ASX to drop 1.1pc at open, Wall Street sinks as rate hopes fade

Stock exchange operator National Stock Exchange, NSX Ltd, has appointed Max Cunningham as its new chief executive from June 3, subject to approval from ASIC. Mr Cunningham was the head of listings at the ASX from 2013 to 2022 and worked at Goldman Sachs and Macquarie before that.

The NSX is seeking to compete for listings with the ASX and Cboe.

ASX futures down 85 points or 1.08% to 7757 near 7am AEST

• AUD -0.2% to 66.04 US cents
• Bitcoin -1.4% to $US68,080 at 7.08am AEST
• On Wall St at 4pm: Dow -1.5% S&P -0.7% Nasdaq -0.4%
• In New York: BHP +0.03% Rio -1.1% Atlassian -0.4%
• Tesla -3.5% Microsoft -0.8% Apple -2.1% Nvidia +9.3%
• Alphabet -1.7% Amazon -1.1% Meta -0.4%
• VIX +3.9% QQQ -0.4% TLT -0.6%
• Stoxx 50 +0.3% FTSE -0.4% DAX +0.1% CAC +0.1%
• Spot gold -1.7% to $US2337.75/oz at 1.31pm in New York
• Brent crude -1.1% to $US81.03 a barrel
• Iron ore -2.3% to $US119.55 a tonne
• 10-year yield: US 4.48% Australia 4.25% Germany 2.59%
• US prices as of 4.59pm in New York

Flash PMIs for the Eurozone and the US showed that there’s more resilience in advanced economies than expected.

In a note, ANZ Research’s London desk said: “Preliminary PMI data for the US and euro area highlighted improving growth momentum at the mid-way point of Q2 and the need for ongoing caution with respect to monetary policy, particularly from the Fed.”

ANZ also said the message from the PMI data was that services sector activity continued to lead growth, manufacturing activity improved, and output prices were not accelerating despite the pick-up in growth momentum this month.

“For central banks that have a responsibility for optimising economic welfare, the growth climate is welcome. Therefore, the primary uncertainty for rate setters continues to be whether inflation will continue to progress towards target despite economies operating strongly.“

In the US, the May composite output price index was unchanged at 54.1 and since October last year is back within the 50-55 range that prevailed in the decade before the pandemic. For that period, the average output price index reading was 52.4 and real policy rates were negative.

“The index is suggesting price pressures have normalised,” ANZ said. “Intuitively it may also be flagging that with time and patience, service price inflation will ease further given high real policy rates of around 2.5 per cent.

As for the euro area, the output price index fell 1.3pts to 52.5 and is back within the 50.6 to 55 range prevailing from 2017 to 2019. For the six years before that, the euro area composite price index was in contractionary territory and the ECB was aggressively fighting deflation.

“We think the current composite PMI output price data are consistent with the ECB easing policy in June and the FOMC [Fed policy committee] remaining patient, eagerly awaiting further evidence on the inflation path before deciding on the appropriateness of current policy settings.”

Oil slipped as broader investment sentiment soured and traders weighed signs of a weakening physical market ahead of the start of the US summer driving season.

West Texas Intermediate settled below $US77 a barrel for the first time since late February. Crude prices have tracked broader financial markets amid a muddled outlook for the commodity’s fundamentals.

A report on Wednesday showed inventories at the key storage hub in Cushing, Oklahoma, swelling to the highest in 10 months, while US gasoline demand improved marginally ahead of the Memorial Day holiday weekend.

Crude prices have retreated about 12 per cent from this year’s peak — even as global demand heads toward a new annual record — due to plentiful supplies from the Americas, a fragile economic outlook in China and uncertainty over US monetary policy. Federal Reserve minutes from a meeting earlier in May indicated a hawkish stance from officials.

The headwinds have led money managers to trim their bets on rising prices. The prompt spread for Brent, a key market measure, has shrunk closer to a bearish contango structure, which would indicate ample supply.

