Trader's View - Stocks keep sliding post-Fed

Stocks fall as markets adjust US rate expectations

Traders have gone about repricing a world without the same imminence of rate cuts from the US Federal Reserve overnight. US Treasury yields have climbed markedly, during the North American session in particular, dragging with it stock indices. The
S&P 500 has traded 0.21% lower, as traders apparently take their profits and adjusted their forecasts in line with the new dynamic. The action seen in the last 48 hours has given undue merit to the “sell-in-May-and-go-away” maxim; but however shallow the saying, profit-taking from all-time highs, and at that, overbought levels, has (ostensibly) proven the rational course of action for market participants right now.

The necessity of a pullback in US stocks

It’d be of little surprise to any clued-up investor or trader as to why the markets’ pull back has transpired. Leading into yesterday’s US Fed meeting, the risk was widely called, and very well telegraphed by pundits. There was a sense US interest rate expectations weren’t on par with reality. But the short-term vagaries of market psychology drove rational folk to buy into the market, chasing momentum, after the S&P 500 hit its all-time highs. The giddiness is over now, and what is being witnessed is a sensible recalibrating of market participants’ positions, more aligned with current market fundamentals.

US inflation the key risk, ahead of NFPs

The pull-back in US stocks ought to be transient, provided inflation and inflation expectations don’t blow-out. The risk of this happening is quite low, although market measures of implied inflation have shifted higher in the past 24 hours. In light of this risk, the major event in the next 24 hours will be US Non-Farm Payrolls data, with key wages growth component of the data to be of most interest. A big beat on this number could add further to bets of higher inflation, and less accommodative monetary policy from the Fed — and therefore threaten to exacerbate the current market sell-off.

US Dollar showing few signs of weakness

If we were to see an upside surprise in wages growth out of the NFP data, then it would likely only add to the might of King Dollar. The Greenback lifted across the board last night, courtesy of the rise in US Treasury yields. With the US economy the only major, developed economy looking in anything resembling a healthy state just at present, it’s difficult to imagine anything but a continuation of the Dollar’s upward trend. By extension, of course, this does not bode well for the Aussie Dollar: once again the local unit flirted with life in the 0.6900 handle overnight.

The other macro-stories, ex-US

In the interest of balance, the US macro-story, while clearly the most significant, wasn’t the only thing driving market activity overnight. Numerous other (albeit lower impact) events transpired, and shifted market pricing around modestly. European PMI figures were dropped, and they were generally better than expectations, leading to a relatively (and only relatively) good day for the DAX. While the Bank of England met, and kept interest rates on hold at 0.75% as broadly expected, but cut its inflation expectations in the process for the UK economy.

The ASX to recover some of its losses

This morning, SPI Futures are suggesting a 7-point lift to the ASX 200 at the open, belying the down-day across global equity markets. The weaker Australian Dollar might have something to with this, with few other clear, positive leads apparent for the market. The jump at the open will do relatively little to erase yesterday’s tumble, which saw the ASX 200 drop 0.59%. It was a sell-off with quite a level of breadth and activity behind it, too: volumes were above average for the day, and market breadth was a meagre 33%.

Bank shares giveth, and bank shares taketh

In a reversal of fortunes from the prior day’s trading, it was the financial stocks that drove the losses in the ASX 200 yesterday. Stripping 22 points from the index, bank stocks took a spill after NAB missed profit expectations, reported a bigger than expected narrowing of its net interest margin, and slashes its dividend from $0.99 to $0.83 per share. Backing on from ANZ’s results the day prior, NAB’s earnings cast doubt on the hope of a trend-reversal in Aussie bank shares, with Westpac’s results on Monday now the next major for bank-share, and ASX 200 traders.