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Video: Strong US dollar, higher bond yields push investors to take equity profits ahead of Fed speeches

Jessica Amir
Market Strategist

Summary:  Watch our video in under five minutes or read the text below.

What’s happening in markets

Investors bunker into the US dollar, take profits in equites after US eco data blew hot, pre-empting hawkish commentary 

Ahead of the Fed Chair speaking and bevy of other speakers from the Fed giving speeches this week, investors are zeroing in the prospect of more US rate hikes following that wildly hot January US jobs report, strong payrolls growth and a rebound in the US services sector. The US dollar gained 3% from its low, US treasury yields leapt higher, and this pressured broad US and European equities, with some investors taking profits. Meanwhile, with the US dollar index hit its highest level since January, with most metal prices continuing to pull away from fresh highs, with the market ignoring the fundamentals and lack of physical commodity supply. 

 

What to watch; with potential trading and investing ideas

RBA meeting ahead; a 25bps hike is likely to 3.35%, while some economists predict a 40bps hike

The latest RBA indicators have been hot; surging Australian inflation, hotter than expected retail sales numbers, slowing employment (although unemployment is near five decade lows, at 3.5%), yet other metrics such as building approvals are soaring - seeing one of their biggest jumps in a decade. Meanwhile the RBA is contending with signs of a slowing economy; with the services sector in contractionary phase and retail spending falling. Still the RBA is likely to continue to hike rates to the highest in over a decade. A 25-bp hike is expected by most today. However guidance is key, as the market is now pricing the RBA for another ~37 bps of tightening, into a peak in either June or July, and then cutting in September. We’re watching AUDUSD and EURAUD with the AUD having nose-dived as commodity prices fell from their highs, while the USD gathers strength, with the dollar index breaking above 103 for the first time since early January. If the RBA hikes more than expected, a knee-jerk rally up the Aussie dollar is likely.

Gold companies are in focus. World’s two largest gold miners are in talks to combine

In case you missed it, the US-listed gold miner Newmont is attempting to acquire Australia’s gold mining giant, Newcrest in a bid that values the gold miner at $17bn. If the deal goes through it will reunite the two gold miners after being separated for over quarter of a century. It will also be the world’s biggest takeover of 2023. Overnight the Canadian listed Newcrest jumped 14%, ASX listed Newcrest shares jumped 9% yesterday. Importantly, the takeover offer reflects the world’s increasing appetitive for gold, given gold generally outperforms equites when the Fed pauses rate hikes. Among retail investors, many have been increasing their exposure to gold companies ahead of central banks easing.

US plans a 200% tariff on Russian Aluminium; yet prices continue to fall on a higher US dollar

President Biden has yet to give the go-ahead, however it’s being reported the White House was mulling an outright ban. The 200% tariff is expected to have a limited impact on prices given Russia accounts for 6% of global aluminium. Aluminum prices held losses, largely pressured by a higher US dollar. In the US, Alcoa and Century Aluminum shares fell. In Australia keep an eye on Rio Tinto and Alumina. Investors may like to consider prices are paring back from their highs amid a higher US dollar, yet concerns linger that supply cannot keep up with demand for high purity aluminium. The same applies to most metals. There are risks of a further pull back in commodity pricing should the US dollar continue to run up, however, the market will likely once again focus back on fundamentals. So keep an eye on the US dollar.

 

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