Overnight, the S&P500 failed again at the 4,711 all-time high resistance, Tech and Discretionary stocks hammered lower whilst the more value-based stocks like Banks and Materials pushed higher. Traditionally Value tends to outperform growth when interest rates go up. At this stage, investors are adjusting to the FED meeting yesterday.
We saw strong movement in industrial metals along with Gold and Silver. Iron Ore jumped. Crude pushed higher as well. This is very positive for the Australian market as the local market is more Value-based mining than growth-based Tech.
History shows us that equities continue to uptrend whilst rates go up, but eventually, it will almost always lead to another large correction, like a GFC or the dot com crash. We will need to see economic data backing up the rate rise next year if it eventuates. Otherwise, a crash is not likely for another year or so from when rates start to rise.
It was a big day yesterday which now has put us in a position of certainty. We now know that the US government will not default, Bond buying is no longer needed, and rates may go up next year to help battle inflation. This leave-on major thing to keep an eye on this side of Christmas and that is the Omicron variant.
Cases in NSW have rapidly increased this week seeing the daily cases surpass Victoria hitting 2,200. Vic daily cases came in at around 1,500. At this stage, there are no official talks of lockdowns or some form of restrictions. But we all know how quickly things can change. Where things are uncertain is that we don’t yet know enough about Omicron and its long-term effects. There will be a rush to get people to have their third doses over the coming months which could stop us from going into lockdowns. Offshore we have seen the UK and some countries in Europe reintroduce restrictions, this is weighing on the mood around travel stocks.
Australian Outlook
The XJO is expected to edge higher on open this morning despite a strong pullback in the U.S last night. Yesterday, we fell despite a strong previous session from the U.S, likely led by red U.S futures during our session. We essentially anticipated the rebound from their key all-time high resistance which played out last night. With green U.S futures this morning, our market has stalled, and may retake some ground that was lost yesterday.
Markets will likely remain sideward, awaiting to see if the U.S can push through their all-time high key resistance.
US Markets
US shares closed lower overnight, with technology stocks falling strongly as they reversed their rally from the prior session. Movements on the SP500 and DOW JONES were only mildly lower, as non-tech sectors mostly saw buying. US economic data was mixed, with housing starts and building permits better than expected, though initial jobless claims were higher than expected and manufacturing and services PMIs were lower than expected. Markets continued to digest the Federal Reserve minutes from the session before, with the ‘Fed’ now clearly entering a tightening cycle, which could see interest return to value stocks and which could see growth stocks underperform. The Fed dot-plot suggest that most members see around three rate rises next year, which is actually slightly behind the bond market, which is starting to price in four rate rises. Notionally these rate rises are required to combat inflation, so look for any update on consumer prices in the periods ahead. Eight of the eleven sectors of the SP500 closed higher, but this wasn’t enough to drag the index higher after strong selling in Technology and Discretionary stocks. Financials and Materials stocks fared best overnight.
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Tim Michaelides is the Head Trader at Emerald Financial Group.
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