Equities fell with bonds on Tuesday weighed by geopolitical tensions, disappointing earnings, and concerns of higher interest rates.
United States
Concerns among investors that central banks are not yet near peak interest rates in their fight against inflation weighed on sentiment on Tuesday. US PMI reports for February released on Tuesday surprised to the upside, with the services report rising back to expansionary territory at 50.5 compared to forecasts of a more modest rise to 47.2 from 46.8 in January. The manufacturing report also improved more than expected to 47.8 compared to estimates of 47.1, remaining in contractionary territory. Given services accounts for a significant portion of GDP, the data suggests that the US may narrowly avoid a recession this year, although a shallow recession remains the base case based on estimates compiled by Bloomberg. In a welcome development, input price inflation was the second-slowest since October 2020 along with there was a sharp increase in output charges as hikes in wages reportedly drove costs higher. The PMI reports along with recent improvements in economic data and hawkish rhetoric from Federal Reserve members have pushed up the odds of a 0.5% rate increase in March to 24% from near zero previously, although a 0.25% increase remains probable for now.
US PMI (MoM)
The S&P500 declined -2.0% on Tuesday with all sectors negative and 93% of stocks trading lower. The Dow Jones also declined -2.06% along with the Nasdaq Composite -2.5% and Russell 2000 -2.99% with the VIX spiking 7.63% to 22.85. In corporate news, Home Depot’s stock price fell -5.8% after announcing flat sales through to January 2024. Walmart’s price rose 0.61% despite admitting cautious spending by consumers would impact profit margins suggesting investors had been braced for a more pessimistic outlook. The yield on 2-year Treasuries climbed 11.2 basis points to 4.729% along with both the 10 and 30-year rates up by 14.2 and 10.3 basis points respectively, with the US Dollar index up 0.32% to 104.194.
In other news, Joe Biden marked the one year of Russia’s invasion of Ukraine declaring that Russia would never win the war. Simultaneously, the White House stated it would not be afraid to issue sanctions against Chinese companies that support the Russian invasion.
Europe
European equities were also lower with the Euro Stoxx 600 down 0.19% along with the DAX -0.52%, CAC -0.37% and FTSE100 -0.46%. In economic data, the ZEW economic sentiment index for the Eurozone rose to 29.7 for the current month, far above forecasts of 22.3 and improving from 16.7 previously. Meanwhile, PMI reports for the Eurozone were mixed, with the manufacturing index declining to 48.5 below expectations of 49.3 while services improved to 53 compared to estimates of 51.
Eurozone ZEW Economic Sentiment (MoM)
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
Australia
The ASX is expected to open lower on Wednesday, with ASX futures down 45 points or 0.62% to 7,214. The RBA’s admission of having to debate a larger rise in interest rates led to the ASX 200 sliding by -0.21% to close at 7336.3 on Tuesday. Energy and materials were the only two sectors to close in the green, gaining 0.35% and 0.61% respectively. The biggest laggards were communications (-1.18%), information technology (-1.09%) and consumer staples (-1.03%). John Lynns (LYN) was the star performer, rocketing 13.2% after sharing an improvement in revenue and EBITDA guidelines for 2023 to $1.146 billion and $111.1 million respectively. Ingenia Communications (INA) was the biggest underperformer, plummeting -13.42% after downgrading its 2023 guidance. New Century (NCZ) saw it’s share price surge 42.2% after an unsolicited takeover bid from Sibanye-Stillwater. BHP lost -0.3% after its interim profit of $6.59 billion fell short of expectations. Woodside Energy (WDS) gained 0.9%, Stockland (SGP) shares sank -3.3% after citing higher interest rates impacting sales. Iluka Resources (ILU) fell 0.7% despite announcing an approval of $480 million mine to ensure supply for its feedstock and an improvement of net profit by 67% to $589 million.
In economic data, the JUDO Bank PMI manufacturing index was flat at 50.1 in February, while the services indexed was up by 2.4% to 49.2 in February compared to 48.6 in January. The reports indicated the economy had started to feel the pressures of higher interest rates on prices.
Commodities
In commodities, the prices of oil declined leading to WTI and Brent Crude falling by -0.24% and -1.38% to $76.16 and $82.92 respectively. In precious metals, spot gold receded -0.41% to $1,833.94 while spot silver gained 0.09% to $21.84. Industrial metals closed in the green. Copper was up by 2.54% to $421, nickel leapt 4.47% to $26,787 and SGX Iron Ore jumped 1.48% to $128.41. The price of bitcoin fell -0.7% to $24,637.
Economic Data
AUS Westpac Leading Index Month-on-Month (January) 11:00
AUS Wage Price Index Year-on-Year 11:30
RBNZ Interest Rate Decision 12:00
RBNZ Press Conference 13:00
GER Inflation Rate Year-on-Year 18:00
ECB Non-Monetary Policy Meeting 19:00
GER Ifo Business Climate (February) 20:00
US FOMC Minutes 06:00
This article was written by Oliver Gordon, Portfolio Manager, Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3632.
