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Interest rates and inflation are key words this week with markets expected to continue to fall, ASX down 1.1% in early trade

Published: 10:23 24 Jan 2022 AEDT

Interest rates and inflation are the key words this week as markets are expected to continue to fall

Wall Street’s reaction to interest rates continues to prove volatile, with fears spreading to the ASX which is expected to open down.

The US central bank will meet tomorrow to discuss interest rate hikes, while in Australia inflation data will be released.

Neither event is likely to provide investors with good news.

The ASX 200 is already down 1.1% in Monday morning trading.

On Friday, the Dow Jones Industrial Average closed down 1.3%, the S&P 500 dropped by 1.9% and the Nasdaq lost 2.7%.

On a positive note, iron ore traded 2.8% higher to $US137.40 a tonne.

Here’s what we saw (source Commsec):

  • The Aussie dollar fell from highs near US72.13 cents to US71.70 cents and ended US trade near US71.85 cents.
  • Global oil prices fell by near 0.5% on Friday as investors booked profits on Thursday's news that US gasoline inventories were at 11- month highs.
  • The Brent crude price fell by US49 cents or 0.6% to US$87.89 a barrel.
  • The US Nymex crude price fell by US41 cents or 0.5% to US$85.14 a barrel.
  • Oil prices rose for the fifth straight week with Brent up by US$1.83 or 2.1% and Nymex crude up by US$1.32 or 1.6%.
  • Base metal prices were mixed on Friday. Aluminium fell 2.6% and copper lost 0.3%. Zinc was flat. But other metals rose 0.7-1.1%.
  • Over the week, metals rose, with tin up 9.3% but lead rose only 0.7%.
  • The gold futures price fell by US$10.80 or 0.6% to US$1,831.80 an ounce.
  • Spot gold was trading near US$1,831 an ounce at the US close. Over the week gold rose by US$15.30 or 0.8%.
  • Iron ore rose by US$3.75 or 2.8% to US$137.40 a tonne.
  • Over the week iron ore rose by US$10.65 or 8.4%.

Australian markets

Economy resilient, says Frydenberg

Federal Treasurer Josh Frydenberg was doing the media rounds this morning, espousing the government's financial credentials as we head closer to an election.

Frydenberg was confident the economy would recover quickly despite inflation and cost of living concerns.

“With the unemployment rate coming down to 4.2%, the lowest in more than 13 years, we know there are 1.7 million more Australians who are now in work,” he told Sky News.

“We've also maintained our Triple A credit rating, we've seen a strong pipeline of investment despite the recession, and of course, households and businesses have accumulated more than $300 billion on their balance sheets that was not there at the start of the pandemic.”

Of current supply chain and cost of living challenges, Frydenberg said, “We know with electricity prices that they've come down by 10% since December 2018, whereas they doubled and went up 100% under Labor, and we also know that when it comes to fuel prices, they were higher under Labor as well.

“We have one of the highest vaccination rates in the world, one of the lowest mortality rates in the world and one of the strongest economic recoveries in the world and that's why Australians can look at the glass, and know that it is more than half full."

Fortescue acquisition

Fortescue Metals Group (ASX:FMG) has entered into a share sale and purchase agreement to acquire UK-based Williams Advanced Engineering (WAE), which will be vertically integrated into the company,

The purchase is for £164 million ($309.7 million) from private equity firm EMK Capital and Williams Grand Prix Engineering and will be managed via Fortescue Future Industries (FFI).

The pair will develop battery-electric solutions for Fortescue’s rail, mobile haul fleet and other heavy mining equipment, as Fortescue looks to accelerate decarbonisation of its mining operations by 2030.

One of the first major projects to be developed will be a “world-leading” battery-electric train concept.

“FFI and WAE will work together to decarbonise Fortescue – and in turn the global heavy industry and hard to abate sectors – for the good of our planet, and the benefit of our shareholders,” Fortescue chairman Andrew Forrest said.

US markets

The Federal Reserve will focus on inflation at its meeting this week.

The Central Bank’s focus will be on not only lifting rates but how many times it is willing to do so.

Omicron has had a major impact on rising consumer prices and this will be front of mind for the bank as it looks to contain inflation.

Interest rates are expected to rise in March.

“I think it’s kind of a holding operation rather than a blockbuster meeting, but the March one will be more fun,” Pantheon Macroeconomics chief economist Ian Shepherdson told AFP.

Fed Chair Jerome Powell has now moved his stance away from one of a transitory nature following several data reports showing prices rising and spreading beyond cars and energy.

Tapering will end in March, when it is likely to be replaced by the first lending rate hikes since the rate was slashed to zero in March 2020.

“The move towards a March rate increase is pretty clear – and I expect Powell in his press conference (Wednesday) to reinforce that perception,” said David Wessel, a senior fellow in economic studies at the Brookings Institution.

Consumer prices spiked 7% in 2021 and the causes of inflation are many.

“If there’s any mention of the persistence of inflation, that would also be an indication that the Fed is not just ready for lift-off but that they want to fly high,” US chief economist at S&P Global Ratings Beth Ann Bovin, said in an interview.

The labour market moving to “maximum employment” after pandemic led mass layoffs would be another sign.

That said, Omicron is still causing uncertainty, and the Fed may still take a cautious approach.

In general news

Shares in Netflix slid by 21.8% after earnings results and guidance disappointed investors.

Shares in Walt Disney fell 6.9%.

The Dow Jones index was down by 450 points or 1.3%. The S&P 500 index fell by 1.9%. And the Nasdaq index fell by 385 points or 2.7%.

Over the week the Dow fell 4.6%; S&P 500 fell 5.7% and the Nasdaq lost 7.6%.

It was the worst week for the Dow since October 2020 and biggest week of falls for S&P 500 and Nasdaq since March 2020.

European markets

The World Health Organisation (WHO) has said Europe is near its pandemic end game.

“It’s plausible that the region is moving towards a kind of pandemic endgame,” Dr Kluge told AFP in an interview on Sunday.

This is due to the milder Omicron variant bringing high case numbers to an end once current cases subside.

“There will be for quite some weeks and months a global immunity, either thanks to the vaccine or because people have immunity due to the infection, and also lowering seasonality,” he said.

“We anticipate that there will be a period of quiet before COVID-19 may come back towards the end of the year, but not necessarily the pandemic coming back.”

In general news

Europe was higher on Friday.

The pan-European STOXX 600 index fell by 1.8% to be down 1.4% on the week - the third week of declines.

The German Dax index lost 1.9% on Friday.

The UK FTSE index fell by 1.2%.

In London trade, shares in Rio Tinto fell by 2.2% after Serbia revoked its lithium exploration licenses. Shares in BHP fell by 3.2%.

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