U.S. equities and Treasuries extended weakness on Monday following Jerome Powell’s speech on Friday where he made it clear the Fed is willing to let the economy suffer as it fights inflation.
The S&P500 retreated -0.67% on Monday weighed by technology -1.28% and health care -0.70% while energy outperformed +1.54% on higher oil prices. The Dow Jones was also -0.57% lower along with the Nasdaq Composite -1.02% and Russell 2000 -0.89% with the VIX up +2.54% to 26.21. According to ClearBridge Investments strategist Jeff Schulze, “The Fed Friday took away the punch bowl from the party and equities were the drunkest asset class at the party…we’re going to deal with the hangover as a consequence. So I think investors are reassessing recession risks and are recognizing that the Fed is prioritizing price stability over economic stability”.
Treasury yields extended a recent rise with the 2-year yield up +2.9 basis points to 3.425% with the 10 and 30-year rates also up +6.5 and +5.0 basis points respectively. Money markets are pricing in a 70% chance of a third consecutive +0.75% rate increase in September and are pricing in the Fed Funds rate to finish the year at +3.7% and is expected to peak around those levels. Key this week will be the release of August’s non-farm payroll data on Friday forecast to show +285k jobs were added with the unemployment rate remaining stable at +3.5%.
European equities also fell on Monday catching up with Friday’s sell-off in U.S. equities with the Euro Stoxx 600 down -0.81% along with the DAX -0.61%, CAC -0.83%, and FTSE100 -0.70%. 10-year government bond yields were higher across the region, ranging from +7.2 basis points in Switzerland to +11.4 in France with the Pound -0.30% lower while the Euro rose +0.31%. Over the weekend, ECB official Isabel Schnabel said she and her colleagues had “little choice” but to continue tightening even if Europe’s economy tips into a recession.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
The ASX looks set for a modestly higher open this morning with ASX200 futures up +18 points or +0.26% to 6,896. The index slumped -1.95% in broad-based selling with 96% of stocks lower and all sectors negative led by declines in technology -4.38%, materials -2.41%, and financials -2.18%. A2M was a standout performer, rising +9.98% after better-than-expected results in China, the infant formula company reported double-digit growth in earnings and announced plans for a NZ$150 million share buyback. Elsewhere, Fortescue fell -4.93% despite better-than-expected profits and dividends, announcing a US$6.19 billion profit and final dividend of $1.21. The Australian dollar is modestly higher overnight by +0.09% at 0.6903 with the 10-year government bond yield rising +9.3 basis points on Monday to 3.669%. In economic data, retail sales for July proved stronger than expected, rising +1.3% over the month compared to forecasts of +0.3% and a prior reading of +0.2% in June which according to the Australian Bureau of Statistics shows that “despite cost-of-living pressures, households are continuing to spend” and is likely to keep the RBA on its tigthening path.
Oil prices rose overnight with both WTI and Brent crude up +4.24% and +3.88% to US$97.01 and US$104.91 a barrel on the potential for OPEC+ production cuts and conflict in Libya. Saudi Arabia last week raised the possibility of production cuts that would coincide with any increased supply from Iran should a nuclear deal with the West prove successful. Iron ore futures in Singapore declined -3.45% on Monday and are a further -0.63% lower this morning at US$101.65 with copper also -2.30% lower. Gold edged -0.06% lower to US$1,737.09 an oz, with silver -0.71% lower while Bitcoin bounced +0.94% to US$20,177 after further weakness over the weekend.
Economic data:
- Eurozone Consumer Confidence Final (MoM Aug) 19:00
- German Inflation (YoY Aug) 22:00
- Fed Barkin Speech 22:00
- U.S. House Price Index (MoM Jun0 23:00
- U.S. Consumer Confidence (MoM Aug) 00:00
- Fed Williams Speech 01:00
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.
