The ASX is likely to start fairly flat this morning, with ASX futures pointing to a small dip in early trading.
The ASX200 has been subdued this week, as investors wait with bated breath for the RBA’s next rate hike decision – more on that in a moment.
European and Chinese markets were closed almost across the board yesterday for Labour Day, May Day and UK Bank holidays, one particular British tradition we seem to have missed out on.
The US Fed and European Central Bank will also be announcing rate hike decisions this week, likely by tomorrow for the Fed, which is expected to pause hikes, and Thursday for the ECB, which analysts expect will continue to raise rates.
More from IG market analyst Tony Sycamore.
Which way are the markets moving?
U.S Equity Markets
“A quiet session overnight as investors digested the JPMorgan (NYSE:JPM) takeover of First Republic Bank (NYSE:FRC), recent economic data, and higher US yields following a string of corporate bond deals and improved risk sentiment,” Sycamore writes.
“Starting with First Republic, regulators announced that they would close First Republic Bank (NYSE:FRC) and sell off its deposits and most assets to JPMorgan.
“All depositors will retain access to their cash in the second biggest banking failure in US history, behind Washington Mutual in 2008.
“ISM manufacturing data rose to 47.1 in April, above forecasts for a rise of 46.8 as new orders and employment rebounded.
“Nonetheless, it was the sixth consecutive month the index has printed in contractionary territory (below 50) and will do little to ease year-end slow-down fears.
“Neither will the 15 basis point (bp) rise in 10-year bond yields as Meta, Comcast (NASDAQ:NASDAQ:CMCSA) Corp and Hersey Co issued a large tranche of corporate debt.
“According to CNN, last week's tax payments pushed the U.S. debt ceiling calamity date out to the second half of July – which is still earlier than some are forecasting.
“Attention turns to key central bank meetings and earnings reports from companies, including AMD (tomorrow) and Apple (NASDAQ:AAPL) (Thursday).
“The S&P500 remains at the top of its multi-month 4200-3800 range.
“While below range highs 4210/00 area, we continue to look for a test of 4000 and then 3800 in the months ahead.
“However, should the S&P500 see a sustained break above 4200/10 (three daily closes above), it will put the August 4327 high on the market’s radar.”
ASX200
“The ASX200 added 25 points (+0.35%) yesterday to close at 7334, kicking off a new month with a positive start,” Sycamore reports.
“The Utilities (+1.26%) and Energy (+1.05%) Sectors were the strongest, while IT (-1.36%) and Materials (-0.42%) were the weakest links.
“Notable moves at a stock level included Sezzle, which added 14.63% after it reported its third straight profitable quarter. Resmed gained +6.59%, and Lake Resources added +5.95%.
“In contrast, EML Payments (ASX:EML) fell 5.56%, Appen fell 4.78%, and Silver Lake Resources fell 4.72%.
“Overall, it was a quiet day ahead of today’s RBA meeting and upcoming half-yearly reports for NAB, ANZ and Westpac.
“For today’s RBA meeting, we are confident, as is the market, that the RBA will stay on hold, as previewed here.”
“As regular readers would know, we are very happy to push a tactical bullish or bearish view in the ASX200 when we have a high-conviction view which have played out well.
“However, right here, it’s unclear as to whether equity markets continue to climb a wall of worry or succumb to the negative seasonals in the May – June period that typically sees a pullback in the vicinity of 3-5%.
“The Australia 200 points to a flat open this morning at 7333.”
How likely are further rate hikes this year?
Janus Henderson Australian Fixed Interest team investment strategist Frank Uhlenbruch believes the economy may finally be cooling.
“The current tightening cycle is maturing and heading towards the plateau phase,” Uhlenbruch writes.
“While the March quarter CPI recorded broad based inflation, the rate of inflation has begun to slow, and with trimmed inflation lifting by 1.2%, the RBA doesn’t have the smoking gun needed to make a May tightening a certainty.
“We still think there is a case for one final tightening taking the peak to 3.85% given labour market strength and building wage pressures. Furthermore, activity measures remain strong at the margin.
“If the RBA chooses to pause in May, we would expect them to maintain a strong tightening bias with a move in June or July likely.
“We suspect that policy conditions are tight enough to push the economy into a period of sub trend growth rather than outright recession.
“In our view, monetary easing is unlikely this year with the window for easing opening in the first half of 2024 as a building output gap reinforces the trend of disinflation.
“We currently see market pricing of a small chance of one further tightening, with an easing fully priced by April 2024 and a cash rate of around 3.10% by the end of 2024 as not that wildly off the mark.
“We currently see the Australian yield curve as broadly valued. We remain on the lookout for tactical opportunities to add duration on spikes in yields on central bank signalling and data flows.
“As the cumulative impact of tighter financial conditions continues to grip and the cycle ages, our focus in the credit space is towards defensiveness, with a keen focus on risk-adjusted returns.
“Our strong bias is towards high-quality, liquid credit and issuers that can survive and thrive through a range of macro-economic scenarios.
“We are avoiding illiquidity, complexity and leveraged sectors, where we anticipate balance sheets will have to contend with a painful period of adjustment in a higher cost of capital environment.
“Lastly, by adopting a patient and disciplined approach to extending risk and reserving ample investment capacity, we will be well placed to take advantage of any further market dislocations.”
In other market news
The US dollar gained overnight, with the Euro falling from US$1.1032 to US$1.0963 and near US$1.0975 at the US close.
The Aussie also fell, sliding from US66.67 cents to US66.24 cents and near US66.30 cents at close.
The yen was also driven down, slipping from 136.58 yen per US dollar to JPY137.52 and was near JPY137.45 at the US close.
Oil and gold also fell, with crude dropping 1.5% over night on weak Chinese demand, and the precious metal slipping 0.3% to US$1,992.20 an ounce.
With the successful take over of the First Republic Bank (NYSE:FRC) calming banking collapse fears, Bitcoin slipped 4.3% overnight to US$27,974.
"Providing the latest pullback in Bitcoin remains above support at $25,000, we remain positive and expect to see Bitcoin retest and break the mid-April $31,035 high," writes IG analyst Tony Sycamore.
Finally, base metals rose but were weighed down by China’s poor economic performance in recent times – copper futures lifted 1.2%, and aluminium futures gained 1.3%.
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