good potential for further gains into year-end although a period of consolidation in the short-term remains likely.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
Australia
The ASX is expect to open flat this morning despite the weaker lead from overseas markets with ASX200 futures up just 2 points or 0.03% to 7,243. The index weakened -0.42% on Monday weighed by materials -0.91%, financials -0.38% and energy -1.68%. On a total return basis, including the effects of dividends, the Australian market has been a notable relative performer this year driven by exposure to energy, utilities and materials. Year-to-date the market is up 1.41% compared with -14.29% for the S&P500, -28.43% for the Nasdaq100 and -6.15 % for the Euro Stoxx 50. Pathology and day hospital-focused Healius was the biggest lagger on Monday, down -10.1% after reporting lower COVID-19 testing volumes weighed on revenues. Elsewhere lithium miners declined as electric vehicle registrations declined by more than a fifth in China in October with LTR down -7.5%, along with CXO -3.4% and LKE -5.1% while PLS only declined -0.9% after announcing a joint venture with Calix for the development of a demonstration plant at the Pilgangoora project. In economic data, retail sales declined -0.2% in October, well below forecasts of a 0.5% increase with CommSec chief economist Craig James noting “The fall in retail spending is one of the first signs that higher interest rates are working” and “the drop in spending may merely be a function of consumers holding fire ahead of the Black Friday/Cyber Monday sales”.
Commodities
Oil prices were mixed overnight with WTI crude up 0.50% while Brent declined -1.33% amid concerns over falling demand in China, with investors looking to the upcoming OPEC+ meeting on the 4th of December, where some are speculating the group may cut production to address weaking prices. Iron ore futures in Singapore were -1% weaker on Monday although are up 2.56% in early trade this morning to US$99.85 with copper -0.91% weaker. Gold finished -0.76% lower at US$1,741 an oz along with silver -3.73% to US$20.93 with Bitcoin -2.03% lower to US$16,235 after crypto lender BlockFi filling for chapter 11 bankruptcy protection amid the fallout from the FTX collapse.
Economic data:
- Eurozone Consumer Confidence (MoM Nov) 21:00
- German Inflation (YoY Nov) 00:00
- Canadian GDP (QoQ Q3) 00:30
- US Consumer Confidence (MoM Nov) 02:00
This article was written by James Woods, Portfolio Manager, Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3632.
