US Fed spoils the party with hawkish outlook, Small Ords index falls for third straight day
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Local stock investors felt the influence of the long arm of the US Federal Reserve this morning, as the ASX lost ground into midday trade.
It followed the central bank’s interest rate announcement overnight, where forward guidance from Fed Chair Jerome Powell left equity investors disheartened.
Commodity prices also fell as the US dollar strengthened, with mining stocks dragging on the local market. The Small Ordinaries index slipped by more than 0.5 per cent, on track for its third straight day of falls.
As was universally expected, the Fed cut rates overnight for the first time since the financial crisis, bringing the official cash rate back to a range between 2 and 2.25 per cent.
With cuts already priced in, markets were focused on whether the Fed would point to further rate cuts in the second half of the year.
But Powell was more circumspect, describing the cut as a “mid-cycle adjustment to policy”, rather than the definitive start of another easing cycle.
Evidently, currency markets were priced for a slightly more dovish tilt from the Fed chair. In response, the US dollar strengthened against the major pairs.
US stocks got sold off, with the S&P500 closing down more than one per cent. And as has often been the case lately, President Trump wasn’t happy:
What the Market wanted to hear from Jay Powell and the Federal Reserve was that this was the beginning of a lengthy and aggressive rate-cutting cycle which would keep pace with China, The European Union and other countries around the world….
— Donald J. Trump (@realDonaldTrump) July 31, 2019
The price action demonstrates how unexpected moves from the US Fed filter through into other asset classes.
Speaking on Commsec today, analyst Steven Daghlian highlighted that for commodities — most of which are priced in US dollars — a sharp rise in the greenback usually weighs on prices.
Gold typically moves inversely to the USD, while iron ore prices fell by more than two per cent this morning.
That weighed on Australia’s big miners today, with the ASX200 resources and materials indexes both falling by more than 1.5 per cent.
As a broader asset class, equities often respond negatively when the outlook for higher rates starts to rise faster than expected.
However, broader falls on the local market today may have been partially offset by the strength in the US dollar. That pushed the AUD further below US69 cents — close to its lowest level since the 2008 financial crisis.
On the macro level, companies operating within Australia’s trade-exposed can often find demand from capital investment flows when the Australian dollar falls.
With major central banks across the globe recently shifting to much more dovish policy positions, the near-term rates outlook will have an important bearing on equity valuations — both locally and abroad.