Global equities rose on Tuesday rebounding after two prior weeks of heavy losses.
U.S. equities rose, likely benefiting from technical factors that left equities oversold following two prior weeks of sharp losses. However, the fundamental headwinds such as high inflation, aggressive tightening by central banks, and the growing risk of a recession remain, leaving many skeptical about the potential for a sustained rally. Goldman Sachs lifted its probability of a U.S. recession over the year to 30% from 15% noting “We now see recession risk as higher and more front-loaded. The main reasons are that our baseline growth path is now lower and that we are increasingly concerned that the Fed will feel compelled to respond forcefully to high headline inflation and consumer inflation expectations if energy prices rise further, even if activity slows sharply”. The report also noted the bank does not foresee a deep recession but rather caused by a moderate overtightening. Morgan Stanley also warned equities may have further to fall to fully price in a recession, citing a target of 3,000 on the S&P500 to be fully priced in.
Federal Reserve of Richmond President Thomas Barkin in a speech overnight said the central bank should raise rates as fast as feasible in order to quell rampant inflation noting “We are in a situation where inflation is high, it’s broad-based, it’s persistent, and rates are still well below normal” and the central bank should “get back to where you want to go as fast as you can without breaking anything”. The S&P500 climbed +2.45% with all sectors positive, paced by energy +5.13%, consumer discretionary +2.82% and consumer staples +2.69%. The Dow Jones also gained +2.15% along with the Nasdaq Composite +2.51% and Russell 2000 +1.70% with the VIX retreating -2.71%. On Wednesday, investors will be focused on comments from Fed Chair Jerome Powell as they begin two days of semiannual testimony before Congress.
European equities also gained tracking U.S. equity futures and cash markets higher. The Euro Stoxx 600 gained +0.35% lifted by materials +1.62% and information technology +1.54% although breadth was mixed with only 52.7% of stocks rising. The DAX also gained +0.20%, along with the CAC +0.75% and FTSE100 +0.42% ahead of U.K. inflation data tonight which is expected to show headline prices rose +9.1% for the 12-months to May, up from +9.0% previously while core prices moderated to +6% from +6.2% previously. Eurozone flash consumer confidence for the month of June is also released overnight and expected to rise modestly to -20.5 from -21.1 in May. The Euro traded +0.23% higher at 1.0535 along with the Pound +0.20% to 1.2277.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
The ASX looks set to open higher this morning with ASX200 futures up +44 points or +0.69% to 6,459. The index climbed +1.41% on Tuesday, tracking U.S. futures higher, and also rebounded after being technically oversold following heavy losses last week. Energy was the top-performing sector rising +2.80% although Queensland coal miners were under pressure after the state government added three more tiers of coal royalties to a maximum of 40% for prices above $300. Bowen Coking Coal sank -47% with Coronado Coal down -9.3% along with Stanmore Resources -9.8%. Shares in GrainCorp rose +4.7% after confirming it expects full-year EBITDA of $590-670 million, representing an increase of 90% from the prior year following demand for Australian grain, oilseeds, and vegetable oils. The Australian dollar is +0.32% higher at 0.6973 with the 10-year yield unchanged at 4.06% on Tuesday ahead of the release of the Westpac leading index for the month of May at 10:30 AEDT.
Oil prices rose overnight with both WTI and Brent crude higher by +1.62% and +0.64% to US$109.74 and US$114.86 a barrel. Iron ore futures in Singapore rebounded +3.58% after eight consecutive sessions of losses, although is -0.79% in early trade this morning at US$114. Gold traded -0.31% lower to US$1,832.98 an oz, along with silver -0.28% to US$21.69 while Bitcoin rose +2.01% to US$20,838.
Economic data:
- Australian Westpac Leading Index (MoM May) 10:30
- U.K. Inflation (YoY May) 16:00
- Canadian Inflation (YoY May) 22:30
- Fed Chair Powell Testimony 23:30
- Eurozone Consumer Confidence (MoM Jun) 00:00
- Fed Evans Speech 02:50
- Fed Barkin Speech 03:30
- Fed Harker Speech 03:30
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.
