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ASX to open higher off the back of record Wall St performances as the RBA keeps rates at record low

Last updated: 09:51 03 Nov 2021 AEDT, First published: 09:47 03 Nov 2021 AEDT

ASX to open higher off the back of record Wall St performances as the RBA keeps rates at record low

The ASX should open higher this morning after record performances on Wall St overnight.

The Dow Jones Industrial Average, the S&P500 and the Nasdaq Composite all traded at fresh record highs.

ASX futures were up 1% at 7,365 at 6.30am AEDT.

Here’s what we saw:

  • The Aussie dollar fell from US75 cents to US74.20 cents and was near US74.30 cents at the US close.
  • Global oil prices were mixed on Tuesday. Traders awaited the weekly US supply reports and also the meeting of the OPEC+ group of oil producers to be held on Thursday.
  • The Brent crude price rose by US1 cent to US$84.72 a barrel.
  • The US Nymex crude price lost US14 cents or 0.2% to US$83.91 a barrel.
  • Base metal prices fell by between 0.5-2.2% on Tuesday with lead down the least and copper the most.
  • The gold futures price fell by US$6.40 or 0.4% to U$1,789.40 an ounce.
  • Spot gold was trading near US$1,787 an ounce at the US close.
  • Iron ore slid by US$6.85 or 6.6% to US$96.45 a tonne.

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Australian markets

All eyes were on the Reserve Bank of Australia (RBA) yesterday.

As expected, it has kept the official cash rate on hold at the record low of 0.10%.

The bottom line is that we will not see a rate hike until wages growth is at 3%, which is some time away.

The RBA will continue purchasing $4 billion per week of bonds at least until mid-February 2022. They did, however, drop the target rate of 0.1% for the Government April 2024 bond.

In its statement, the RBA noted, “The board is committed to maintaining highly supportive monetary conditions to achieve a return to full employment in Australia and inflation consistent with the target. While inflation has picked up, it remains low in underlying terms. Inflation pressures are also less than they are in many other countries, not least because of the only modest wages growth in Australia.” 

The only other noteworthy change was the winding back of the timeline for the first rate rise to potentially 2023 from 2024.

Speaking about the decision, Mortgage Choice and Smartline CEO Susan Mitchell said, “The nation’s ongoing economic recovery and strongest inflation reading in six years have pushed the Reserve Bank board to discontinue the yield target.”

“The bank’s decision to unwind its previous guidance certainly impacts home loan interest rates. However, the extent remains to be seen, noting that the central forecast for underlying inflation to be no higher than 2.5% at the end of 2023 with only gradual increases in wages growth. This is likely to keep the property market buoyant throughout next year,” said Mitchell.

The RBA has discontinued its yield target.

“The RBA seemingly abandoned its three-year Government bond target, which saw bonds shift much higher than their 0.1% target. The repercussions of this for housing is that interest rates, particularly new fixed rates, may see further increases over the coming weeks and months,” REA Group director of economic research Cameron Kusher said.

Deutsch Bank chief economist Phil Odonaghoe believes the key takeaway is the upwardly revised inflation forecast.

“Stepping back, that shift in guidance in itself is hardly remarkable. It appears the RBA's revised central scenario now has conditions for rate lift-off (ie inflation "around the middle of the target range") being met in two years’ time, rather than two and a half,” Odonaghoe said.

“What is far more remarkable about today's decision is the outright abandonment of the RBA's April 2024 yield target. At his most recent parliamentary appearance, Governor Lowe indicated this target 'will continue to (reinforce) forward guidance over the next few years'. That was on August 6, 88 days ago. And it was only a little over a week ago, on October 22, that the RBA's dealing room last intervened to defend the target.

“As such, this decision marks one of the most astonishing policy reversals in the almost 30-year history of RBA inflation targeting. And one that, we think, will have lasting implications for the RBA's ability to craft market and community expectations around its policy guidance.

“There are two practical implications, one short term and one long-term:

  • Short term, the market will now test the RBA's resolve on its bond purchase program. The bank reaffirmed today that it will "continue to purchase government securities at the rate of $4 billion a week until at least mid-February 2022". But that commitment now looks to be at serious risk of being unwound earlier, if data surprises to the upside.
  • Long-term, the RBA's foray into yield curve control will probably never be repeated again. It might have been beneficial in the dark COVID days of 2020, but today demonstrates how rapidly unfit for purpose such a 'physical' expression of forward rate guidance can become. Once bitten, twice shy.

“We also find our own view on rates less tethered to RBA's forward guidance than it has been previously. As such, we bring forward our own call for rate liftoff to May 2023, 12 months earlier than we previously expected, and six months earlier than the RBA's revised guidance today. Specifically, we expect a 15bp hike in May 2023, with a further 50bps of hikes in H2-2023, taking the cash rate to 0.75% by Dec 2023.”

Australian indices

  • ASX 200 fell 0.63% to 7,324.30.
  • ASX24 futures rose 1.0% to 7,360.
  • S&P/ASX Small Ordinaries fell 0.68% to 3,511.30.
  • All Ordinaries fell 0.59% to 7,646.60.

US markets

Major US stock indexes were at record highs on Tuesday, a day ahead of a pivotal Federal Reserve decision.

According to Dow Jones Market Data, the last time the three benchmarks closed at records for three consecutive days was back in December 2019.

Investors cheered strong earnings and, for the time being at least, put the Federal Reserve and potential monetary tightening to one side.

A market analyst company in the US reports that S&P500 company earnings are likely to have climbed 40.2% from the third quarter last year with most companies thus far having reported better than expected profits.

Shares in heavily-shorted Avis Budget rose 108.3% after the company's earnings beat analyst estimates.

Shares in Pfizer rose 4.2% after the drug maker flagged 2021 sales of its COVID-19 vaccine that beat market estimates.

Shares in athletic apparel maker Under Armour rose 16.3% in response to higher sales guidance.

Materials and real estate sectors rose while the consumer discretionary sector fell.

However, attention will be on the Fed in US trading today, which is fully expected to scale back monthly asset purchases.

Investors will watch closely to see if Fed chairman Jerome Powell pushes back against rising market expectations leading to a series of rate increases in 2022. 

US indices

  • Dow Jones rose 0.4% to 36,052.63.
  • S&P 500 rose 0.4% to 4,630.65.
  • Nasdaq rose 0.3% to 15,649.60.

European markets

There were mixed results in Europe on Tuesday.

Healthcare stocks rose 1.3% but mining stocks fell 2.9% in response to lower iron ore, base metal and oil prices.

According to Refinitiv IBES data, about 166 companies of the STOXX 600 have reported quarterly earnings so far and 65.7% have topped profit estimates.

In a typical quarter, 52% beat estimates.

The pan-European STOXX 600 rose to record highs.

In London trade shares in Rio Tinto fell by 2.2% and BHP shares fell by 3.0%.

European indices

  • STOXX 600 rose 0.14% to 479.53.
  • German Dax rose 0.9% to 15,954.54.
  • UK FTSE fell 0.2% to 7,274.81.

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