ASX Futures point to a 0.5% dip in early trading, mirroring weakness in US and European markets.
Said markets were abuzz last night as the US Federal Reserve Board handed down its interest rate decision, delighting Wall Street with a full 50 basis point (bp) rate cut to lower the range to 4.75% - 5.00% for the first time in four years.
Policy makers and analysts are predicting a further 50 bp cut before the end of the year, with another 1% cut expected in 2025 and 50 bp in 2026 to finish that year in the 2.75% - 3.00% range.
Market wins the bet on rate cuts
“The market was right, economists were mostly wrong,” writes XTB research director Kathleen Brooks.
“The Federal Reserve started their rate-cutting cycle with a bang and cut rates by 50bps. However, there was more drama to come.
“The Fed has also revised down their expectations for interest rates in the short to medium term, while marginally revising higher their longer-term outlook for interest rates.
“Combined, a big rate cut and a dovish assessment of future rate cuts, has sent the dollar on a downward spiral, the gold price has hit a fresh record high and stocks initially spiked higher, especially the US mid-cap index.
“This is good news for the value trade in the US, as this move is supportive of economic growth, and it could prolong the economic cycle.
“The prospect of further rate cuts from the Fed could see the equal weighted S&P 500 continue to outperform the market-cap weighted S&P 500 in the medium term.
“The market-cap weighted S&P 500 rose to a fresh record high today, as did the S&P 500 minus the magnificent 7.
“Interestingly, Microsoft (NASDAQ:MSFT), the world’s second largest company, is currently lower on the day, suggesting that the biggest tech firms will not be leading US stocks higher in the next leg of this stock market rally.
“The Fed statement was illuminating because the even though the Fed made a large interest rate cut, the first line of the FOMC statement read ‘Recent indicators suggest that the US economy has continued to expand at a solid pace.’
“This supports the view that the Fed decided to cut interest rates by 50bps as a precautionary move, to protect the US economy from a potential future recession.
“The FOMC voted 11-1 to cut rates by 50 bps, with one member preferring to cut by a more moderate 25bps.
“This suggests that the doves have control at the Federal Reserve, and this may drive policy down the line.”
US and European markets
Regional banks gained as interest rate pressures lifted – the KWB regional bank index lifted 0.5%.
Despite the optimism over rate cuts, the markets fell overall, weighed down by weakness in the Utilities sector, which fell 0.8%.
The S&P500 fell 0.3% despite rising as much as 1% during the trading session, mirroring the Dow Jones which also lifted 376 points before faltering to shed 0.3% or 103 points.
Both indexes touched new record highs before slipping, perhaps indicating a round of interest rate-fuelled profit taking. The Nasdaq also fell, shedding 55 points or 0.3%.
In Europe, markets didn’t fare any better.
The Food and Beverages sector fell 1.1%, leading markets down. UK inflation data remained steady at 2.2%, but services inflation rose to 5.6%, above forecast.
Sticky inflation has downgraded bets on the Bank of England cutting rates at its Thursday meeting, which are expected to hold steady.
The FTSE300 fell 0.5%, while the FTSE100 shed 0.7%.
Currencies and commodities
Despite weakness in the US dollar introduced by the Fed’s rate cut, it still gained against major currencies in trading overnight.
The Euro fell from US$1.1187 to near US$1.1120. The Aussie dipped from US$0.6820 to around US$0.6765 and the Japanese Yen eased from JPY140.50 per US dollar to end near JPY142.25.
A small decline in US crude oil inventories didn’t stop a dip in oil, as Hurricane Francine applied pressure to fuel demand.
Brent crude dropped by 5 cents (0.1%) to US$73.65 per barrel, while the US Nymex fell 28 cents (0.4%) to US$70.91 per barrel.
Base metal prices gained on US interest rate cuts, with copper futures rising 0.6% and aluminium futures adding 0.3%.
Gold hit a new all-time high for the same reason, rising US$6.20 (0.2%) to US$2,598.60 per ounce, while spot gold traded near US$2,558 per ounce at the US close.
Iron ore was left out of the party, slipping 41 cents (0.4%) to US$91.57 per tonne as global supply increases and Chinese demand remains low.
On the small cap front
The ASX Small Ordinaries gained 0.10% yesterday, beating the ASX200’s paltry 5.9-point dip.
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