ASX to tumble; Wall Street and Europe slump

   2023-05-24 18:05

Natasha Rudra

Australian shares are set to tumble as markets across Europe and the US sold off sharply. A shock UK inflation report sent bond yields soaring and US Treasury secretary Janet Yellen warned the country would run out of cash by June 1.

Yields on securities due in early June surged as investors steered clear of more at-risk bills, with the rates on at least one instrument topping 7 per cent, more than 4 percentage points above instruments maturing May 30, while other securities in the first weeks of June also saw their yields leap.



There appeared to be no movement on the debt ceiling negotiations. The FOMC minutes showed officials were divided earlier this month on whether to pause their interest rate rises at the upcoming meeting in June.

“Several [policymakers] noted if the economy evolved along the lines of their current outlooks, then further policy firming after this meeting may not be necessary” — Fed parlance for a pause — the minutes from the May 2-3 meeting said.

Despite that, Blackstone CEO Steve Schwarzman said he doesn’t expect the US to default on its debt as time runs short for negotiators to reach a deal.

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“That speaks to the US government paying principal and interest on a timely basis,” he said in a video interview at the Qatar Economic Forum.

The IMF’s Kristalina Georgieva also expressed confidence that the US will reach a debt deal and urged central banks around the world to keep monetary policy tight in the face of inflation risks.

“History tells us that US will wrestle with this notion of default but come the 11th hour it gets resolved,” she said. “And I have confidence that they will again.”

Bond traders continued adding to wagers on a June interest-rate increase by the Federal Reserve despite the persistent threat that lawmakers will fail to raise the US debt ceiling in time to avoid a financial crisis.

“If we get a debt ceiling resolution, the market will go to a coin toss immediately on pricing for the June meeting,” said Jonathan Duensing, head of US fixed-income at Amundi. “Then it really comes down to the data as to whether the hawks win out over the doves at the FOMC.

Swap contracts priced in as much as 12 basis points of tightening in June, a new high since the last central bank hike on May 3, spurred in part by surging UK policy rate expectations after the upside surprise by British inflation data.

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The ASX was down 43 points or 0.6% to 7184 near 4.30am AEST

  • On Wall St: Dow -0.8% S&P 500 -0.8% Nasdaq -0.9%
  • In New York: BHP -3.4% Rio -2.2% Atlassian +0.7%
  • Tesla -2.0% Apple -0.3% Amazon +0.8%

The local currency was down -1.2% to 65.33 US cents

On bitstamp.net, bitcoin was down -3.8% to $US26,215 near 3.17am AEST

The yield on the US 10-year note was down 3 basis points to 3.73%

On Wall Street, shares took a dive. The S&P 500 was 0.9 per cent lower in afternoon trading, a day after dropping 1.1 per cent. The Dow was down 272 points, or 0.8 per cent, while the Nasdaq composite was 1 per cent lower. The VIX fear gauge was up 9 per cent and hovered near three-week highs.

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Benjamin Dietrich, portfolio manager at Lazard Asset Management: “I’m starting to get the feeling that the Republicans don’t believe in Yellen’s X-date and think they have the upper hand. I think the risk is for no short-term solution and the S&P breaking lower. Also, the China surprise index collapse should be bad for risk sentiment.”

Today’s agenda

Local: ABS labour force April; RBA payments system board meeting

Overseas data: US FOMC meeting minutes; US GDP annualised Q1; Chicago Fed index April; US pending home sales April; Kansas City Fed index May

Other stories

‘Fully tax-deductible’: Andrews tax rise hits federal budget Victoria’s “horror” budget will cost the federal government almost $3 billion over the next four years as landlords and business owners write off its tax increases.

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The big debate in critical minerals is on further processing The Australian Financial Review Mining Summit heard the $US369 billion Inflation Reduction Act was a catalyst for a scramble to develop the sector.

