Summary: Markets see red on concern FAANG’s will bite into markets, while there is worry the Fed won’t cut rates this year like the market expects, this has resulted in traders booking profits ahead of end of month. Commodities see short term pull back risks, with prices already down from fresh peaks; oil is down 5.6%, iron ore, copper and aluminium lose 2% ahead of the Fed meeting. While Australian shares hold steady, defying negative leads from Wall Street. In FX the US dollar picks up, pushing most currencies off course, with the Aussie dollar down 0.8%. What's the short vs long term narrative.
Markets see red on concern FAANG’s will bite into markets, while there is worry the Fed won’t cut rates this year as markets has priced in
Ahead of the Fed, ECB, and BOE meeting this week, for the first time in 2023, with the central banks potentially setting the course of interest rates for the year, risk management resulted in traders and investors booking profits ahead of end of month, which dragged the S&P500(US500.I) down 1.3% and the Nasdaq 100 (NAS100.I) 2.1%. The worry is that the market believes the Fed will only hike by 0.25% this week and 0.25% next month. Two and done, before cutting in July. There is also a risk the Fed says it has “more work to do”, which could send equities into a tailspin. Our view is given financial conditions have improved, and there is a 20% chance of a recession, the Fed can keep rates higher for longer. This is why we think there could be a short term potential correction, so potentially consider taking profits and buying downside optionality (puts), and consider tight stops. Secondly, the worry is that major tech company earnings will continue to slump, with average overall earnings down 0.3% this quarter, across the 145 of the S&P500 companies. This is why profit taking in Facebook, Apple, Amazon and Google parent Alphabet is occurring ahead of them reporting results. Ultimately, we think their outlooks could set the tone for equities this year. Consider FAANG names like Facebook/Meta are up 61%, Apple is up 10%, Amazon is up 20% and Google’s parent Alphabet is up 12% from recent lows. Click here for more on US earnings.
Commodity short term pull back risk – with prices already down from fresh peaks; oil down 5.6%, iron ore, copper and aluminium lose 2% ahead of the Fed
On Monday oil dropped 2.4%, while most commodities lost almost 1%, with the markets awaiting further evidence China is picking up demand - just as BHP, Rio and FMG alluded to in their quarterly results. It seems traders are torn between real demand physically rising, but awaiting the Fed’s decision this week, which could result in the US dollar spiking, that would ultimately pressure commodity prices down. So these factors raise the risk of a short-term correction across the board. That said, resources prices have been really strong up 17-70% on from their lows. In 2023 alone iron ore and copper are up 9%, Aluminium up 11%, spot gold up 5%. However, with commodity prices falling, it also raises the alarm that Aussie dollar and the Aussie share market could be at risk of a short term correction or consolidation as well. The key is to watch the US dollar index. However keep in mind, over the longer term, commodity prices are supported higher, underpinned by rising demand over course of the year, and lower physical supply. For more on commodities, see Saxo’s Commitments of Traders report, that highlights broad buying slowed in recent weeks.
Australian shares hold steady, defying negative leads from Wall Street. Australian retail sales fall off a cliff, borrowing falls
Australia’s share market, as measured by the ASX200(ASXSP200.I) opened 0.3% higher today at 7,501 defying the futures and US markets negative lead. Not only are Australia shares outperforming US shares this year, but also UK’s FTSE. However, given materials prices could be at risk of a shorter term pull-back, it’s worth pointing out the technical indicators suggest the ASX200’s uptrend is weakening. Our Technical Analyst suggests a possible short term correction down to 7,167 should not be ruled out. However, over the longer term, we think upside in the ASX200 is intact with mining companies to report some of the strongest earnings on record, and provide their strongest outlooks in several years amid China reopening. For stocks, ETFs and baskets to watch, click here. In company news today, Gold Road Resources (GOR) reported a drop in production in the prior quarter and higher costs due to inflationary pressure, but guided for higher grades in 2023. This follows Oz Minerals (OZL) also guiding for higher costs, which paints a picture of what we can expect for full year earnings season next month. In economic news, retail sales fell 3.9% in December, shocking the market, which expected sales to only decline 0.3%. On top of that, borrowing data also missed expectations. Borrowing rose 0.3% in December, vs consensus expecting lending to rise 0.5%. Today’s data is telling as it shows interest rates have taken effect on the consumer, and supports the market thinking that the RBA could potentially pause and then cut rates later this year.
In FX the US dollar picks up, pushing most currencies off course
The US dollar index has bounced up off it low and risen 0.5% and pressured most currencies lower, with the Aussie dollar (AUDUSD) falling 0.8% from its high, with the Aussie buying 0.7061 US. The Aussie against the US has fallen under its 200-day moving average, while there is caution the Fed’s Wednesday’s decision could cause the US dollar to rise. Should the Fed only hike by 0.25% as expected and guide for one more hike, or if the Fed mentions its hikes have been effective, or that it sees interest rates having a lag effect, then the AUDUSD could potentially rally back up. Supporting longer term upside in the Aussie is the rise of China’s economy and commodity buying. From a technical perspective, the bulls may like to hear the 50 day moving crossed above the 200, indicating the longer term rally could remain intact, despite the RSI indicating, there are currently more sellers right now, than buyers.
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