More Fed induced pain for the share market

After a brief pause yesterday, the share market’s valuation response to Friday’s strong US employment report will continue this morning. There are two drivers behind the US stock market sell-off in response to Friday’s jobs number. The first is valuations. Markets are positioning for the possibility of higher interest rates and many world stock markets go into this adjustment from a starting point of relatively high PE values meaning making them vulnerable to a pull back...

After a brief pause yesterday, the share market’s valuation response to Friday’s strong US employment report will continue this morning.

There are two drivers behind the US stock market sell-off in response to Friday’s jobs number. The first is valuations. Markets are positioning for the possibility of higher interest rates and many world stock markets go into this adjustment from a starting point of relatively high PE values meaning making them vulnerable to a pull back. The second driver is the strong $US, which will have a negative impact on earnings for many US companies.

To the extent that the decline in US stocks is a response to the negative impact of a stronger dollar on the earnings outlook, it should not impact other markets. Indeed for some, especially European companies this is a positive. While markets outside the US are likely to follow the US down in any negative valuation adjustment they may not move as far. Interest rates will stay low for longer elsewhere and currency moves could be a positive for company earnings. In Australia’s case, however, the stronger US Dollar is also driving down commodity prices and this will be a negative for both resource stocks and the broader economy.

Resource and energy stocks look set for a weak opening this morning following lower overnight prices in iron ore, oil, gold and copper. However, release of China’s monthly data for February also has potential to influence sentiment on this sector later in the day.

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