Geopolitical tensions flow through Red Sea and Taiwan Strait, prompting an ASX pullback

Our XJO is expected to open around 22 points lower this morning, at roughly 7,560 index points. This follows moderate falls from the US on Friday. Overall optimism remains around the potential for interest rate cuts this year. However, potential negative factors are also starting to build-up. These include recent natural disasters, including a massive earthquake in Japan (with more expected), as well as flooding in South-East Queensland and other parts of Australia.

Additionally, there are increasing geopolitical tensions, including attacks on shipping in the red sea, other attacks from Iranian proxies, and a renewed Russian offensive in Ukraine, which may not be helping sentiment.

If we do see a pullback, then roughly 7,500 is the next key level of support. If selling is aggressive, we could blow past it with 7,450 and 7,400 being the following key levels.

US Markets

Equity markets closed mostly lower overnight, with the Dow Jones up +0.1%, S&P 500 down -0.6% and NASDAQ down -1.6%. IMF’s Chief forecast the US economy to “definitely” head for a soft landing thanks to the Fed’s “decisiveness” in taming inflation.

European Markets

European equity markets closed mostly lower overnight, with the Stoxx Europe 600 down -0.1%, German DAX up +0.1% and U.K. FTSE 100 down -0.2%.

Food inflation in UK stores fell sharply in December to its lowest level in more than a year, slowing to +6.7% vs +7.7% in November.

Asian Markets

Asian equity markets closed mostly lower overnight, with the Shanghai Composite down -0.4%, as data revealed China’s factory activity shrank in December with official manufacturing PMI declining to the lowest level in six months while non-manufacturing PMI improving boosted by expansion in the construction sector as government-led infrastructure investment accelerated in recent months. A slide in home sales accelerated with the value of new home sales among the 100 biggest real estate companies falling -34.6% y/y to 451.3bn yuan, with sentiment further hurt as Chinese President Xi Jinping reiterated his claim that Taiwan would “surely be reunified” with China. 

The Hang Seng was down -1.5%, as data revealed Hong Kong’s property market in 2023 posted the fewest number of transactions in 33-years.

KOSPI was up +0.5%, amid foreign investor demand for chipmakers, as the nation kept a short-selling ban in place. Nikkei 225 was closed for a holiday.

WTI oil is trading at US$70.49 a barrel.

Iron ore price is at US$130.33 per ton. 

Spot gold is trading at US$2059 per oz.

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