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September bloodbath; what’s next for ASX; and will RBA slow down rate rises?

Stock Markets Oct 03, 2022 10:31
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© Reuters. September bloodbath; what’s next for ASX; and will RBA slow down rate rises?
 
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The ASX 200 is set to open five points higher this morning, despite the S&P 500 closing at a two-year low last week.

The S&P 500 was back at levels not seen since 2020. In fact, September saw the worst monthly drop for the S&P 500 since March 2020, while all three major US benchmarks fell between 7-9% last month – trading at levels not seen since November 2020.

Year-to-date the indices have recorded:

  • S&P 500 - 25.3%
  • Dow Jones - 21.5%
  • Nasdaq - 33.2%
Real Estate led the sector bloodbath. It is down 30.4% in 2022 and lost 13.6% during September as interest rate rises bite.

Communication Services has dropped 39.4% in 2022, down 12.2% in September and Information Technology rounded out the three hardest hit sectors losing 31.9% year to date and 12% for the month of September.

Of the stocks, FedEx (NYSE:NYSE:FDX) Corp copped a hiding after releasing a sales and profit warning on September 16, down 29.6% in September and 42.6% for the year so far.

VF Corp (NYSE:VFC) was down 27.8% in September and 59.2% for the year. Carnival (NYSE:CCL) Corp has taken a 25.5% battering in September and recorded -65.1% for the year to date based on below estimate sales and earnings for the cruise giant.

Nike Inc (NYSE:NYSE:NKE) is down 21.9% for the month and 50.1% for the year. Nike warned that discounting to clear inventory would continue to affect its earnings performance.

The Federal Reserve's position on raising rates until inflation finds a path down to its 2% target is the main cause for the sharp selloff and has been complicated by a string labour market and soaring home prices which have only just begun to show signs of a retreat after gaining 45% nationally during the pandemic.

Here’s what we saw to round out the week:

  • The Euro fell from highs near US$0.9850 to lows near US$0.9735 and was near US$0.9800 at the US close.
  • The Aussie dollar eased from highs near US65.25 cents to lows near US63.90 cents and was near US64.00 cents at the US close.
  • The Japanese yen eased from near 144.20 yen per US dollar to JPY144.80 and was near JPY144.75 at the US close.
  • Global oil prices fell by as much as 2.1% on Friday. According to a Reuters survey, OPEC oil output rose in September to 2-year highs.
  • The Brent crude oil price fell by US53 cents or 0.6% to US$87.96 a barrel.
  • The US Nymex crude oil price shed US$1.74 or 2.1% to US$79.49 a barrel. For the week, Brent crude rose by US$1.81 or 2.1%. Nymex crude rose by US75 cents or 1%.
  • Base metal prices were mixed on Friday. Nickel fell 5.6% and aluminium fell by 1.4% but other metals rose by up to 1.9%. Over the week, metals were again mixed with nickel down 9.8% while lead rose by 7.0%.
  • The gold futures price rose by US$3.40 an ounce or 0.2% to US$1,672 an ounce. Spot gold was trading near US$1,660 an ounce at the US close.
  • For the week, gold rose by US$16.40 an ounce or 1.0%.
  • Iron ore futures fell by US11 cents or 0.1% to US$98.31 a tonne. Over the week, iron ore fell by US58 cents a tonne or 0.6%.
On the horizon this week

Josh Gilbert, market analyst at eToro, shares his three things to watch in Australia this week.

3. RBA Rate Decision: Are we ready to slow down?

October 4 sees another rate decision from the RBA, and the big question will be whether the central bank raises rates by 25 or 50 bps. It will be a close call between the two, given a slew of economic data in the last few weeks.

The US Federal Reserve made another aggressive hike of 75bps which could influence Governor Lowe’s decision this week.

However, retail sales and inflation data last week were positive. Retail sales climbed for another month, showing consumer resilience, and the first monthly CPI reading showed that inflation had dropped by 0.2% month-over-month.

The RBA’s tone seems to suggest they are ready to slow the pace of their hikes, but a look at other economies indicates that more work is likely needed to squash inflation altogether.

However, compared to the rest of the world, Australian households are some of the most indebted in the world, meaning the RBA is unlikely to raise rates as aggressively as other economies, given the pain it would cause local households.

2. Australia Balance of Trade: Mineral sales are dropping

On October 6, Aussies will get an update on the balance of trade for August. This data print is the total value of exports minus the total value of Australia’s imports.

Economists use the balance of trade to measure the relative strength of a country's economy, and it also supports the Australian Dollar when the balance is positive.

July’s reading showed a sharp decline to AU$8.73 billion from June’s record reading of A$17.13 billion as exports plunged due to a slowdown in coal, metal and mineral sales. This drop comes from weakness in China, Australia’s largest export destination, given their weakening economic growth with continued COVID lockdowns.

These slowdowns in China could hurt this month's trade balance numbers again, which would then likely weaken overall economic growth in Australia.

1. US Non-Farm Payrolls: Bad news is good news for the markets

Another crucial data set will be released from the US on October 7, with Non-Farm Payrolls giving us a look into the US job market.

The US economy added 315,000 jobs in August 2022, coming in above market forecasts. The positive from the report was the wage growth that came in lower than expected, which will be another focal point of this reading.

The Federal Reserve wants the red-hot labour market in the US to cool, although that sounds counterintuitive, to help reign in soaring inflation. With labour demand so high, wage growth has continued to grow, something the Fed doesn’t want to see.

If we begin to see a weakening jobs market and lower wage growth, it may give the Fed an option to slowly ease back on its aggressive tightening policy. Like many data points this year, it will once again be bad news is good news for markets.

Will the market rise or fall?

Wealth Within founder and chief analyst Dale Gillham gives his take on whether the market will rise or fall in the near term.

It has now been six weeks since the high in August and on four of those weeks, the All Ordinaries Index closed lower eroding most of the gain from the eight weeks it rose between June and August.

If the market can end this week in positive territory, this may be the first sign that the down move may be over. That said, as we know anything can happen, which is why I continue to urge investors to be careful.

If the market is going to rise until the end of the year, it needs to find support above the June low of 6,581 points. If this occurs, then we should see the market rise next week and continue to rise over the coming month. If this level is broken, then the market will continue to fall away over the coming month with the next level of support at 6,192 points.

Read more on Proactive Investors AU

Disclaimer

September bloodbath; what’s next for ASX; and will RBA slow down rate rises?
 

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