US lead points to early gains for Australian stocks

Australia’s share market may rise strongly after solid gains on Wall Street at the end of last week.

RBA governor Philip Lowe. The RBA is widely expected to leave all aspects of its interest rate and bond-buying targets unchanged from their current extremely stimulatory levels after it meets on Tuesday. Picture: Getty Images

Australia’s sharemarket may rise strongly after solid gains on Wall Street at the end of last week amid solid economic data, US infrastructure spending plans and optimism about reopening.

The S&P 500 rose 1.2 per cent to a record high of 4019.87 points on Thursday and futures on that index climbed 0.4 per cent while the US sharemarket was closed on Good Friday.

Overnight futures on Australia’s S&P/ASX 200 index rose 0.9 per cent over Thursday and Friday, suggesting the local benchmark could resume trading near 6890 points — its highest point in more than six weeks — on Tuesday.

“The positive global lead points to a strong gain in the Australian sharemarket when it reopens on Tuesday, although this may depend on what the US sharemarket does on Monday,” said AMP Capital’s head of investment strategy and chief economist, Shane Oliver.

Investors will be looking to see if the S&P 500 can sustain its tentative break above the 4000 chart point when trading resumes on Monday amid renewed upward pressure on US bond yields following the release of stronger-than-expected US economic data on Friday.

Japan’s Nikkei 225 index rose 0.8 per cent on Monday and Singapore’s Straits Times index rose 0.9 per cent while most other Asian markets were closed for holidays.

S&P 500 futures rose 0.4 per cent and Dow Jones Industrial Average futures rose 0.6 per cent while Nasdaq futures were little changed in Monday’s APAC trading.

After falling seven basis points on Thursday, the US 10-year bond yield rose five basis points to 1.7216 per cent in a half-day session on Friday amid US non-farm payrolls and ISM data for March.

US employment rose 916,000, versus 660,000 expected, while the unemployment rate remained at 6 per cent, although average hourly earnings change fell to 4.2 per cent year on year, the lowest level since March last year. The ISM manufacturing index hit a 37-year high of 64.7, versus 61.5 expected.

“Bond markets have been a bit more stable lately — particularly outside the US — helped by a combination of central bank action, the renewed rise in global coronavirus cases and a pause after bond markets became oversold,” Dr Oliver said.

“But it’s still too early to conclude that the bond tantrum is over and there could still be more upwards pressure on yields ahead as headline inflation spikes higher and economic recovery continues. This could in turn drive more volatility in shares.”

However, the cyclical bull market in shares that started in March last year “still has a long way to go” given spare capacity in jobs markets and still low underlying inflation, he added.

Dr Oliver noted that shares still offered a decent earnings yield gap to bond yields, the economy and corporate profits were recovering and central banks including the Federal Reserve and Reserve Bank of Australia were a “long way from raising interest rates”.

“Shares remain at risk of further volatility from rising bond yields and coronavirus-related lockdowns,” he said.

“But looking through the inevitable short-term noise, the combination of improving global growth helped by more stimulus, vaccines and still low interest rates augurs well for growth assets generally over the next 12 months.”

The RBA is widely expected to leave all aspects of its interest rate and bond-buying targets unchanged from their current extremely stimulatory levels after it meets on Tuesday.

However, investors will scrutinise any central bank commentary on the booming housing market and the economic impact of reduced fiscal support after the JobKeeper wages subsidy and JobSeeker dole payment supplement expired last week.

“The focus will likely be on the RBA’s assessment of the resurgence in the property market which will also be the main thing to watch in the RBA’s Financial Stability Review to be released on Friday,” Dr Oliver said.

Internationally, the focus will be on the International Monetary Fund and World Bank spring meetings, which will take place virtually for a second year starting on Monday.

The IMF will release its updated World Economic Outlook on Tuesday, with managing director Kristalina Georgieva indicating that it will include an upgrade to January’s forecast for 5.5 per cent economic growth for this year.

Attention will then turn to a Group of 20 finance ministers’ meeting on Wednesday, where officials may decide to extend the debt service suspension initiative, set to expire in June.

Minutes from the latest Federal Reserve and European Central Bank meetings are due Thursday.

Federal Reserve chair Jay Powell is due to speak at an event on Thursday.