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Risk assets jump on Fed’s 50bps rate hike, USD falls, ASX set to open higher

jerome powell

Asian equity markets are set to open higher following a jump in US stocks on an expected Fed 50-basis-points rate hike. Risk assets across the board rallied as the Fed's moves and following statements were entirely in line with expectations, even slightly less aggressive than the markets’ prediction. 

The FOMC committee also penciled in a plan to start its US$9 trillion balance sheet reduction from June, with a US$47.5 billion reduction in June, and rise to US$95billion per month after three months. Fed chair Jerome Powell says a 75 basis points hike "is not something the committee is actively considering.” He also added an approach of a "soft" landing of the economy. The markets now project a 50-basis-point rate hike in each of the Fed’s meetings for the rest of the year, arriving at the benchmark rate of 3-3.25% by the end of the year.

Australia and New Zealand day ahead

SPI futures were up 0.43%, pointing to a higher open on the ASX. The major banks all jumped post the rate rise after an RBA-induced lift of mortgage rates. The major lenders may continue to benefit from the rising rates environment. The mining and energy sectors are also expected to be resilient following the risk-on sentiment across the board.

NAB beat expectations with the release of HY1FY22 results with $3.5b net profit (+10.7%) and revenue of $8.8b (+4.6%) from the same time last year. Australia’ s #1 business bank saw strong demand for loans to companies and residentials amidst the economic recovery. A fully franked interim dividend of 73c per share was announced.

The NZX 50 rose 0.48% at the open. Air New Zealand’s shares fell 6%, to NZ$0.825 after a trading halt on Wednesday. The local flag carrier completed the shortfall bookbuild, with a total of NZ$1.2 billion raised under the rights offer of 2 for 1 pro-rata. But the share price is still trading at a premium considering the rights offer’s price of NZ$52cents.

US and EU stock markets overnight

The Dow Jones Industrial Average advanced 2.81%, the S&P 500 rose 2.99%, the Nasdaq jumped 3.19%, and the small-cap index, Russell 2000 rose 2.82%.
All 11 sectors in the S&P 500 closed in the green, with growth stocks leading gains. The mega-caps strongly advanced with Apple, Alphabet, and Tesla all up more than 4%. Meta Platforms Inc. rose 5.3%. Advanced Micro Devices jumped 9% after the chipmaker beat earnings expectations.

Bank stocks were also strong on Powell’s “soft landing” economic narrative. All major lenders, including JPMorgan Chase, Wells Fargo, Citigroup Inc, and Goldman Sachs were up between 2% and 5%. 

Energy stocks rose on spiking oil prices triggered by the EU's proposal for a full ban on Russia's oil. Occidental was up 4% and Devon Energy rose 5.5%.

European major indices, however, fell on risk-off trades as major stock exchanges closed before the announcement. Also, the EU’s oil ban on Russia weighed on sentiment. The Stoxx 50 was down 0.96%, CAC 40 fell 1.24%, DAX slid 0.49%, and the FTSE 100 fell 0.90%. 

Commodities

Crude oil prices spiked as the EU proposes a full ban on Russia’s oil export by the end of the year despite exemptions demanded by Slovakia and Hungary. WTI crude futures were up 5.03%, to US$107.57 per barrel, and Brent futures were up 4.81%, to US$110.02per barrel.

Natural gas price rose for the fourth consecutive trading day, up 5.03%, to US$8.35 per MMBtu as a full embargo on Russia’s gas export is also on the table in the EU’s proposal. The natural gas price reached a fresh high in December 2008.

Precious metals rose on a weakened USD. NYMEX gold futures were up 0.68%, to US$1,883.60 per ounce after hitting the intraday high at $1889, a pivot near-term resistance. Silver rose 1.57%, to US$23.02 per ounce after dropping to US$22.12, close to key near-term support around US22.00.

Currencies

The USD index fell off a pandemic high, down 0.91%, to 102.57 as the Fed’s projection of the rate hike pace was not as aggressive as previously predicted.

The Aussie dollar strengthened strongly for the second day, supported by a weakened USD and a greater-than-expected rate hike of 0.25% by the RBA. The AUD/USD rose 170 points (+2.2%), to 0.7261. The Kiwi dollar was up 1% against the greenback, to 0.6547. The Eurodollar strengthened 0.97% against the USD, to 1.0629%.

GBP/USD advanced 138 points (+1.03%), to 1.2638 ahead of the BOE meeting, where the central bank is expected to continue raising the bank rate by 0.25% but may turn less aggressive due to the softening local economy due to geopolitical tensions. 

All the other currencies also rose against the USD.

Treasuries

Bond yields fell on the Fed’s less aggressive tightening approach of the monetary policy. The 10-year US Treasury yield fell to 2.93% after topping 3% on Monday, while the 2-year Treasury yield slumps to 2.50% from 2.78% the previous day. However, the 30-year bond yield was flat at 3.03%.

Adversely, the Australia 10-year bond yield continued to rise, adding 14 points to 3.54%, thanks to the RBA’s hawkish rate hike. The New Zealand 10-year bond yield stayed as high as 3.78%, the highest since June 2015.

Cryptocurrencies

Crypto markets spiked as risk-on sentiment was boosted by the Fed’s expected tightening approach, together with a slew of positive news. ApeCoin surged 10% after Tesla’s CEO, Elon Musk changed his Twitter profile photo to an image featuring a collection of a Bored Ape Yacht Club NFT. Moreover, the French stock market’ s regulator, AMF, approved Binance as a registered operator to provide its crypto exchange services in France, which is the first EU country to allow this form of digital asset trading.

Bitcoin jumped 5.8%, to $US39,775 and Ethereum rose 6.65%, to US$2,945.97 in the last 24 hours. The whole market's cap for cryptocurrencies grew 5.84%, to US$1.80 trillion. 


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