ASX to fall slightly as Wall Street sweats on debt ceiling

   2023-05-09 18:05

Natasha Rudra

Australian shares are set to fall slightly as investors absorbed the implications of a federal budget that has had to walk the line between addressing the cost-of-living crisis and fuelling inflation.

ASX futures were down 12 points or 0.2% to 7244 at 5.11am AEST.



The main budget headlines:

$15b in welfare, deficits keep pressure on rates and taxes The Albanese government has unveiled a $15 billion package of welfare increases, bulk-billing incentives and energy bill discounts, in a budget it says is not inflationary, but paves the way for more tax hikes.

The winners and losers in the budget Low-income earners, JobSeeker recipients, small businesses and renters were among the big winners in Tuesday night’s budget, while superannuation savers with big balances were losers.

Chanticleer | Why budgets now matter again for markets When monetary policy has been the only game in town, bond traders could ignore federal budgets. But it’s going to get more complicated from here.

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Analysts didn’t see much impact for the sharemarket.

AMP – Shane Oliver and Diana Mousina: “Cash and term deposits – cash and bank deposit returns have improved substantially with RBA rate hikes but are still relatively low. Bonds – budget deficits add to upwards pressure on bond yields, but at least they have been lowered near term so there should be no new pressure. Shares – the Budget is a small positive for household spending but not enough to offset the negatives impacting the sector and overall there is not really a lot in it for the share market.”

NAB – Ivan Colhoun, Taylor Nugent and Tapas Strickland: “The much-telegraphed improvement in the budget bottom line over the last six months will result in (more) downward revisions to CGS issuance. Net new funding for FY24 has more than halved relative to the last Budget, from $77 billion to $36 billion. FY25 net issuance is also more than halved to $35 billion.

“This points to a gross bond issuance program of around $70-75 billion during FY24 after refinancing the April 2024 maturity. Beyond FY24, the refinancing load increases to around $80 billion per year so gross issuance programs still remain comparatively large, well above $100 billion. Because of that high refinancing load, the AOFM may choose to prefund and keep the FY24 issuance program a little larger rather than slowing the issuance pace this year before having to ramp it back up.”

ASX futures weredown 12 points or 0.2% to 7244 at 5.11am AEST.

The local currency was down 0.3% to 67.64 US cents.

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On bitstamp.net, bitcoin was up 0.3% to $US27,611 at 4.22am AEST.

The yield on the US 10-year note was up 1 basis point to 3.52%.

  • Dow flat S&P 500 -0.2% Nasdaq -0.4%
  • In New York: BHP -0.3% Rio +0.3% Atlassian +3%
  • Tesla -2% Apple -0.7% Amazon +0.7%
  • Palantir +22.1%

On Wall Street, stocks slumped as the debt ceiling impasse dragged on investor sentiment, with the benchmark S&P 500 down 0.4% at midday.

Republican House Speaker Kevin McCarthy exacerbated the confrontation with Democrats as he rejected the possibility of a short-term debt-limit extension hours ahead of a meeting with President Joe Biden.

Here’s how Wall Street is prepping for the showdown.

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Federal Reserve Bank of New York President John Williams signalled he is open-minded about the central bank’s next policy move in June, saying he will be monitoring credit conditions closely.

“I will be particularly focused on assessing the evolution of credit conditions and their effects on the outlook for growth, employment, and inflation,” Williams said Tuesday at an event with the Economic Club of New York.

Goldman Sachs is urging investors to cushion themselves from the possibility of increased volatility as Wall Street quants dive back into US stocks.

Quant investors have swooped into equities as strong first-quarter earnings and resilient growth in the US has kept a lid on volatility. The VIX has been below the 20 level since late March. This has pushed the exposure of systematic investors to above neutral for the first time since December 2021, according to Deutsche Bank calculations.

But because of this increased participation by quants, analysts at Goldman Sachs including Christian Mueller-Glissmann are now cautioning that stock prices are becoming more prone to sudden selloffs.

