A raft of data points to a weak opening
A raft of news including strong US jobs data, weak Chinese trade figures and lower commodity prices look likely to produce a weak opening for the share market today.
Strong US jobs data for October leaves little doubt that, barring any unforeseen setbacks, the Fed is close to beginning its rate tightening cycle. With the unemployment rate now at 5% and the underemployment rate now below 10% and continuing to trend lower, the US labour market may be getting close to the stage where wage growth begins to pick up.
Mounting certainty that the Fed will hike rated in December comes after an 11% rally in the S&P 500 since late September. This creates potential for a pause or pullback in the stock market.
However, the US equity markets has been resilient in the face of mounting prospects for a Fed rate hike. Perhaps the major theme for US markets in recent weeks is that support for cyclical sectors like materials, Info tech, consumer discretionary and industrial has strongly outweighed selling of defensive sectors like utilities. This is typical bull market behaviour as investor’s position for earnings growth in the early stages of a monetary tightening cycle. If there is to be a pullback in the near term it may be more related to emerging market economies and how the question of how strong the $US becomes.
Weekend news of another set of disappointing trade data from China will be a source of concern for local markets this morning. Imports have been consistently weaker for 12 months highlighting problems for the Australian mining sector.
Frequently Asked Questions about this Article…
Strong US jobs data can lead to expectations of interest rate hikes by the Federal Reserve, which might cause a pause or pullback in the stock market. However, it also indicates a robust economy, which can be positive for cyclical sectors like materials and consumer discretionary.
A potential Fed rate hike suggests that the economy is strengthening, which can lead to growth in cyclical sectors. However, it may also result in a stronger US dollar and impact emerging markets, so investors should be prepared for possible market volatility.
Cyclical sectors like materials and info tech are performing well because investors are positioning for earnings growth in the early stages of a monetary tightening cycle. This is typical bull market behavior as these sectors tend to benefit from economic growth.
The Australian mining sector is facing concerns due to consistently weak import data from China over the past 12 months. This highlights potential challenges for the sector as China is a major consumer of Australian commodities.
A strong US dollar can create challenges for emerging markets by making their exports more expensive and increasing the cost of servicing dollar-denominated debt. This can lead to economic instability in those regions.
The S&P 500's 11% rally since late September indicates investor confidence in the US economy. However, it also raises the potential for a market pause or pullback, especially with the looming prospect of a Fed rate hike.
Disappointing trade data from China is concerning because it suggests a slowdown in economic activity, which can impact global markets and particularly affect countries like Australia that rely heavily on trade with China.
Defensive sectors, such as utilities, are typically less sensitive to economic cycles. They are being sold off as investors shift focus to cyclical sectors that are expected to benefit from economic growth and a potential Fed rate hike.
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