Global equities slumped on Thursday with sentiment weighed by concerns of a recession as central banks continue to raise interest rates, with the U.K. and Swiss central banks raising rates overnight.
The S&P500 declined -3.25% on Thursday in broad-based selling with 97% of stocks lower and all sectors negative led by declines in energy -5.58%, consumer discretionary -4.76% and technology -4.11%. The Dow Jones also declined -2.42%, along with the Nasdaq Composite -4.08% and Russell 2000 -4.70% with the VIX climbing +11.24% to 32.95. The move in equities reversals an initial bounce and rally following the Federal Reserve’s largest rate increase since 1994 overnight on Wednesday to combat inflation which has proved more persistent and widespread than officials anticipated. While Powell noted they do not expect such large increases to be the norm going forward, the market is pricing a minimum hike of +0.50% in July and officials have begun the acknowledge the chance of an economic downturn. Investors will turn their attention to a speech by Fed Chair Jerome Powell tonight for further clues on the outlook for rates and growth.
Rate increase by the U.K. and Swiss central banks overnight also weighed on risk-appetite, especially given there had been no expectations by economists of the +0.50% increase by the Swiss National Bank which raised rates for the first time since 2007 to -0.25%. The SNB joined other central banks in lifting their inflation forecasts, noting further rate increase may be needed and “we should not underestimate the risk of high inflation”. Elsewhere, the Bank of England raised rates by +0.25% as forecast with officials noting they were ready to act “forcefully” to address the dangers of higher inflation which is heading above +11%. European equities were broadly lower, following the risk-off appetite globally with the Euro Stoxx 600 down -2.47% along with the DAX -3.31%, CAC -2.39% and FTSE100 -3.14%. On Friday investors will be focused on the final reading of Eurozone inflation for the 12-months to May, with headline prices expected to have risen +8.1% from +7.4% previously and core prices increased +3.8% in line with the prior reading.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
The ASX looks set to follow global markets sharply lower at the open with ASX200 futures down -127 points or -1.97% to 6,333. The index reversed early gains on Thursday to finish -0.15% lower after strong than forecast employment data prompted expectations of further rate increases by the RBA. Sector performance was mixed, with real estate +1.19% and communications +0.53% leading gains while utilities -1.56% and industrials -1.24% underperformed. Employment data for May showed 60,600 jobs were added well above expectations of 25k and the unemployment rate remained steady at +3.9%, a 48-year low. Economists pointed to a fall in the underemployment rate by -0.4% to +5.7% as further signs of a strong labour market, prompting expectations the RBA will need to be more aggressive in tightening policy although the implied rate increases derived from cash rate futures over the remainder of the year was little changed. The Australian dollar is +0.63% higher overnight at 0.7047 while the 10-year government bond yield declined -20.7 basis points on Thursday to 3.993% after surging more than +0.5% between Tuesday and Wednesday.
Oil prices rose overnight with both WTI and Brent crude +1.98% and +0.51% higher at US$117.59 and US$119.11 a barrel. Iron ore futures in Singapore declined -1.08% on Thursday and are down a further -1.47% to US$126.15 this morning along with other steel making ingredients after a pessimistic demand outlook from a top steel producer in China. Gold rose +1.28% to US$1,857 an oz overnight, with silver also +1.23% higher at US$21.96 while Bitcoin declined -4.45% to US$20,677.
Economic data:
- Eurozone Inflation Final (YoY May) 19:00
- Fed Chair Powell Speech 22:45
- U.S. Leading Index (MoM May) 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.