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Confidence in Powell sinks to lowest in recent US history: poll A yearly Gallup survey shows Jerome Powell has become the most unpopular Federal Reserve chairman since the poll began in 2001.

Today’s agenda

Local: Treasurer Jim Chalmers at the National Press Club

Overseas data: US CPI; Euro zone Germany CPI April

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Senators demand names in PwC leaks scandal Politicians across the board are demanding names of other partners involved in the PwC tax leaks scandal after the departure of former CEO Tom Seymour.

Market highlights

ASX futures were down 6 points or 0.1% to 7250 at 4.22am AEST.

  • AUD -0.3% to 67.64 US cents
  • Bitcoin +0.3% to $US27,611 at 4.22am AEST
  • On Wall St: Dow flat S&P 500 -0.2% Nasdaq -0.4%
  • In New York: BHP -0.3% Rio +0.3% Atlassian +3%
  • Tesla -2% Apple -0.7% Amazon +0.7%
  • Stoxx 50 -0.6% FTSE -0.2% DAX flat CAC -0.6%
  • Spot gold +0.7% to $US2,036.41 /oz at 2.29pm in New York
  • Brent crude +0.2% to $US77.14 a barrel
  • Iron ore $US102.35 a tonne
  • 10-year yield: US 3.52% Australia 3.45% Germany 2.34%
  • US prices as of 2.29pm in New York

United States

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Stocks drifted lower following some mixed earnings reports. Several beaten-down banks are also weakening after a brief respite from a brutal run. After finding some stability in the two prior days, stocks of regional banks under the heaviest scrutiny by Wall Street fell again. PacWest Bancorp dropped 2.2 per cent, and Western Alliance Bancorp fell 3.3 per cent.

Palantir soared 22.1 per cent after reporting a stronger profit than expected and saying demand for its new artificial intelligence platform “is without precedent.”

But Paypal fell 11.8 per cent despite reporting better profit and revenue for the latest quarter than expected. Analysts pointed to its forecast for how much profit it expects to wring out of each $US1 of revenue, which may have disappointed some investors.

Electric automaker Lucid Group dropped 6.9 per cent after reporting a worse loss than expected for the latest quarter.

Skyworks Solutions sank 6.1 per cent after reporting profit for the first three months of the year that matched forecasts. The company’s comments about weakness in demand from China for Android phones may have frightened investors.

Europe

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Citi has torn up a previous prediction that the pound would drop to parity with the dollar in the wake of the mini-budget and now predicts sterling could rise towards $US1.30 at the start of next year. Sterling is currently trading close to a one-year high against the dollar at $US1.26 after a boost from strengthening economic activity and a more resilient housing market.

Vasileios Gkionakis, head of European foreign exchange strategy at Citi, said that its predictions of a “material correction” in house prices and a collapse in consumption had not come to pass.

In a note to clients on Tuesday, he said: “We have been wrong, plain, and simple. The reality is that, while inflation exhibits some idiosyncratic persistence, contrary to what we expected, activity has proven far more resilient.”

Commodities

Commodity price revision to deliver $22b to bottom line The Albanese government is expected to bank a further $22 billion in revenue from record iron ore and coal prices in future budgets after Treasury was forced to update its price assumptions for key commodities.

On markets, oil pared losses after the Biden administration announced it was cancelling some 140 million barrels of previously mandated sales and would begin replenishing strategic reserves later this year.

West Texas Intermediate edged back above $US72 a barrel after shedding as much as 2.5 per cent earlier in the session. “The price is right for the US to begin refilling their strategic oil reserve, providing a much needed bid for oil bulls as recessionary headwinds grow,” said Daniel Ghali, a commodity strategist at TD Securities

Traders have been watching closely for news on when the US would refill the reserves, which stand at a four-decade low. The administration had previously said it planned to restock the cache when oil prices fell to about $US70.

Oil has retreated about 10 per cent this year. Bank of America Corp. on Tuesday cut its forecast for Brent crude on a weaker outlook for global demand. Still, the United Arab Emirates, a key OPEC member, downplayed the need for deeper production cuts following curbs that started this month.


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