As a result, the OPEC+ alliance of producers led by Saudi Arabia and Russia is widely expected to prolong current output curbs into the second half of the year when it meets on June 1. Moscow pledged on Wednesday to make up for pumping above its agreed limit, but the country has a mixed track record on compliance.

US Treasury yields surged as data showing strength in US business activity and a tight labor market sparked traders to push back the timing for Federal Reserve interest-rate cuts until the end of this year.

The Fed-policy sensitive two-year yield rose more than 8 basis points to touch 4.955 per cent, its highest since May 2, before easing a touch late in New York.

Meanwhile, rates across maturities were up at least 5 basis points, causing the yield curve to flatten. Trading volume was below average heading into a long weekend, with US markets set to shut on Monday for Memorial Day.

Data on Thursday showed US business activity accelerated in early May at the fastest pace in two years. That came on the heels of a report showing initial applications for US unemployment benefits fell last week.

“The short end is fearful of the Fed,” said Andrew Brenner, head of international fixed income at NatAlliance Securities LLC.

Overnight index swaps contracts tied to upcoming Fed policy meetings now fully price in a full quarter-point rate in December, versus November a day earlier. And for all of 2024, the contracts imply a total of 33 basis points of rate reductions — compared to around 39 basis points at the close on Wednesday.

The added pressure on Treasuries comes after selling on Wednesday following the release of minutes from the Fed’s latest policy meeting, which showed “many” officials questioning whether policy was restrictive enough to bring inflation down to target.

“The minutes show many participants are uncertain about the degree of how restrictive the policy rate is,” said David Rogal, portfolio manager, fundamental fixed income group at BlackRock.

He said the yield curve likely remains in a flattening trend if the economy holds up, and this week the gap between two, and 10-year yields has shifted to its most inverted level since early April. A rising two-year yield is around 0.46 per cent above the 10-year note, up from a low of 0.3 per cent earlier this month.

“If the Fed is going to do a mid-cycle adjustment, which is our base case, they’re not necessarily going into an easing cycle and that’s based on our view of the economy staying fairly resilient, then it’s hard for the curve to steepen beyond the forward rates because they’re not taking policy below neutral,” said Rogal.

Shares of Nvidia, the chipmaker at the centre of an artificial intelligence boom, surged after its bullish sales forecast showed that AI computing spending remains strong.

The shares rose 9.3 per cent to $US1037.99 on Thursday (Friday AEST), adding nearly $US220 billion to Nvidia’s valuation.

The big question heading into the earnings report was whether Nvidia’s latest numbers could justify the dizzying run-up in its stock. The shares had gained 92 per cent this year through Wednesday’s close, fuelled by investor hopes that the company would continue to shatter expectations.

The report didn’t disappoint, and chief executive officer Jensen Huang stoked the excitement by talking about the dawning of a new era. “This is the beginning of a new industrial revolution,” he said in an interview, echoing one of his favourite themes. “This is really exciting.”

“With the AI-theme still delivering and the macro hypothesis intact, we are likely to continue to make new all-time highs,” JPMorgan’s trading team including head of us market intelligence Andrew Tyler wrote in a note to clients.

Tyler sees a mix of at or above-trend gross domestic product growth, positive earnings, and the Federal Reserve on pause as a recipe for a bull market.

Tyler recommends a barbell portfolio strategy composed of the so-called Magnificent Seven stocks and semiconductor companies, along with value and cyclicals like banks, credit cards, automakers and suppliers, and homebuilders.

The upbeat view is once again at loggerheads with the bank’s own chief market strategist, Marko Kolanovic, who just days ago said he does not currently see stocks as an attractive investment given a litany of risks, including lofty valuations, sticky inflation and geopolitical uncertainty.

While it’s not unusual for firms to have different views under one roof, the disconnect at JPMorgan has been amplified since last year, with Tyler correctly calling for all-time highs as Kolanovic predicted a rout that has so far failed to materialise.

Good morning and welcome to the Markets Live blog for Friday, May 24, 2024.

This blog is not intended as investment advice.