U.S. equities reversed earlier declines on Monday with dip buyers pushing indices into positive territory after April proved to be the worst month since the start of the pandemic for the S&P500.
The S&P500 climbed +0.57% having initial weakened -1.68%, with technology +1.56%, communications +2.43% and consumer discretionary +1.36%. The Dow Jones also rose +0.26%, as did the Nasdaq Composite +1.63% and Russell 2000 +1.01% with the VIX retreating -3.17% to 32.34. Several indicators suggest recent selling has left the market vulnerable to a bounce, although with fears of an economic slowdown, high inflation and increasingly hawkish rhetoric by central banks are likely to continue weighing on risk appetite suggesting any potential rally is likely to be seen as corrective at this stage. Adding to the likelihood of a short-term bounce, the VIX curve has twice closed back in contango from backwardation over the past week, typically signalling receding levels of fear that can often proceed gains.
The focus this week is on the Federal Reserve where the central bank is widely expected to increase interest rates by +0.50%. Investors will also focus on how many further rate hikes Powell signals, with futures markets pricing in another +0.50% rate increases for both the June and July meetings with the September meeting also close to pricing in another +0.50% increase. Aside from the Federal Reserve, investors will also focus on the ISM non-manufacturing PMI survey overnight on Wednesday expected to grow modestly to 58.5 from 58.3 previously, as well as non-farm payroll data on Friday. The average analyst estimate is for +400k jobs to be added in April, with the unemployment rate edging lower to +3.5% from +3.6% previously.
European equities were lower on Monday, briefly experiencing a sudden “flash crash” led by a -8% decline in the OMX Stockholm 30 Index before equities recovered those losses with market commentators pointing to a likely erroneous trade by a market participant. Elsewhere, disappointing figures for economic activity from China over the weekend also weighed on sentiment, with PMI for services and manufacturing falling to their lowest levels since February 2020 amid stringent lockdowns. The Euro Stoxx 600 weakened -1.46%, paring a loss of as much as -2.96% with the DAX also retreating -1.13%, as did the CAC -1.66%, and IBEX 35 -1.73% while the U.K. was closed for a public holiday.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
The ASX is set for a weaker open this morning, although late buying in the U.S. may help the index move closed to positive territory, with ASX200 futures down -25 points or -0.34% to 7,299. The index weakened -1.18% on Monday ahead of an RBA decision today where the central bank is widely expected to lift interest rates for the first time in over a decade and signal plans for further rate increases over the coming months. Based on futures pricing, market participants expect a total of 10 rates hikes by the end of 2022 brining the cash rate to 2.83% although most major bank’s economists are forecasting less tightening. The Australian dollar is -0.16% lower at 0.7050 overnight and the yield on 10-year government bonds traded +13.5 basis points higher on Monday at +3.26%.
Oil prices rose overnight with both WTI and Brent crude up +0.46% and +0.49% respectively to US$105.17 and US$107.66 as prices continue to consolidate within a tightening range that once complete is likely to lead to a strong trending move. Iron ore futures in Singapore edged -0.27% lower on Monday to US$145.90, gold weakened -1.79% overnight to US$1,863 as did silver -0.60% while Bitcoin was little changed at US$38,312.
Economic data:
- RBA Rate Decision 14:30
- German Unemployment (MoM Apr) 17:55
- Eurozone Unemployment (MoM Apr) 19:00
- U.S. Factory Orders (MoM Mar) 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.
