ASX set to fall, weighed down by rate concerns and losses on Wall Street

The Australian sharemarket is set for a soft start to the trading session amid speculation that the Reserve Bank could raise official interest rates to a 12-year-high on Melbourne Cup Day, and after a weak lead from Wall Street.

ASX futures fell 17 points, or 0.25 per cent, to 6843 as of 6.47am AEDT, tracking declines in the US market. The Australian dollar traded at 63.11 US cents, down 0.7 per cent.

All three major US stock indexes tumbled overnight, weighed down by Alphabet after Google’s parent posted disappointing earnings and rising bond yields, reviving fears that the US Federal Reserve could keep rates higher for longer. The S&P 500 lost 1.3 per cent to 4193.14, its fifth decline in six days, while the Dow Jones Industrial Average shed 0.2 per cent and interest-rate-sensitive megacaps sent the Nasdaq Composite down 3.4 per cent.

“The dominant themes of the day are disappointment with tech earnings and rising interest rates,” said Jay Hatfield, portfolio manager at InfraCap in New York. “Rates continue to be a huge overhang on the market, as they should be.”

Rate fears had also dominated a volatile session on the Australian sharemarket on Wednesday. The S&P/ASX200 closed flat in the afternoon, having dropped sharply after the release of higher-than-expected September quarter inflation figures, which some economists said mean a rate rise next month is increasingly likely. Reserve Bank governor Michele Bullock warned earlier this week that the central bank’s board would not hesitate to raise interest rates if needed. 

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In commodities, oil prices rose overnight as Israel mounts preparations for a ground invasion of Gaza and the US readies air defences in the region. Israel’s Prime Minister Benjamin Netanyahu said in a televised speech that the country is in a battle for its existence. West Texas Intermediate rallied above $US85 a barrel and Brent cruse jumped above $US90 a barrel as the comments injected a fresh risk-war premium.

“Crude is trading from headline to headline as the market tries to price in the potential” of war ensnaring multiple countries in the Middle East, said Rebecca Babin, a senior energy trader at CIBC Private Wealth. “Living headline to headline keeps traders on the edge of their seats and likely to react quickly before understanding the full impactions of what is happening.”

The yields on 10-year Treasury notes also resumed their upward drift, edging closer to the 5 per cent level again, after robust new US home sales data and mortgage rates reaching 23-year highs affirmed market expectations of prolonged elevated interest rates heading into 2024.

Big Tech in focus

On Wall Street, shares of Alphabet plunged 9.5 per cent after the Google parent reported disappointing cloud services revenue, reviving fears of an economic slowdown. The communication services sector, of which Alphabet is a constituent, was on track for its biggest daily percentage drop since February 2022. Microsoft advanced 3.1 per cent following its better-than-expected result.

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Social media giant Meta Platforms is next in line, posting its results after the bell. The owner of Facebook and Instagram is expected to report its best quarterly sales growth in nearly two years.

It is a momentous week for earnings in the US, with nearly one-third of the companies in the S&P 500 expected to post third-quarter results. So far, 146 of the S&P 500 have reported. Of those, 80 per cent have delivered earnings above expectations.

“Earnings drive stock prices,” said Howard Ward, chief investment officer of Growth Equities and portfolio manager at Gabelli Funds. “This is where the rubber meets the road. A recession would result in higher unemployment, less consumer spending, slower gross domestic product growth and lower earnings, which implies lower stock prices.”

With Reuters/Bloomberg

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