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Natasha Rudra

Australian shares are set to fall after markets suffered a slump across the board and Federal Reserve chair Jerome Powell offered a bleak view on the US economy.

ASX futures were down 68 points or -1.2% to 5356.

The Australian dollar was down -2.6% to US 64.52 cents.

At the risk of reawakening Donald Trump’s ire, Federal Reserve chairman Jerome Powell shot down all talk of turning to negative interest rates to address a downturn “significantly worse than any recession since World War II”.

Mr Powell’s decision to draw a firm line in the sand over the issue came less than 24 hours after Mr Trump urged him to accept the “gift” of negative rates by joining countries that already have them, and after financial markets began last week pricing the once unimaginable possibility of a benchmark cash rate below zero.

Markets promptly suffered a case of the jitters on the back of Mr Powell’s remarks with indexes in both Europe and the US falling.


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Unsurprisingly, LPL Economics’ Ryan Detrick and Scott Brown write that caution is warranted.

“Given the current technical warnings and seasonal headwinds, equity weakness may make sense now, but the possibility of a full retest of the March 23 lows may be quite low,” they say.

“Based on our analysis of valuation, technical, and sentiment factors, we anticipate that a potential pullback in stocks, possibly around 10%, may create a more attractive entry point for more tactical investors. Historical patterns after bear market lows support this view, and we continue to recommend patience.

“For long-term investors, we continue to believe stocks may be more attractive than bonds at current valuations, and we recommend overweight allocations to stocks, and a corresponding underweight to fixed income for suitable investors.”

Billionaire David Tepper came out strongly on the side of pessimism, saying the market was the most overvalued in decades with many stocks “ridiculously” overvalued.

Today’s agenda

Local: Consumer inflation expections May; Labour force April; NZ net migration March

Overseas data: US import price April; Euro zone German CPI April

Market highlights

ASX futures down 68 points or -1.2% to 5336 near 3.47am AEST

  • AUD -2.6% to US 64.52 cents
  • On Wall St: Dow -2.1% S&P 500 -1.7% Nasdaq -2.1% at 3.37am AEST
  • In New York: BHP +0.6% Rio +1.3% Atlassian -1.1%
  • In Europe: Stoxx 50 -2.5% FTSE -1.5% DAX -2.6% CAC -2.8%
  • Spot gold +0.5% to $US1711.71 an ounce at 1.37pm New York time
  • Brent crude -1.7% to $US29.46 a barrel
  • US oil -1.2% to $US25.47 a barrel
  • Iron ore flat to $US91.63 a tonne
  • Dalian iron ore +0.9% to 646 yuan
  • LME aluminium +0.2% to $US1480 a tonne
  • LME copper -0.6% to $US5221 a tonne
  • 10-year yield: US 0.66% Australia 0.95% -0.52%

From today’s Financial Review

Boycott may widen as Beijing goes to war: China’s state-controlled media and trade experts warn that key Australian exports including iron ore and LNG are not immune to the growing trade hostilities between the two countries.

Project Maroon’: Queensland breaks cover in Virgin race: Treasurer Cameron Dick confirmed the state government’s intention to make a play for a stake in Virgin Australia, saying a second national carrier was crucial to the state’s tourism sector.

House listings on the rise as confidence lifts: Listings are set to rise significantly over coming weeks as more vendors make plans to put their homes on sale, in an early sign of recovering housing confidence.

United States

US stocks fell sharply for the second day after Federal Reserve Chairman Jerome Powell warned of an extended period of weak growth and stagnant incomes due to the coronavirus pandemic, dashing hopes of a quick economic recovery.

It will take some time for the US economy to get back to where it was, Powell said in a webcast, as he pledged to use the ’s power as needed and called for more fiscal stimulus.

However, Powell made it clear the Fed won’t push interest rates below zero, as traders had been increasingly betting.

“Powell’s doing the right thing by warning people that this is not just going to be a V-shaped recovery,” said Sam Hendel, president and co- of New York-based Levin Easterly Partners.

“I think the market may be overstating the ease of returning back to normal.”

Powell’s comments came a day after a warning from leading US infectious disease expert Anthony Fauci prompted a sharp selloff in equities, as investors fretted over how the economy would reemerge from weeks of virus-related lockdowns.

Wall Street’s fear gauge rose for the second day to hit a one-week high.

“Volatility is likely to persist because there’s a lot of uncertainty on how this virus plays out,” said , global market strategist for Invesco.

Europe

European markets fell across the board. The STOXX index fell 1.9% to hit a one-week low. The travel & leisure index and auto stocks fell 5% each, while banking shares slid 3.7%.

