ASX inches closer to record highs on rate cut hopes

Investor hopes of interest rate cuts have caused the Australian sharemarket to briefly break its previous record closing high, as the market welcomed signs of weaker consumer spending, ahead of key data on inflation.

The S&P/ASX 200 briefly touched 7629.8 points on Tuesday morning, its highest point since August 2021 when the market closed at 7628.9, but still below the intraday high of 7632.8 set in the same month. It closed 21.8 points, or 0.29 per cent, higher at 7600.2, led by a rally in local tech stocks.

The ASX is closing in on a record high.Credit: Daniel Munoz

Morgans investment adviser Brooke Gardener said investors were becoming increasingly positive about the local index amid easing inflation and signs from the US Federal Reserve it will begin cutting interest rates this year.

“The market is trading back to highs … and that price is really reflective of the largest weighted stocks on the markets, particularly the banks which have had a multiple re-rate that has pushed up valuations,” Gardener said.

“More broadly, investors are more positive as we see a likely peak in interest rates.”

eToro markets analyst Josh Gilbert said the December retail sales data, which showed spending fell 2.7 per cent from November – sharper than expected – had largely driven the market on Tuesday. The fall is a step in the right direction, as the Reserve Bank considers the data when it meets for the first time next week to determine where interest rates are headed next.

Wednesday’s inflation data for the December quarter will be another key figure for the RBA, but Gilbert said unemployment and retail sales data “more than underscored” the board was done with hiking rates. Analysts expect the consumer price index to rise 4.2 per cent in the December quarter, down from 5.4 per cent in the previous three months.

“This is all good news for bringing forward the rate cut expectations,” Gilbert said. “[The index closed lower] because whenever you get to record highs, there is profit taking. Investors are potentially nervous about Q4 data [on Wednesday].”

He expected a stronger year for the ASX as falling interest rates will help boost the mining, financial and healthcare sectors, which weigh heavily on the bourse.

Five out of the 11 sectors were trading in the green on Tuesday, with industrials (down 0.34 per cent) the worst hit.

Northern Star Resources (up 2.93 per cent) led the rally among large-cap stocks, followed by EBOS Group (up 2.59 per cent) and Atlas Arteria Group (up 2.24 per cent).

On the flipside, Mercury NZ was the weakest mega-cap stock after its shares fell 2.91 per cent, followed by QBE (down 2.16 per cent) and Meridian Energy (down 2.07 per cent).

It’s a big week on Wall Street. Credit: Bloomberg

On Wall Street, the S&P 500 jumped by 0.8 per cent, the Dow Jones added 0.6 per cent and the Nasdaq jumped by 1.1 per cent.

Big Tech stocks are the main reason the S&P 500 has soared more than 35 per cent to a record since two autumns ago. A small handful of seven has been responsible for the majority of the index’s returns over that time, propelled by a furor around artificial intelligence technology and expectations for continued dominance.

Five members of that group, which have been nicknamed “the Magnificent Seven”, will report their latest quarterly profits this upcoming week: Apple, Alphabet, Amazon, Meta Platforms and Microsoft.

Because they’re so much more massive than almost every other stock, their movements pack much more weight on the S&P 500 and other indexes. They’ll need to meet analysts’ expectations for growth to justify their huge recent moves.

And that’s not all that’s coming this week.

On Wednesday, the Federal Reserve will make its latest decision on what to do with interest rates. Traders do not expect it to make a move, but the hope is that it may cut interest rates at its next meeting in March. That would mark the first downward move since the Fed began dramatically raising interest rates two years ago to get inflation under control.

A wave of encouraging data has Wall Street believing its dream scenario can come true: The Fed will successfully conquer high inflation and soon deliver the cuts to rates that investors crave, while the economy skirts through without falling into a recession that seemed inevitable last year.

On Friday, an economic report could bolster or weaken beliefs in that dream. The government will release the latest monthly update on the job market, and economists expect it to show continued growth in hiring, but at a cooler pace. That’s exactly what the Fed would want to see because too much growth could mean upward pressure on inflation.

“This week could be key,” said Chris Larkin, managing director, trading and investing at E-Trade from Morgan Stanley. “If the market is going to sustain its latest breakout, it may need to avoid earnings disappointments from this week’s Big Tech lineup, get encouraging news from the Fed on interest rates, and see jobs numbers that are solid, but not too hot.”

This profit reporting season is expected to be lacklustre, with analysts forecasting a fourth drop in earnings per share for S&P 500 companies in the last five quarters. But it would be even worse without the Magnificent Seven.

Facebook’s parent company, Meta Platforms, is expected to be the single biggest contributor to growth for the overall S&P 500, according to FactSet. Nvidia is close behind, followed by Microsoft, Apple, Alphabet and Amazon.

With AP

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