US equities posted modest gains on Tuesday, driven by financials with no key economic data to guide investors.
United States
The S&P 500 closed 0.24% higher at the end of trading on Tuesday, with the index on the edge of the commonly defined definition of a bull market, being a 20% gain from lows in October 2022. A drop in Apple Inc’s share price was offset by the gains of regional banks’ share prices. The financial sector was the star performer rising by 1.33%, consumer discretionary followed by firming 0.99% and energy gained 0.69%. In recent weeks, attention has been focused on the low readings of the VIX which often sees mean reversion, whereby low readings and followed by high readings and vice-versa. However, as the chart below, highlighted by analysts at SentimenTrader highlights, during extended bull markets the VIX can remain around what is considered low levels for extended periods of time. A low reading itself does not mean that we should expect an increase in volatility, although it does highlight a degree of complacency by investors that can leave key benchmarks vulnerable to corrections.
S&P500 vs VIX
The Dow edged up 0.03%, the Nasdaq gained 0.36%, the Russell 2000 firmed 2.69% and the KBW Regional Bank index added 5.4%. Traders are cautiously optimistic that the Fed will keep the cash rate steady in the upcoming June meeting. In contrast, Former vice-chair Richard H. Clarida commented that it was unlikely the Fed would back down from its hawkish stance on interest rate hikes. The yield on the 2-Year treasury bond rose by 1 basis point to 4.48%, while the yield on the 10-year treasury bond fell 2 basis points to 3.66% and the VIX index fell by -5.23% to 13.96.
Europe
In Europe, the STOXX 600 Index closed 0.36% higher at the end of trading on Tuesday with miners benefiting from further expectations of stimulus from China as authorities asked the country’s biggest lenders to lower their deposit rates. On the stimulus, Susannah Streeter of Hargreaves Lansdown noted “Any news of stimulus in the world’s second-largest economy will be welcomed, but it’s likely to be short-lived” and investors should remember “how intertwined China is with the rest of the world, and with skies darkening over the global economy, it will have repercussions for activity within its borders”. The CAC added 0.11%, the DAX was up by 0.18% while the financial and material-heavy FTSE100 rose by 0.37%.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
Australia
The ASX 200 Index is expected to open higher this morning, with ASX futures 0.34% to 7,163. The Index closed -1.2% lower at 7129 at the end of trading on Tuesday in broad-based selling after the Reserve Bank of Australia raised interest rates by 0.25%, a decision which came as a surprise based on economist and financial market pricing. The decision brings interest rates to the highest levels since April 2012 with RBA Governor Philip Lowe signaling additional tightening may be required to bring inflation back to the target range. Those interested in reading more about the decision and the potential implication can do so here. In focus today is a speech by Governor Lowe at 09:20 AEDT followed by Q1 GDP data at 11:30 AEDT.
RBA Cash Rate
Interest rate-sensitive sectors felt the tremors of the RBA’s decision. Consumer discretionary was the biggest underperformer falling by -2.16%, followed by industrials which retreated -1.56%, and financials lost -1.46% likely over concerns that mortgage stress will see an increase in defaults outweighing better interest rate margins. The utilities sector bucked the trend by closing 0.54% higher. Shares in Baby Bunting tumbled -16.9% after cutting profit guidance for 2023 to $13.5-15m from $21.5-24m previously in a sign that consumers are pulling back on spending. ASX Ltd. plummeted -10.22% after revealing it expects as much as 50% higher CAPEX of as much as $140m next financial year, meaning that dividends may be cut to pay for upgrading the CHESS infrastructure.
Commodities
In commodities, the rally in oil prices from the news of cuts in Saudi oil production was short lived with WTI and Brent Crude down -0.57% and -0.96% to $72 and $75.97 respectively. Precious metals saw the price of spot gold edge higher by 0.08% to $1963.54, while the price of spot silver edged up 0.10% to $23.56. Industrial metals were mixed with copper rising by 1.09% to $377, nickel dropped by -1.54% to $20,800 and SGX Iron Ore jumped 1.10% to $105.04. The price of Bitcoin jumped 5.3% to $26,998 despite the Securities and Exchange commission announcing a lawsuit against crypto exchange Coinbase as illegally operating without registering with the regulator, shares in COIN slumped -12.1% in the US.
Economic Calendar
7th June 2023
RBA Gov Lowe Speech 09:20
Australian GDP Growth Rate (YoY Q1) 11:30
China Balance of Trade (MoM May) 13:00
ECB de Guindos Speech 17:50
Bank of Canada Interest Rate Decision 00:00
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.
