Equities declined on Wednesday despite a decline in longer-dated Treasury yields with members of the Federal Reserve reiterating hawkish comments.
United States
Investors sentiment was weighed by comments from Federal Reserve policymakers with John Williams of the New York Fed noting the central bank should avoid incorporating financial stability risks into its considerations as it raises interest rates. Elsewhere, San Francisco President Mary Daly said a pause is “off the table” while Fed Governor Christopher Waller said the size of the next rate increase will be data dependent and was comfortable with the idea of moderating increases. In economic data, retail sales for the month of October were higher than forecast, rising 1.3% compared to estimates of 1.0%, although the figures are not adjusted for inflation. The resilient figures are seen as keeping the Federal Reserve on its hiking path, which according to futures markets investors expect to peak at 4.9% in mid-2023 before declining. Meanwhile, analysts at Goldman Sachs said they now expect the Fed Funds Rate to peak between 5-5.25% up from 4.75-5% previously.
The S&P500 weakened -0.83% along with the Nasdaq Composite -1.54% and Russell 2000 -1.95% while the Dow Jones was little changed. While comments from Fed members likely contributed to Wednesday’s decline, it may also be technical driven after a sizeable rally at the end of last week had left markets overbought and vulnerable to a pullback. Elsewhere, the spread between the 2 and 10-year Treasury yields remained at the most negative since 1982, signalling investors expect a recession or economic slowdown in the coming quarters that is seen as requiring interest rate cuts.
Europe
In Europe, equities were also lower weighed by higher than forecast UK inflation. Over the 12 months to October, headline prices in the UK rose 11.1%, above forecasts of 10.7% with core prices modestly above estimates at 6.5% over the same period. In reaction, interest rate futures for the UK moved to price a higher rate expectations for February 2023, increasing from 4.48% to 4.89%. The Pound rose 0.32% to 1.1903 while the FTSE100 declined -0.25% as the domestic-focused FTSE 250 slumped -1.77%. Major equity benchmarks were lower across the region, with the Euro Stoxx 600 down -0.98% along with the DAX -1.0% and CAC -0.52%. However, strong gains last week left equities in a similar technical situation to U.S. equities and a pullback following strong gains is typically a healthy part of market price action.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
Australia
The ASX looks set for a modestly lower open this morning with ASX200 futures down just -6 points or -0.08% to 7,124. The index declined -0.27% on Wednesday with weakness in financials -1.02% and consumer discretionary -1.27% offsetting strength in materials 0.67% and energy 1.18%. Nufarm was a notable performer up 8.9% after announcing net profit leapt 65% to $107.4 million in the 2022 financial year and declared a final dividend of $0.06 per share up from $0.04 over the same period last year. Oz Minerals shares were paused on Wednesday as expectations grow for a further bid from BHP after an initial approach was rejected. Pilbara Minerals rose 1.9% following heavy falls on Tuesday while also announcing it will start paying dividends in the 2023 financial year, targeting a payout rate of 20-30% of free cash flow. In focus today is the release of the October employment report, expected to show 15k jobs were added during the month and the unemployment rate to remain unchanged at 3.5%.
Commodities
Oil prices retreated overnight after NATO confirmed a missile strike in Poland was not launched by Russia but by Ukrainian air defenses, seen as reducing geopolitical tensions. Both WTI and Brent crude were -1.52% and -1.11% lower at US$85.61 and US$92.83 a barrel respectively. Iron ore futures are -1.62% lower this morning at US$95.40 after rising 2.38% on Wednesday while copper is also -1.70% lower. Gold edged -0.20% lower to US$1,775.37 an oz with silver also -0.38% weaker at US$21.48 along with Bitcoin -2.02% to US$16,549.
Economic data:
- Australian Employment (MoM Oct) 11:30
- Eurozone Inflation Final (YoY Oct) 21:00
- US Building Permits (MoM Oct) 00:30
- US Initial Jobless Claims (Nov 12th) 00:30
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.
