The US market for the second day in a row saw some selling out of Tech into Energy and Banks. Energy stocks are seeing another round of buying after storms in Texas saw Crude Oil jump above $60US. Financials also continue to catch a bid as they benefit from a steepening yield curve. The Major indices in the US closed mixed overnight and seem to be set to consolidate here for a little bit.
In the US investors are expecting more fiscal stimulus soon, this is seeing longer-term bond yields rise are investor price in higher inflation. This is all good news for asset prices including equities. But the risk is that inflation could go up too quickly, which could lead Central Banks to increase interest rates. The FED and RBA want a period of high inflation to make up for the weak inflation that we have seen over recent years. The RBA went out of their way to reinsure everyone that rates will stay low until 2024. However, we need to remember that as the yields get higher Bonds become more attractive, so in the short-term bonds could reach a level where investor move some money back into a safer asset class.
The two major risks we need to watch out for at this stage is- we see another major COVID-19 Wave/lockdown. Or for whatever reason, the FED or RBA changes there to view and start to increase interest rates.
The XJO is set to edge lower on open this morning, putting us just under 6900 – the post-fall highs we have been flirting with recently. The U.S had a fairly lacklustre night but their futures this morning have ticked into the green. If they can remain so during our session, our market should be able to hold these levels if not push into the green.
Local reporting could also help drive us, with RIO reporting and WBC giving a quarterly update. The AUD fell last night which should help our miners and if RIO today and FMG tomorrow report well, we should see strength remain in materials. In addition, U.S financials did well last night and if we see a good update from WBC, strength should also remain in our financials. With both sectors doing well, our market should follow suit as a whole.
US shares were mixed overnight, with weakness in tech stocks helping to force the S&P500 and NASDAQ lower. Economic data was largely positive however, with stronger than expected retail sales, PPI, and industrial production. There was also talk that the rising longer-term bond yields could start to affect share prices should they continue to move higher. There was little news on the US fiscal stimulus front overnight, with President Joe Biden giving a ‘town hall’ speech.
Tech and Basic Materials stocks were the weakest performers overnight, while Telecoms and Oil & Gas stocks were the strongest performers. In the absence of fiscal stimulus and with the rising bond yields, shares may need a bit of a breather before continuing to climb.