Earnings expectations are deteriorating sharply in Europe, with companies listed on the STOXX 600 now expected to report a collective drop of 46.7% in earnings in the second quarter, down from a fall of 44.9% forecast the week before.

The FTSE 100 shed 1.5%, snapping a five-day winning streak and wiping out most of the gains it made this month. Britain’s economy shrank by a record 5.8% in March, while first-quarter GDP contracted by 2%, with figures for April likely to show an even bigger fall in economic output.

The Bank of England has predicted the biggest economic slump in 300 years.

“Second quarter figures that cover a much longer period of lockdown will obviously be far worse,” said Hugh Gimber, global market strategist at J.P. Morgan Asset Management.

“While economic activity should improve from the second half of this year, it still appears that a rebound is likely to be very gradual.”

The mid-cap FTSE 250 also shed 1.8%, with travel stocks plummeting again after a warning from European travel company TUI about thousands of job cuts to ride out a virtual halt in global travel.

Asia

High demand for video games during COVID-19 lockdowns buoyed Tencent’s first-quarter revenue and profits. The Chinese company’s video games business, which generates more than a third of its revenue, saw growth of 31% to 37.30 billion yuan.

Tencent’s stock has jumped nearly 14.38% this year, against a 15% decline in Hong Kong’s broader Hang Seng index. Meanwhile shares in its U.S.-listed rival, which is focused on e-commerce rather than gaming, have dipped by almost 6% over the same period.

Tokyo’s Nikkei 225 index lost 0.5% and the Hang Seng in Hong Kong ended lower, down 0.3%. The Shanghai Composite index gained 0.2% and South Korea’s Kospi jumped 1% after the government said it needed more time to assess recent outbreaks and would not immediately re-impose new restrictions to fight the virus.

Commodities

OPEC presented a bleaker assessment of global oil markets for the second quarter as the coronavirus crisis continues to drain demand, days after some of the cartel’s biggest producers pledged to make even deeper production cutbacks.

The Organization of Petroleum Exporting Countries cut estimates for the amount of crude it will need to supply over the three-month period by just under 3 million barrels a day, or about 15%, in a report published on Wednesday.

US crude oil stockpiles surprisingly fell last week, including at the Cushing, Oklahoma, storage hub, the first time supply has dropped since the coronavirus pandemic choked off fuel demand in the in the United States.

Crude inventories fell by 745,000 barrels in the week to May 8 to 531.5 million barrels, the US Energy Information Administration said, compared with analysts’ expectations in a Reuters poll for a 4.1 million-barrel rise. That was the first decline after 15 weeks of increases.

Demand destruction caused by the pandemic will dwarf the impact of supply disruptions for industrial metals such as aluminium and zinc, leaving heavy surpluses and inventory levels that will pressure prices and output this year.

“The bigger picture for metals right now is that on the supply side impacts are nowhere near enough to offset the surpluses,” said Kieran Clancy.

Currencies

The U.S. dollar erased losses to trade flat. Sterling recovered, though it remained vulnerable as traders weighed the benefit of government support to shield the economy from the COVID-19 pandemic against the high financial costs of doing so.

The pound rose in spite of the fact that Britain’s economy shrank by a record 5.8% in March as the coronavirus crisis escalated and the government shut down much of the country.

Analysts attributed the move to previous market expectations and to the short positions in sterling held by global leveraged funds.

Even though the fall in the UK’s gross domestic product was severe, the decline was not as bad as feared by the economists polled by Reuters, who were expecting the economy to shrink by 8%.

Euro zone government bond yields fell as fixed income assets were supported by concern over the pace of economic recovery and the risk of a second wave of infections.

But analysts said optimism was fading.

“I think there’s a dawning realisation that this isn’t going to be a V-shaped recovery,” Lyn Graham-Taylor, fixed income strategist at Rabobank, said.

“People are just taking a second look at the fact that there are still massive restrictions and worries about resurgence of cases.”

Australian sharemarket

Australian shares ended the day flat after recovering from a sharp fall at the open over the course of the day, shaking off a negative lead from Wall Street as investors were confronted with an alternative view of a quick end to restrictions.

The S&P/ASX 200 Index dropped by close to 2 per cent at the open before recovering over the course of the session to end the day at 5421.9 points, or a third of a per cent above its previous close.

“Right now we’re just kind of moving out of the eye of the storm,” said Fidelity International portfolio manager Kate Howitt, referring to the reduction in growth in new COVID-19 cases through developed markets.

“The second half of the storm is moving into the shocking economic outcomes and actually seeing those data points play out.”

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    Natasha Rudra is an online editor at The Australian Financial Review based in London. She was the life and entertainment editor at The Canberra Times. Connect with Natasha on Twitter. Email Natasha at [email protected]

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