ASX to bounce higher as Wall Street rebounds

Stocks rebounded on Wall Street on Monday (US time), clawing back most of their sharp loss from last week, as the initial jolt passes from the Federal Reserve’s reminder that it will eventually offer less help for markets.

The S&P 500 snapped 1.4 per cent higher and recovered nearly three-quarters of its worst weekly loss since February. Oil producers, banks and other companies that were hit particularly hard last week led the way.

Wall Street surged higher to kick off its week. Credit: NYSE

The Dow Jones Industrial Average gained 1.8 per cent and the Nasdaq composite rose 0.8 per cent. It sets up the Australian sharemarket to bounce higher after a dismal session to start the week. At 6.54am AEST, futures are pointing to a jump of 89 points, or 1.2 per cent, at the open for the ASX. On Monday, the ASX shed 1.8 per cent.

Investors are still figuring all the ramifications of the Fed’s latest meeting on interest-rate policy, where it indicated it may start raising short-term rates by late 2023. That’s earlier than previously thought. The Fed also began talks about slowing programs meant to keep longer-term rates low, an acknowledgment of the strengthening economy and threat of higher inflation.

The market’s immediate reaction to last week’s Fed news was to send stocks lower and interest rates higher. Any shift by the Fed would be a big deal, after investors have feasted on easy conditions with ultra-low rates for more than a year. Higher rates would make stock prices, which have been climbing faster than corporate profits, look even more expensive than they do already.

But it’s not like the Fed said it will jack rates higher off their record low of nearly zero anytime soon.

“If markets are worried about a march back to more normal monetary and fiscal policy as the economy recovers, it will be a very long march,” Barings chief global strategist Christopher Smart said in a note. In the meantime, support from both the Federal Reserve and the U.S. government should continue to help stock prices, even if they do look expensive compared with history, he said.

Companies whose profits are the most closely tied to the economy’s strength and inflation were among the market’s strongest on Monday.

Hess, Marathon Oil and Devon Energy all rose at least 6.9 per cent as energy stocks rallied with the price of oil.

Banks were also strong, with Bank of America up 2.5 per cent and Wells Fargo climbing 3.7 per cent.

High-growth companies able to flourish almost regardless of the economy lagged behind, meanwhile. It’s a reversal from last week’s trend, when investors rattled by the Fed piled back into the biggest winners of the pandemic.

Amazon slipped 0.9 per cent Monday, for example, and the lagging performance for tech meant the Nasdaq was trailing other indexes.

Shorter-term yields slipped, and longer-term yields rose in another reversal from last week’s initial reaction to the Fed news.

The two-year Treasury yield dipped to 0.25 per cent from 0.26 per cent late Friday, while the 10-year yield rose to 1.49 per cent from 1.45 per cent.

More bumps may be ahead for markets, which had been mostly quiet for weeks before the Fed’s announcement. Fed Chair Jerome Powell will speak before a House subcommittee on Tuesday about the Fed’s response to the pandemic.

On Friday, investors will see what the Federal Reserve’s preferred gauge for inflation says about May. Prices have been bursting higher across the economy, from airfares to restaurant meals, but the Fed has so far said it expects the big increases to be only temporary. If it proves to be longer lasting, the Fed may have to get much more aggressive about raising rates.

Corporate deals helped lift shares of some companies well beyond the market’s gains. Industrial products maker Raven Industries jumped 49.3 per cent on news it is being bought by CNH Industrial. Engineered products company Lydall surged 85.4 per cent on news of its sale to Clearlake Capital-backed Unifrax.

Wall Street’s strong gains followed up on a tumultuous day of trading that preceded it in Asia.

Japan’s Nikkei 225 sank 3.3 per cent, while Hong Kong’s Hang Seng fell 1.1 per cent in the first trading following Wall Street’s tumble on Friday. South Korea’s Kospi lost 0.8 per cent, but markets calmed as trading headed westward.

Across Europe, stock indexes made mostly modest gains. Germany’s DAX returned 1 per cent.

AP

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