Australian stocks are likely to rise in morning trade after Wall Street recovered from a two-day losing streak, as investors await how aggressively the US Federal Reserve will hike interest rates this week.
- The ASX 200 is down 3.5 percent over the past five days
- The US Federal Reserve is expected to hike interest rates by at least 0.75 percent
- Gold has fallen to a 29-month low
ASX futures were up 0.8 percent at 6,776 points by 7:25 a.m. AEST.
The Australian dollar held steady at 67.25 US cents.
The Reserve Bank is set to release minutes from its September meeting at 11:30am AEST – and investors will be looking for clues as to whether the next rate hike will be 0.25 or 0.5 percentage point.
At a parliamentary hearing on Friday, RBA Governor Philip Lowe said the central bank may consider slowing the pace of its rate hikes.
US markets rallied as hedge funds braced themselves for the unlikely possibility that the Fed’s tone will be less dovish than markets expect when policymakers hike rates on Wednesday.
“Positioning is being made just in case something comes out of the Fed that turns out to be less hawkish,” said Michael James, managing director of equities trading at Los Angeles-based Wedbush Securities.
“I don’t think anyone is predicting that’s going to happen, but it’s positioning for the possibility of it.
“The majority of people are currently in the negative camp.”
“We may have a hard landing ahead of us”
Wall Street’s main indices were volatile for most of the day but managed to recover in the final hour of trading.
The S&P 500 rose 0.7 percent to 3,900 points, the Nasdaq Composite rose 0.8 percent to 11,535, while the Dow Jones index rose 0.7 percent to 31,023.
Markets are pricing in a 0.75 percentage point rate hike, with futures showing an 18 percent chance of a 1 percentage point hike, according to CME’s FedWatch tool on Wednesday (local time).
Markets are also pointing to a real chance that rates could hit 4.5 percent by March as the Fed is forced to push the economy into recession to curb inflation
“Our biggest concern and the reason you are seeing such volatility in the market today is that there is now more uncertainty about earnings in addition to concern about it [US] rate hikes,” said King Lip, chief investment strategist at Baker Avenue Asset Management in San Francisco.
“We may be going for a hard landing rather than a soft landing, and the hard landing is that the Fed may overtighten in a situation where we’re already seeing the economy slowing down.”
Global rate hikes
At least 10 central banks are meeting this week – from Switzerland to South Africa – and most of them are expected to hike rates.
Economists are divided on whether the Bank of England will rise 0.5 percentage point or 0.75 percentage point.
But China’s central bank cut a buyback rate by 0.1 percentage point on Monday to prop up the struggling economy.
The other exception is the Bank of Japan, which is also scheduled to meet this week and has shown no signs of abandoning its ultra-loose yield curve policy despite a sharp fall in the yen.
The central banks of Norway, Sweden, Indonesia, Taiwan, the Philippines, Turkey and Brazil are also meeting this week to discuss interest rate policy.
Oil prices edged higher in volatile trading as worries about tight supplies outweighed worries that global demand could slow on the back of a stronger US dollar and potentially sharp hikes by the Fed.
Brent crude rose 0.4 percent to $91.74 a barrel.
Spot gold was flat at $1,675.48 an ounce, near its lowest level in 29 months.
Bitcoin, also moving in line with investors’ risk appetite, touched a three-month low of $18,271 and was last steady at $19,537.