U.S. equities fell on Wednesday as the Federal Reserve confirmed it will keep monetary policy tight to crush inflation.
The S&P500 closed -1.71% lower on broad-based selling, with consumer discretionary, communications, and materials showing the largest declines of -2.37%, -2.29%, and -2.19% respectively. The Dow was down by -1.7% to 30183.78 and the Nasdaq fell -1.79% to 11220.19. The Fed delivered a third consecutive interest rate hike of 75 basis points bringing the Fed Funds rate to 3.25%. Fed Chairman Jerome Powell stated more increases are likely in the future with the pace to be determined by upcoming data and that a soft landing would be “very challenging”. The chairman also noted, “We have got to get inflation behind us. I wish there were a painless way to do that. There isn’t.” Officials expect the rate to rise to 4.4% by year-end and 4.6% in 2023, indicative of a fourth consecutive hike from current levels before easing to 3.875% in 2024. The yield curve flattened as the 2-year yield rose +8.6 basis points to 4.053% while the 10 and 30-year rates declined -3.5 and -6.9 basis points respectively, signalling the market still expects rate cuts following the current hiking cycle. In economic data, home sales continued to decline at a slower pace, from -5.9% in July to -0.4% in August. Oil supply stocks improved to 1.142 million after the US began buying up fuel last week to increase the country’s reserves.
The European markets rallied ahead of the Fed’s interest rate hike. The Euro Stoxx 600 rose +0.6% with utilities, information technology, and industrials lifting the index by gaining +1.68%, +1.54%, and +1.19% respectively. Financials fell by -0.05% and healthcare were down -0.08%. The FTSE was up +0.6%, the CAC gained +0.9% and the DAX closed +0.8% higher. Traders had been selling equities in anticipation of a hike in the US Fed rate. Analysts at Interactive Investor commented on the European market’s rally even before the Fed announcement, ”A lot of the negative market sentiment towards the jumbo 75 basis point expected hike is already priced into the US dollar and equity markets and we’re already seeing a relief rally even before the announcement has happened”. Elsewhere, Vladmir Putin accused the West of “nuclear blackmail”, leading to defense stocks gaining support. The share prices for Rheinmetall, Leonardo, Thales, and BAE Systems all rose between the range of 4.0- 9.3%. In correlation, the German government announced plans to nationalize Uniper SE, in a historic move to rescue the country’s largest gas importer.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
ASX futures were down -50 points of -0.75% to 6,640 overnight while the market is closed on Thursday for a public holiday. The ASX 200 closed -1.56% lower on Wednesday, losing 106.2 points to close at 6700.2. Communications was the only sector closing higher at +0.07%, while the largest declines were in materials, utilities and real estate which dropped by -2.64%, -2.34%, and -2.17% respectively. Whitehaven rose by +3.8% after the company announced a plan to reward shareholders with a stock buy-back plan during a period of soaring coal prices. Brickworks stock price gained +0.4% on Tuesday, as the company prepares to give shareholders a final dividend to $0.41 after seeing profits more than triple to $854 million. Washington H. Soul Pattinson shares rose 0.5% after announcing a profit of $834.6 million. Iron ore producers saw a decline in their stock prices after SGX prices dropped. BHP group fell by -3.1% while Rio Tinto fell -3.7%. Centuria Capital dropped by -0.3% after acquiring a 50% stake in Allendale Square office tower in Perth for $111.5 million, a joint venture with MA Financial. Air New Zealand rose +8.4% on the ASX after providing guidance on earnings before tax to range between $NZ 200-275 million for the first quarter of 2022. The yield on the Australian 10-year bond was 3.66%, while the local currency fell 0.3% to 66.67. The ASX will remain closed today due to a public holiday and will open on Friday.
In commodities, oil prices dropped with WTI and Brent down -1.14 % and -0.85% to $82.97 and $89.85 a barrel respectively. In precious metals, spot gold rose by +0.64% and $1,675.1, spot silver gained +2.3% to 19.72, and the price of bitcoin rose +3.6% to $19,652. Copper traded -2.65% lower while iron ore futures in Singapore are +0.56% higher this morning at US$96.20 reversing a -0.47% decline on Wednesday.
Economic Calendar:
• BoJ Interest Rate Decision 13:00
• ECB General Council Meeting 17:00
• ECB Economic Bulletin 18:00
• BoE Interest Rate Decision 21:00
• US Jobless Claims report 22:30
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.
