Stock markets lower on spectre of higher US interest rates
While news of strong US job growth is good news for economies, it looks like triggering a downward adjustment in stock prices as investors adapt to the increasing likelihood of higher US interest rates. The early stage of Fed tightening cycles tends to be bullish for stock markets as growth improves. In this case, however, markets are starting from a high valuation base creating the potential for some “froth” to be knocked off valuations as markets adjust for the possibility of higher US bond yields.
The strength of US jobs growth now looks likely to impact the Feds thinking on the timing of its move to lift rates. The Fed has made it plain that it wants comfort that inflation is heading back towards 2% before it moves on interest rates. Wage growth will be a key factor in providing the Fed with that comfort. While growth in hourly earnings was a disappointing aspect of Friday’s US employment data, the ongoing momentum of jobs growth now means that higher wage growth is unlikely to be far away.
Weekend news of strong China’s strong export growth is encouraging and may soften the extent of today’s sell off. However, commodity stocks, especially gold miners are likely to be lower as investors factor in the likely impact of a stronger US Dollar on commodity prices.
Weaker prices today will see the ASX 200 index get well below recent support levels, including the 20 day moving average. This sets the market up for an ongoing correction with the 38.2% Fibonacci retracement level around 5700 providing initial support. However, with dividend yield stocks having been pushed to high valuation levels in recent weeks, a deeper correction is possible in a scenario in which strong US data increases the likelihood of a June rate hike in the US. Potential support levels for a deeper correction include the 200 day moving average around 5500.
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Frequently Asked Questions about this Article…
Strong US job growth can lead to a downward adjustment in stock prices as investors anticipate higher US interest rates. This is because the Federal Reserve may consider raising rates sooner if the economy shows signs of strength, impacting stock valuations.
Higher US interest rates can affect stock market valuations by increasing bond yields, which makes stocks less attractive compared to bonds. This can lead to a decrease in stock prices, especially if markets are starting from a high valuation base.
Wage growth is a key factor for the Federal Reserve when deciding on interest rates. The Fed wants to see inflation heading towards 2%, and higher wage growth can provide the necessary comfort that inflation is on track, potentially leading to a rate hike.
Strong Chinese export growth is encouraging and may help soften the extent of stock market sell-offs. It provides a positive signal for global economic activity, which can be beneficial for stock markets.
Commodity stocks, including gold miners, are likely to be lower with a stronger US Dollar because a stronger dollar can lead to lower commodity prices. This impacts the profitability of companies in the commodity sector.
During a market correction, the ASX 200 index may find initial support around the 38.2% Fibonacci retracement level at 5700. For a deeper correction, potential support could be around the 200-day moving average at 5500.
The possibility of a US rate hike in June can lead to a deeper correction in Australian stock markets. This is because strong US economic data increases the likelihood of higher US interest rates, which can impact global stock valuations.
Investors should consider the impact of higher interest rates on stock valuations and the potential for market corrections. It's important to monitor economic indicators like job and wage growth, as these can influence central bank decisions on interest rates.
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