Equities rebounded on Wednesday amid technical signs that selling had become exhausted, also receiving a boost from a sharp drop in oil after the UAE said it would call on other OPEC members to increase production.
As of 07:28 am AEDT the S&P500 was +2.90% higher in broad-based buying with 89% of stocks higher, with technology +4.22 %, financials +4.17%, and consumer discretionary +3.25% the largest contributors to the gains, while energy lagged -3.38%. The Dow Jones also rose +2.30%, the Nasdaq Composite climbed +3.74%, the Russell 2000 gained +2.98% and the VIX slumped -9.39% to 31.83. Also boosting sentiment were comments from an aide to the Ukrainian President that the country was open to discussing Russia’s demand of neutrality if it’s given security guarantees adding optimism that a compromise could be reached. Thursday will see the release of inflation data for February which is expected to see core inflation rise +6.4% over the year and headline inflation rise +7.9%.
From a technical perspective on the S&P500, the strength of recent declines is fading highlighted by what is known as bullish momentum divergence where the strength or momentum of declines, as measured by the relative strength index, is fading relative to prior lows. This is often seen before a trending move ends and has the potential for a sharp bounce higher in the short-term towards chart resistance at 4,400 and 4,600, although does not suggest recent declines from all-time highs are complete.
Treasury yields continued to rise with the 2-year rate +7.7 basis points higher at 1.676% with the 10 and 30-year rates also gaining +10.1 and +7.2 basis points respectively. Breakeven inflation expectations declined across the curve following the drop in oil prices, with the 1-year rate down -47 basis points to 5.44% and both the 5 and 10-year rate declining -12.1 and -7.6 basis points respectively lifting real yields across the same periods by +21 and +16.8 basis points to -1.52% and -0.91% while the U.S. dollar index weakened -1.10%.
European equities which have experienced some of the heaviest selling recently surged with the Euro Stoxx 600 rising +4.68% with 94% of stocks higher led by gains in consumer discretionary +8.73%, financials +6.93%, and technology +6.92%. The DAX surged +7.92%, as did the CAC +7.13% and the FTSE rose +3.25% with major benchmarks across the region broadly higher. Investors will be focused on the ECB meeting on Thursday for clarity around the wind-down of stimulus measures, while a summit of European leaders the day after may provide clues on fiscal support to cushion the impact of the war. The Euro climbed +1.64% to 1.1078 and the Pound rose +0.63% to 1.3184.
*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 +27 points or +0.38% higher at 7,065. The index advanced +1.04% on Wednesday with all sectors positive and 85% of stocks higher, with financials +1.53% and materials +0.53% the largest contributors to gains. The Australian dollar climbed +0.74% to 0.7323 after a speech by RBA Governor Philip Lowe suggesting the bank will not raise rates any sooner than the market currently expects. Lowe noted that ongoing supply constraints as well as the invasion of Ukraine will spur higher inflation that could push the central bank to lift rates faster than previously thought, although stressed the RBA would take time to assess information and how uncertainties resolve. Lowe also noted “it is plausible the cash rate will be increased later this year”, bringing the central bank closed to expectations by the market of at least five rate hikes in 2022.
Oil prices slumped following comments from the UAE’s ambassador to Washington that “we favor production increases and will be encouraging OPEC to consider higher production levels”, although it is unclear whether the UAE has consulted other OPEC members. Both WTI and Brent crude slumped -11.88% and -12.78% to US$109.02 and US$111.52 a barrel respectively. Natural gas for delivery in the U.K. and Netherlands fell -26.96% and -27.35% respectively amid hopes that a compromise could be reached in Ukraine. Iron ore futures declined -1.32% on Wednesday and are a further -2.84% lower this morning at US$158.70. Gold declined -2.74% to US$1,994 weighed by a rise in real yields as well as lower demand for haven assets, silver retreated -2.49% to US$25.75 while Bitcoin surged +9.31% to US$42,092. Gains in the cryptocurrency came following comments from Treasury Secretary Janet Yellen around a U.S. overhaul of crypto oversight following an executive order from President Biden mandating government agencies to look at issues for developing a potential digital U.S. dollar. Yellen praised the order saying it strikes a balance between fostering innovation and addressing potential risks.
Economic data:
- Australian Consumer Inflation Expectations (MoM Mar) 11:00
- ECB Rate Decision 23:45
- U.S. Inflation (YoY Feb) 00:30
- U.S. Initial Jobless Claims (5th March) 00:30
- ECB Macroeconomic Projections 01:30
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.
