U.S. equities declined on Tuesday ahead of an interest rate decision by the Federal Reserve tonight, while the 2-year Treasury yield approached 4%.
The S&P 500 dropped by -1.13% on broad-based selling. Real estate, materials and consumer discretionary were the biggest laggards declining by -2.57%, -1.90% and -1.69% respectively. The Dow fell by -1.01 % while the Nasdaq composite slipped -0.99% with the Russell 2000 -1.40% lower and the VIX rising +5.43% to 27.16. Goldman Sach’s chief US equity strategist David Kostin commented on market outlook, “In the face of inflation, rising interest rates, and more Fed tightening, equity valuations likely face further downside.” Analysts forecast companies will begin to feel the impact of a rise in interest rates. BlackRock’s Nigel Bolton stated, “The tone of management teams is already starting to change and we’re going to see pretty substantial reductions for 2023”.
The real estate sector is particularly vulnerable to rising interest rates. Economic data revealed building permits dropped significantly in the US from -0.6% in July to -10% in August, while the NAHB Housing market index fell short of expectations to 46, lower than previous month’s 49. Traders are preparing for the Fed to announce a 75-basis point hike in the interest rate today although this is well priced in by traders, a key focus will be the updated economic projections or so-called “dot plots” as well as Jerome Powell’s press conference following the meeting. The yield on the 2-year US bond yield rose +2.9 basis points to 3.964%, while the 10-year and 30-year bond yields were +7.5 and +5.8 basis points higher
The European markets closed lower ahead of the Fed meeting, with the Euro Stoxx 600 declining by -0.92% with all sectors underperforming. Real estate, materials and consumer discretionary suffered the largest declines, falling by -2.36% -1.63% and -1.58% respectively. The FTSE slid -0.6% after remaining closed on Monday, while the CAC declined by -1.4% and the DAX fell -1%. Real estate stocks declined with Fastighets AB Balder, Wallenstam and Sagax all dropping 6-7% of their share price. Germany is expected to announce an agreement on nationalizing Uniper today, with the company’s share price rising by +3.8%, and parent company Fortum gaining +9.5%.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
The ASX is set to open lower this point, with ASX futures down -1.09% or 74 points to 6,740. The ASX 200 closed +1.29% higher on Tuesday, gaining 86.5 points to close at 6806.4. Materials, energy and utilities were the biggest gainers, closing at +2.67%, +1.99% and +1.34% respectively. New Hope’s share price rallied +8.8% due to rising coal prices and a record profit of $983 million, nearly 3 times the miner’s previous record. The company declared a dividend of $0.31/share and special dividend of $0.25/share worth $446.1 million. As a result, the Washington H Soul Pattinson investment company, which has a 40% of shareholding saw its share price rise by +2.6%. AMP fell -2.1% after being penalized $14.5 million by a court for charging 25k customers superfund fees of totaling $900,00 without service. Lithium stocks rallied as a result of rising prices. Allkem jumped +4%, Pilbara Minerals soared +3%, Lake Resources was up 0.5% while Core Lithium added 0.4%. Fortescue Metals declined -0.9% after announcing capex of $6.2 billion to ensure the company could meet renewable energy goals for 2030. BHP Group rose +3.6% as SGX Iron Ore prices traded higher, while Rio Tinto gained +2.5%. The yield on the Australian 10-year bond was 3.63% while the local currency declined -0.5% to 66.93.
Oil prices slumped with WTI and Brent crude down -1.49% and -1.29% to $84.45 and $90.81 respectively despite OPEC+ oil production at a record 3.58 million barrels per day below production targets, equating to roughly 3.5% of global demand. Copper prices traded -0.27% lower and iron ore futures in Singapore are -1% lower at US$95.15 having weakened -0.97% on Wednesday. Precious metals followed with spot gold falling -0.64% to $1665.16, spot silver down -1.51% to $19.27 and the price of Bitcoin slid -1.7% to $US19,002.
Economic Calendar:
• Australian Westpac Leading Index (MoM Aug) 10:30
• Fed Rate Decision 04:00
• FOMC Economic Projections 04:00
• Jerome Powell Press Conference 04:30
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.
