Market Insights Today: Fed Hikes “still have some ways to go”. Weight will be put on eco data ahead – 3 Nov 2022

What is happening in markets?

The Nasdaq 100 (USNAS100.I) & S&P 500 (US500.I) drop after Fed made hawkish remarks post lifting rates 0.75%

US major indices dropped on Powell's hawkish comments. The S&P 500 shed 2.5% and the Nasdaq plunged 3.4% with megacap tech stock copping the brunt of the selloff with Apple (AAPL) down 3.73% and Tesla (TSLA) down 5.6% with the EV giant reportedly shutting its flagship showroom in China, in Beijing as it shift strategy. What prompted high PE stocks being sold off was that Treasuries yields rose across the curve, with the 10-years up 4 bps to 4.08%. The dollar reversed course and rose against every G-10 peer save the yen. So, the bottom line is, the market will now be contending with a risk-off tone, until the next US economic data sets prove the Fed can pivot. Oil moved higher, while corn and wheat dropped on grain-corridor developments. Elsewhere, Boeing (BA) shares rose 2.8% with the plane maker saying it could generate $10 billion in cash annually by mid-decade, once it turns around its operations after years of setbacks.

Australia’s ASX200 (ASXSP200.1) futures suggest risk-off mode will be enacted with tech stocks on notice. Focus will be on milk

Aussie tech stocks are likely to come under pressure with US bond yields rising again. However, there may be bright sparks today. Iron ore (SCOA) rose 0.4% sitting back above $80.85, which might support iron ore companies shares. That said, BHP closed 3.1% lower in NY. A2Milk (A2M) may garner attention after the US FDA gave approval for a2 Milk to be sold in the US. Bubs Australia (BUB) may likely 'piggyback' on any gains. That said, you could expect infant formula stocks to gain interest, particularly as China’s outgoing premier signal China is striving to build sustainable development. In other news; Rio (RIO) moved in on taking over a Canadian copper-gold company, Turquoise Hill Resources (TRQ). On Wednesday in Australia, Rio offered C$43 per share for the Canadian miner, saying that is its best and final offer. Rio is seeking to buy 49% of the Canadian miner, that it doesn’t already own, in a deal valued at around C$4.24 billion. Turquoise Hill Resources shares surged The Investor meeting to consider the takeover is set for November 8. Rio is also bidding to gain control of Mongolia’s Oyu Tolgoi, one of the world’s biggest copper mines.

Crude oil (CLX2 & LCOZ2) rocks up after OPEC raised its forecast for oil demand

Oil rallied for several reason; firstly OPEC rose its forecasts for world oil demand in the medium to longer term, saying that $12.1 trillion of investment is needed to meet this demand. Second, an EIA report showed US gasoline inventories fell to the lowest since 2014 and East Coast distillate stocks slide to a record low seasonally, which intensifies supply concerns. Crude supplies also fell. Natural gas rose in the US and in Europe.

Fed says ‘we still have some ways to go’; and it will make ‘ongoing increases’ until rates are ‘sufficiently restrictive’. What to watch next, what it means for equities

Federal Reserve Chair Jerome Powell stuck to his campaign to bring inflation under control, saying “we still have some ways to go”, before rates were ‘sufficiently restrictive’ but the path may soon involve smaller hikes. Still, Powell sees it may be appropriate to make smaller hikes, as soon as December, or at the meeting after. But, he also said it was very premature to be thinking about pausing. After the Fed raised rates by 75 basis points on Wednesday, Powell said “incoming data since our last meeting suggests that ultimate level of interest rates will be higher than previously expected.” He also mentioned rate hikes have a lag effect on the economy, and the Fed needs to take this into account. This means, the devil will be in the detail ahead, as in the upcoming economic data which the Fed will respond to. Provided the upcoming economic data is strong, shows the US economy is, then the Fed can essentially keep hiking. For equites this means the risk-off mode in high PE stocks, like tech can possibly continue, inversely, defensive and commodity plays with rising cash flows might continue to garner interest. Saxo’s Head of FX Strategy says, so cue tomorrow’s ISM Services, Friday’s US jobs report, the October CPI due out next week, November 11 next week, and the November CPI report due December 12.

China’s Li Keqiang signals a potential economic recovery, fueling commodities and China’s markets

China’s outgoing premier Li Keqiang said China will strive for a "better" economic outcome and promote stable, healthy and sustainable development, saying China’s economy is showing signs of stabilizing, as well as “rebounding momentum" thanks to stimulus. This has supported gains in iron ore (SCOA) and also supported optimism in Asian equites.

Australian lending and building approvals fall more than expected, giving the RBA greater cause to remain dovish. Keeping AUDUSD on notice

House lending in Australia fell 8.2% in September (far more than the market expected) while building construction lending fell 36.6%, with the weaker data sets coming out just a day after the RBA remained dovish - rising Australia’s official cash rate by 25bps (0.25%) to 2.85%. On Tuesday the RBA acknowledged tighter financial conditions and the ‘full effect’ of increased interest rates are yet to be felt in ‘mortgage payments’, but the rate hikes since May, combined with higher inflation have already put pressure on household budgets. We believe the RBA could increasingly become dovish despite inflation running away to the upside. We think the RBA may be forced to potentially pause on rate hikes sooner, as they have done in history, despite peak inflation continuing to rise YoY. The AUDUSD remains under pressure for this reason. Plus until the Fed has reason to pivot the US dollar remains supported.