Stocks tipped for a fall as attention turns to US debt ceiling
The benchmark S&P/ASX 200 Index advanced 1.1 per cent last week after the US Federal Reserve shocked investors by keeping its $US85-billion-a-month asset-buying program at full steam. The market was expecting a $US10 billion taper.
But the optimism that spread across the globe may be short-lived. On Friday, the ASX gave up 0.4 per cent, after rising more than 1 per cent on Thursday after the Fed's decision.
The losses were sharper in overseas trade on Friday night, with Wall Street slipping off its record highs. The Dow Jones Industrial Average fell 185 points, or 1.2 per cent, while the S&P 500 shed 23 points or 0.7 per cent.
The nosedive came after the president of the St Louis Federal Reserve Bank, James Bullard, said the Fed could start scaling back its massive bond-buying program at its next meeting in October, if the economic data was strong enough.
Mr Bullard said the Fed was looking for signs of further strength in US payroll and employment figures. "To the extent that these two important labour market indicators continue to show improvement, the likelihood of tapering policy action will continue to rise," he said.
ASX SPI futures indicated a soft start to the week, down 23 points. CommSec chief economist Craig James said that made sense, adding that last week's rally was a bit of an overreaction.
"All the Fed was saying was that they are delaying [tapering] not cancelling it," Mr James said. "The US is actually going quite well.
"And markets were already weaker on Friday, following a bit of profit-taking."
Mr James pointed to losses to ASX heavyweights BHP Billiton and Rio Tinto in their respective London listings in overnight trade on Friday as pulling Australian shares further into negative territory on Monday.
The miners' losses came after Mr Bullard's comments triggered a fall in metals prices. Copper slipped off its month high of $US7368 a tonne, to $US7280 at Friday's close.
Ongoing concerns about the US debt ceiling, which Congress must decide on mid next month, are expected to further weigh on investors this week.
But AMP chief economist Shane Oliver said local markets could also get a boost when purchasing managers' indexes (PMIs) are released in China, Europe and the US, with China's figures predicted to show Australia's biggest trading partner is on the mend again.
But he agreed with Mr James, saying overall the big question was whether sharemarkets had run a bit too hard and too fast.
"With these debt ceiling negotiations on the way in the US, it's quite possible we might have a bit of a speed bump or correction over the next month or so," he said.
Frequently Asked Questions about this Article…
Economists say last week’s 1.1% rally may have been overblown after the US Federal Reserve kept its $US85 billion-a-month asset-buying program in place. Profit-taking, weaker overnight trade on Wall Street and concerns about the US debt ceiling have left ASX SPI futures softer and analysts expecting a modest pullback.
The Fed’s decision to maintain its large asset-buying program initially sparked optimism and a rally, because markets had expected a small taper. But comments from a Fed official that tapering could begin if US labour data stays strong reignited concerns about eventual tightening, prompting profit-taking and softer markets here.
The US debt ceiling is a congressional deadline coming up mid next month to decide on government borrowing limits. Ongoing concerns about those negotiations are expected to weigh on investor sentiment globally and could act as a near-term risk for sharemarkets.
Commentary from US Fed officials triggered falls in metals prices, which in turn pressured mining stocks. The article notes losses for BHP Billiton and Rio Tinto in their London listings as falling commodity prices pulled Australian shares lower.
Yes — copper slipped from a month high of about $US7,368 a tonne to $US7,280 at Friday’s close after Fed comments suggested tapering could be possible. Because miners are a large part of the ASX, lower metal prices can drag the overall market down.
No. CommSec chief economist Craig James and AMP chief economist Shane Oliver both warned the rally may have run too hard and too fast. They suggested last week’s bounce looked like an overreaction and flagged the potential for a correction or a ‘speed bump’ as debt-ceiling talks unfold.
Possibly. AMP’s Shane Oliver pointed to upcoming purchasing managers’ indexes (PMIs) from China, Europe and the US. Positive PMIs — especially signs China is recovering — could give local markets a lift if they show improving activity.
Watch key drivers highlighted in the article: US employment and payroll data, Fed commentary on tapering, US debt ceiling negotiations and upcoming PMIs. Stay diversified, avoid knee-jerk reactions to short-term moves, and focus on your time horizon — these are sensible approaches while markets digest the risks described.
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