China lockdowns see Oil lower, Tech falls on inflation issues

The SP500 and Dow closed strongly lower overnight with the Nasdaq now down 8% from the March highs, the SP500 is nearing 5%. This shows that the current theme is selling in growth, with value stocks holding strength. The only difference last night is that energy joined in the selling with Crude trading lower. Crude prices have come off as it seems the lockdowns in China might last longer than first thought, affecting the current demand.

All in all, this will help take pressure off inflation in the next few months, but tonight’s US CPI reading is expected to be a big one with analysts expecting 8.4% YOY in the US which will be the largest reading since the early 80s.

On the back of the runaway inflation, many are expecting back-to-back 0.50% rate hikes in the next few FED meetings. Additionally, there are talks the FED will start to sell assets they purchased throughout the pandemic. Officials discussed the idea that a maximum of $60 billion in Treasury and $35 billion in mortgage-backed securities would be allowed to roll off, phased in over three months, and likely starting in May.

Locally the big four banks are expecting 4 rate hikes from the RBA this year, but the RBA has still not given a real indication of when they will start to increase rates. Inflation is not as bad here as overseas and they are still looking to achieve CPI sustainably in the 2-3% range and for wage inflation to pick up. The Australian bond markets tell a different story with the one-year government bond now trading at 1.34%.

With parts of China still in lockdown, we are seeing the likes of metals and Iron Ore sell-off, we will need to monitor this as it could trigger some short-term selling in the miners. If so, we could see another buying opportunity as the lockdowns in China will hopefully come to an end in the coming weeks/months.

Australian Outlook

The XJO is expected to edge higher on open this morning, despite a small pull back in the U.S on Friday. Furthermore, their futures have edged into the red which will put further strain on our market today.

On Friday we rebounded more than our fair share compared to the U.S the night before, once again showing our market’s out-of-character resilience when comparing to the U.S. With the U.S down on Friday, and their futures in the red this morning, today will be a test of that resilience. On Friday we held 7450, which seems to have supported our market the past few sessions.

This morning’s open at 7,500 will have us back firmly trading within last week’s consolidation range. If we do see continued strength, we will need to first break the top of the consolidation range at roughly 7,540 if want to have a shot at our all-time highs at roughly 7,625.

Ultimately, there are a lot of head winds the market needs to face for a continued run higher. Interest rates and the war continue to weigh on sentiment, although markets have shown resilience the past week or so against the growing opinion of a Fed that will move too quickly. On Tuesday evening, their CPI numbers will be released for March. On Wednesday morning, New Zealand’s central bank will give a cash rate decision. The same evening UK CPI, and U.S PPI numbers will be released. Canada’s central bank on Thursday will give a cash rate decision, U.S consumer spending numbers will be released, and locally we will get an update on employment change. All of these announcements, (some larger than others) should help develop the global narrative around interest rates and inflation.

Finally, U.S reporting will kick off this week, which will likely keep volatility alive as the market sorts between the winners and losers.

US Markets

US shares closed firmly lower overnight, with each of the three major indices again closing heavily in the red. Markets were displaying extreme nervousness ahead of tonight’s CPI data, which is expected to show US consumer prices growing at a rate of 8.4 percent year-on-year. Persistently high CPI readings are expected to lead to monetary policy that is so tight that it will cause a recession in a couple of years time. We are also about to enter a US company earnings reporting season, which is usually a bullish time of year for prices, it will be interesting to see if this season is enough to drag shares out of their current malaise. Wednesday night brings the first of the major reports, with JPMorgan, BlackRock, Fastenal, and many more reporting results. Every major sector of the SP500 closed lower overnight, with Energy and Technology stocks faring the worst. Industrials, Financials, Materials, and Staples fell the least.