Market highlights

ASX down 43 points or 0.6% to 7184 near 4.30am AEST

  • AUD -1.2% to 65.33 US cents
  • Bitcoin -3.8% to $US26,215 near 3.17am AEST
  • On Wall St: Dow -0.8% S&P 500 -0.8% Nasdaq -0.9%
  • In New York: BHP -3.4% Rio -2.2% Atlassian +0.7%
  • Tesla -2.0% Apple -0.3% Amazon +0.8%
  • Stoxx 50 -1.8% FTSE -1.7% DAX -1.9% CAC -1.7%
  • Spot gold -0.7% to $US1,961.56/oz at 1.15pm in New York
  • Brent crude +0.6% to $US77.32 a barrel
  • Iron ore $US95.10 a tonne
  • 10-year yield: US 3.73% Australia 3.65% Germany 2.47%
  • US prices as of 2.30pm in New York

United States

Markets sold off. Nvidia Corp fell 2.0 per cent ahead of its quarterly earnings after markets close. The chipmaker is the fifth most-valuable publicly traded company and the top performer in the S&P 500 index, up 105 per cent for the year. Citigroup fell 3.1 per cent as the lender abandoned the sale of its Mexican retail unit, Banamex,

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Sephora owner Kohl’s jumped 5 per cent after reporting a surprise profit for its latest quarter. Analysts had expected it to turn in a loss.

Most companies have been topping expectations for the first quarter of the year, but much of that is because analysts set the bar particularly low. S&P 500 companies are still on track to report a second straight quarter of weaker profits from year-ago levels.

Wells Fargo’s Darrell Cronk says this is a bad time to get sucked back into risky stocks. “Today you are just not getting paid to take risk,” Cronk said on Surveillance. Bear markets are exhausting, but every recession investors often get faked out by a few positive data points before the downturn hits, he said.

Liz Young of SoFi said the market showed “pretty classic late cycle behaviour,” although she warned the late cycle could last up to 18 months. She sees enough evidence to stay cautious over the next six months or so, while remaining invested for longer-term horizons.

Europe

Markets slumped across the board after a horror UK inflation report, showing prices fell by less than expected while core inflation surged to a 31-year high, bolstering the chances of more rate rises.

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The Europe-wide STOXX 600 index slid 1.8 per cent, its worst one-day showing since mid-March, with all regional markets in the red. Europe’s luxury stocks fell 1.7 per cent, touching a seven-week low. On the FTSE, homebuilders and property stocks took the brunt of the sell-off.

Swedish gaming group Embracer faceplanted 44.8 per cent to the bottom of the STOXX 600 after a promised partnership evaporated and it trimmed its full-year adjusted EBIT forecast.

Michael Hewson, chief market analyst at CMC Markets: “The modest declines of the last two days have accelerated as sentiment continues to deteriorate, raising the question as to whether this is the beginning of a market puke that gets US lawmakers’ attention and generates the urgency required to preserve the fiscal integrity of the US government.”

Rob Wood, chief UK economist at BofA Global Research: “Today’s data suggests inflation will fall much slower than previously expected. The risk that inflation does not halve from its peak by year-end is growing in our view.”

Japanese bank Nomura, Citi, BofA Global Research and Credit Suisse all revised their forecasts for interest rates in Britain.

Traders are nearly fully pricing in a 25-basis point hike by the Bank of England in June, which would be the 13th straight hike by the British central bank.

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Bank of England governor Andrew Bailey denied that the UK is suffering from a wage-price spiral but admitted that the central bank is grappling with stubborn core price pressures and a “very tight labour market.”

“It’s the stickiness downwards, and the question of how fast is it going to come down,” Bailey said at an event hosted by the Wall Street Journal. “Quite a bit of that obviously depends on how inflation expectations are coming down and they are coming down.”

Commodities

Iron ore tumbled nearly 5 per cent. Copper fell below $US8,000 a ton for the first time in six months as investors cool on the prospects for a robust economic recovery in China this year.

The metal has tumbled about 8 per cent this month in the face of disappointing economic data from the world’s top consumer, wiping out gains seen following the end of China’s Covid-19 lockdowns. Poor domestic demand has forced smelters in the Asian nation to ramp up exports that have helped replenish inventories elsewhere.

Funds are turning bearish with short positions outweighing longs for the first time in almost three years on the London Metal Exchange, marking a rapid turnaround in sentiment since the first quarter, when Trafigura Group and Goldman Sachs were calling for copper to hit an all-time high within a year.

Oil shed most of its gains. West Texas Intermediate slipped below $74 a barrel after hitting the highest price since early May in a late Wednesday turnaround.


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