Global equities rallied on Tuesday while yields climbed following strong economic data while comments from Federal Reserve members confirmed expectations the central bank will continue to tighten until inflation is moving substantially lower.
The S&P500 climbed +2.02% on Tuesday in broad-based buying with 90% of stocks trading higher with technology +2.91%, financials +2.69% and consumer discretionary +2.68% contributing the most to gains. Consumer staples -1.15% was the only negative sector weighed by a -11.38% decline in Walmart after reporting a -25% drop in quarterly earnings and cutting its full-year outlook on rising costs of fuel and labour. The Nasdaq Composite also climbed +2.76%, as did the Dow Jones +1.34% and Russell 2000 +3.19% with the VIX retreating a further -4.99% to 26.10. Lifting sentiment was stronger than expected economic data, with retail sales for the month of April rising +0.9%. While this was modestly below expectations of a +1% gain, the prior figure from March was revised higher to +1.4% from +0.5% suggesting consumer spending remains resilient despite higher prices and lower real incomes although concerning is the increased use of credit cards to fund spending.
Elsewhere industrial production rose +1.1% over the month, beating forecasts of a +0.5% rise. Treasury yields rose across the curve with the 2-year rate up +13.5 basis points to 2.704%, as were both the 10 and 30-year rates by +10.7 and +8.5 basis points respectively, flattening the yield curve a sign the market remains worried about the outlook for growth. Jerome Powell speaking at a Wall Street Journal event said the central bank will keep pushing to tighten monetary policy until it is clear that inflation is declining. “What we need to see is inflation coming down in a clear and convincing way and we’re going to keep pushing until we see that. If we don’t see that, we will have to consider moving more aggressively” to tighten financial conditions. As the chart below shows, financial conditions have now tightened to levels last seen during the pandemic and the Fed’s prior hiking cycle in 2018.
European equities also gained with sentiment lifted by optimism over easing lockdowns in China as well as higher GDP for Q1 than originally estimated. The second estimate of Q1 GDP rose to +5.1% over the year from +5.0% previously, growing a +0.3% over the quarter compared to +0.2% originally estimated. The Euro Stoxx 600 climbed +1.22%, as did the DAX +1.59%, CAC +1.30% and FTSE100 +0.72% with benchmarks higher across the region. The FTSE100 underperformed after the Pound rose +1.42% to 1.2494 after unemployment data reached the lowest level in decades, declining to +3.7% for the 3-months for March compared to estimates to remain unchanged at +3.8% with +83k jobs added over the period compared to +4k forecast. Elsewhere, the Euro strengthened +1.11% to 1.055 after ECB and Dutch central bank chief Klass Knot said the central bank should raise rates by +0.25% in July and should not yet rule out a bigger increase. Futures traders show a 50% chance of a +0.25% increase in July, while pricing in at least two hikes by the July meeting.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
The ASX look set top open sharply higher this morning with ASX200 futures up +68 points or +0.96% to 7,179. The index rose +0.27% on Tuesday boosted by materials +1.11% and financials +0.73% offsetting mixed performance across all other sectors. After Brambles shares jumped on Monday following take over talks with CVC Capital Partners, the shares declined -77.6% on Tuesday after CVC advised it will not be proceeding with a proposal or due diligence. Energy shares were strong performers with the sector up +2.09% following gains in the price of oil with WPL up +2%, as was STO +2% and BPT +6.1%. The Australian dollar is +0.83% higher at 0.7029 overnight while the yield on the 10-year government bond rose +2.1 basis points to 3.405%.
Oil prices weakened overnight with both WTI and Brent crude -0.60% and -1.49% lower respectively at US$113.51 and US$112.58 a barrel. Iron ore futures in Singapore were -1.41% weaker on Tuesday and are slightly lower by -0.20% this morning at US$127.80. Gold traded -0.49% lower at US$1,815.16 while silver edged up +0.06% to US$21.63 and Bitcoin gained +0.57% to US$30,077.
Economic data:
- Australian Westpac Leading Index (MoM Apr) 10:30
- Australian Wage Prices (YoY Q1) 11:30
- U.K. Inflation (YoY Apr) 16:00
- Eurozone Inflation (YoY Apr) 19:00
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.
