Stocks extended recent weakness on Monday as investors assess the outlook for the economy and central bank policy.
United States
Hawkish comments from policymakers last week continued to weigh on sentiment on Monday with little economic data to guide investors. Following last week’s more hawkish “dot plots” from the Federal Reserve, former New York Fed President William Dudley suggested that optimistic markets could only make the central bank tighten even more as it seeks to implement the “reverse wealth” effect to tame inflation. Bloomberg columnist John Authers presented the following comparison of the Bank of America survey of fund managers that believe earnings will improve, compared to current sell-side forecasts compiled by Bloomberg. Sell-side analysts typically tend to be overly optimistic when it comes to forecasts, and the pessimistic figures from the buy side which sit at the lowest on record suggest worries of an earnings recession in 2023 are a growing risk.
Data on Monday showed the NAHB housing market index for December unexpectedly declined to 31 from 33 previously missing estimates of an increase to 34 amid higher mortgage rates and construction costs, with readings below 50 signalling builders view conditions are poor. The S&P500 declined -0.90% on Monday with energy 0.14% the only sector higher while communications -2.18% and consumer discretionary -1.66% lagged. The Dow Jones was also -0.49% lower along with the Nasdaq Composite -1.49% and Russell 2000 -1.41% with the VIX surprisingly -1.19% lower at 22.35 despite the fall in equities which typically sees the VIX rise.
Europe
European equities were buoyed on Monday over optimism of China’s pledge to focus on boosting the economy next year. China’s top leaders at a two-day Central Economic Work Conference hinted at business-friendly policies and further support for the property market, while scaling back fiscal stimulus. According to Bloomberg economists, the “unprecedented weight attached to reviving consumption, hints of a peak in regulatory tightening, a renewed effort to encourage entrepreneurship and silence on ‘common prosperity’ are important signals of a shift in policy approach”. The Euro Stoxx 6000 gained 0.27% along with the DAX 0.36%, CAC 032% and FTSE100 0.40%. Meanwhile, UK bonds slumped on speculation of a wave of extra supply as the Bank of England prepares to push on selling bond holdings at the start of the new year. Yields were higher across the UK curve with the 2-year rate up 18.3 basis points along with both the 10 and 30-year rates by 17 and 14.9 basis points respectively, while the Pound was little changed at 1.2143. In economic data, the German Ifo business climate survey for December improved more than expected to 88.6 compared to estimates of 87.4 and a prior reading on 86.4 in November which according to Bloomberg economists suggest that Germany may face a milder recession with the business expectations survey also improving.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
Australia
The ASX is set to open lower this morning with ASX200 futures down -23 points or 0.34% to 7,061. The index edged -0.21% lower on Monday with only materials 0.45% and energy 0.52% higher for the session. Star Entertainment Group shares slumped -18% on Monday following the NSW government’s proposed increase to the state’s gaming tax that could raise $364m over the next three years according to NSW Treasurer Matt Kean over the weekend. Shares in Warrego Energy climbed 6.7% after Strike Energy launched a sweetened takeover offer of $0.335 per share, a 19.6% premium to Hancock’s revised $0.28 offer. ANZ has downgraded its Australian GDP forecast to 1.5% year-on-year for the end of 2023 compared to 1.8% previously, reflecting a sharper drop in householder consumption that previously factored in, and expects the economy to avoid a recession amid a tailwind from recovery in migration. The bank also expects headline inflation to peak at 7.8% in Q4 2022 down from 8% previously and the RBA to stop hiking rates after reaching 3.885% in May 2023.
Commodities
Both WTI and Brent crude were higher overnight, rising 1.80% and 1.57% respectively to US$75.663 and US$80.28 a barrel amid China’s pledge to revive consumption. Iron ore futures in Singapore fell -3.32% on Monday although are 0.45% higher this morning at US$108.05 while copper futures in the US traded modestly lower by -0.13%. Gold is -0.34% lower at US$1,786.97 an oz, along with silver -1.15% and Bitcoin -0.87% to US$16,606.
Economic data:
- Australian Business Confidence (MoM Dec) 11:00
- RBA Policy Minutes 11:30
- BOJ Rate Decision 14:00
- US Building Permits (MoM Nov) 00:30
- Eurozone Consumer Confidence (MoM Dec) 02:00
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.
