Australian investors are looking at a flat start to the week, with ASX 200 futures down just three points to 7,226.
The ASX200 finished 1.8% higher last week at 7,251, snapping a three-week losing streak led by standout sectors IT (4.8%), Financials (3.38%), Materials (3.08%) and Energy (+2.79%) sectors. On the downside was Healthcare (-5.86%); the only sector to close lower following a downgrade for biotech giant CSL.
A flat start for the ASX comes as major US benchmarks eased after an uneventful Friday session, noting that Wall St had a strong rally last week.
The US could, however, see a pullback with IG Markets analyst Tony Sycamore noting, “Despite equity market optimism, the rates market isn’t buying into the idea that the Fed has ended its tightening cycle. As recent RBA and BoC meetings showed, a ‘pause’ is only good, if the data that follows cools.
"The US rates market is pricing in a 75% probability (20bp) of a 25bp rate hike at the July meeting. This week's key events in the US will be Fed chair Powell’s Testimony to Congress and Flash PMIs for June.
“After extending into overbought territory, we noted at the end of last week that we were wary of a pullback developing in the coming sessions. The view remains that buyers will use pullbacks to position for the next leg higher towards 4,600.
"Aware that only a sustained break below support at 4,165 (SPX), and 4,215 (Sep contract) would negate the positive medium-term outlook.”
What happened last week
Here's what we saw (source Commsec):
US markets
The S&P 500 index ended a six-day winning streak on Friday with the market facing the test of a massive options expiration.
Comments from US Federal Reserve officials curtailed optimism that the central bank is nearing the end of its aggressive interest rate hikes.
A 1.7% decline in Microsoft (NASDAQ:MSFT) shares and a 1.3% dip in Amazon.com (NASDAQ:AMZN) shares weighed on the S&P 500 and the Nasdaq indexes. Micron Technology (NASDAQ:MU) shares fell 1.7% after warning of a bigger hit to global revenue from a Chinese ban on the sale of its memory chips to key domestic industries. But Adobe (NASDAQ:ADBE) shares climbed 0.9% after the Photoshop maker's earnings forecast surpassed analysts' estimates.
At the close of trade, the Dow Jones index fell by 109 points or 0.3%. The S&P 500 index slid 0.4% and the Nasdaq index shed 93 points or 0.7%. For the week, the Dow added 1.2%, the S&P 500 rose by 2.6% and the Nasdaq gained 3.2%. The S&P 500's weekly gain was its fifth in a row. And the Nasdaq logged its eighth consecutive week of gains, its longest winning streak since March 2019.
European markets
Closed at a three-week high on Friday.
Household goods stocks (+1.9%) led gains. China-focused luxury stocks LVMH (+3.0%) and Richemont (+3.1%) both rose.
The continent-wide FTSEurofirst 300 index gained 0.6% and was up 1.6% for the week. And the UK FTSE 100 index rose by 0.2% with shares of supermarket group Ocado (LON:OCDO) lifting by 7.4%. The index posted a weekly gain of 1.1%.
Currencies
Were weaker against the US dollar in European and US trade.
- The Euro fell from US$1.0968 to US$1.0917 and was near US$1.0935 at the US close.
- The Aussie dollar dipped from US68.97 cents to US68.56 cents and was near US68.75 cents at the US close.
- The Japanese yen eased from 140.63 yen per US dollar to JPY141.92 and was near JPY141.80 at the US close.
Commodities
Global oil prices rose by more than 1% on Friday, as higher Chinese demand and OPEC+ supply cuts lifted prices, despite expected weakness in the global economy and the prospect for further interest rate hikes.
- The Brent crude price rose by US94 cents or 1.2% to US$76.61 a barrel.
- The US Nymex crude price added US$1.16 or 1.6% to US$71.78 a barrel.
- Brent posted a weekly gain of 2.4%.
- The Nymex rose by 2.3%.
Base metal prices were mixed on Friday. The copper futures price fell by 0.3% as data showed growing inventories on the London Metal Exchange, highlighting an improving supply picture. But the aluminium futures price rose by 1.1%.
- For the week, copper lifted by 2.5%.
- Aluminium fell by 0.1%.
- The gold futures price rose by US50 cents or less than 0.1% to US$1,971.20 an ounce.
- Spot gold was trading near US$1,957 an ounce at the US close.
Gold recorded its first weekly loss in three, down by 0.3%, after hawkish signals from both the US Federal Reserve and European Central Bank.
Iron ore futures added US9 cents or 0.1% to US$113.02 a tonne, benefiting from strong expectations of more stimulus to be rolled out to help the bumpy post-COVID-19 economic economy in top steel consumer China.
Iron ore posted weekly gains for a third week in a row, lifting by 0.1%.
Three things to watch for the week ahead
eToro market analyst Josh Gilbert shares his three things to watch in Australia in the coming days.
1. RBA Meeting Minutes - Are more hikes justified?
The RBA 'surprised’ markets again at the start of June by hiking Australia’s cash rate to 4.1% after a stronger-than-expected inflation reading. Given the RBA’s unexpected hawkishness this year, the ASX200 has come under pressure, with investors being left wrong-footed after expecting rate cuts by the end of 2023.
Next week’s meeting minutes should provide investors with further insight into the board’s decision to raise the cash rate when most economists felt the cash rate should stay on hold.
The key takeaway from the rate decision was that the door is still open for more hikes if required and interest rates may still have further to go as the RBA pointed towards upside risks to inflation. Their hawkish tone, though, may have been matched this week with the stronger-than-expected jobs data, which will spark fears of further wage increases and prolonged inflation.
2. Will China continue to cut rates?
This week, China ramped up its efforts to help boost the economy as its property market continues to weaken and business investment slumps. The People’s Bank of China (PBOC) cut rates on its seven-day reverse purchase rate and medium-term lending facility.
Both cuts followed data that showed further signs of weakening economic activity, with industrial output slowing to 3.5% from 5.6% in April and retail sales grew by 12.7% but below expectations.
The cuts, alongside the weak data, point toward a further reduction in lending rates next week. This will be good news for Chinese stocks, which climbed this week after the cut and local stocks exposed to China, such as BHP (ASX:BHP), Fortescue (ASX:FMG) Metals and Rio Tinto (ASX:RIO). Although more cuts are on the horizon, policymakers still have plenty to do in order to shift this recovery into 1st gear, particularly direct support to the property sector.
3. Can AI help productivity and boost the economy?
There are only two ways to grow economies - more people (demographics) or more output per person (productivity). Despite tech advances over the years, productivity has been stagnant or grown slowly and in Australia, this has been flagged by the RBA as a key concern in recent months when handing down their interest rate hikes.
An AI-powered boost in productivity would be important for economies. It’s also good for markets, with eToro’s latest Retail Investor Beat demonstrating that 58% of Australians are looking to maintain or increase their investment in sectors that stand to benefit from AI.
This AI tech boom is not without a potential downside, however.
Undoubtedly, AI will disrupt industries and companies will reduce headcounts if they feel they are more efficient with AI. The good news is, like any industrial breakthrough, new industries and jobs will be created, which will open up plenty of opportunities.
After all, most job types today did not exist 50 years ago – and inversely, you wouldn’t find new job openings for lift operators, signallers or lamp lighters on a careers website. These far-reaching industrial changes can be vital long-term, but the transition can cause tension as businesses and employees move quickly to adapt.