By: Tony Xie
Australian equity investors rejoiced on Wednesday as the ASX 200 reached an 11-year high of 6,387.40. Elio D’Amato, executive director at Lincoln Indicators, described a number of factors driving the “strong performance”, citing the historically low interest rates and the “general health of the Australian consumers”. On the last trading day of the week, the ASX opened relatively quiet, despite disappointing results from both Flight Centre and Fortescue Metals, and ultimately closed at 6,385.60.
Globally, the US equity market delivered mixed messages, as a big rally in tech stocks driven by Microsoft and Facebook was matched with a commensurate fall in industrial shares. The cut in earnings from 3M and profit drop from UPS caused both stocks to drop by 10.6% and 6.8% respectively, leading to little change in the S&P 500 overall.
In Europe, shares weakened following Finnish giant Nokia’s surprising quarterly loss. Nokia was the largest drag on the STOXX 600, an index of 600 large, mid, and small capitalisation companies among 17 European countries, as the telecommunications firm logged its sharpest decline in profits since 2017. UK’s Competition and Markets Authority further exacerbated the pessimism held by European investors, as the anti-competitive agency blocked the proposed £7.3 billion merger of Sainsbury’s and Asda.
Across the country, Australian wheat farmers are experiencing the third consecutive year of drought, causing concern yet again over production prospects. The country has always been dependent on its wheat exports, which was the largest rural export last year, accounting for an estimated 5.5 billion AUD. However, Australia’s recent droughts have displaced the country in the eye of many of its traditional customers, with Indonesia, the world’s second-largest importer, choosing to buy record volumes from Russia and Ukraine.
Globally, oil prices took a small hit after the Energy Information Administration announced on Wednesday that crude inventories in the U.S grew by 5.5 million barrels last week, around five times more than anticipated.
Following the increase in jobless claims reported by the U.S. Department of Labor, gold prices edged up to $1,277.90, representing an increase in the spot price of 0.19%. Concurrently, gold futures for June delivery decreased by 0.2% and settled at $1,218.85.
On Wednesday, US Treasury yields fell across the board, following news of Australia’s inflation slowdown last quarter and investor pessimism in Europe. Across the different maturities, US yields fell around 5 basis points, with the largest changes occurring in the five-year and seven-year yields. Longer term bonds appeared to have been less affected, as the 30-year bond fell by only 3.4 basis points.
Domestically, the likelihood of the RBA making further cuts to the interest rate has increased, with some analysts forecasting a cut as soon as May. Consequently, the 10-year Australian bond yield fell 11 basis points to 1.78%.
In the foreign exchange market, the Australian dollar fell to a seven-week low, amidst the increasing likelihood of the RBA cutting interest rates next month. Previously, the RBA has stated that it would be “appropriate” to lower the cash rate if unemployment and inflation refuse to budge. Given that the ABS report announced inflation between January and the end of March as being zero percent, analysts across the world are anticipating the RBA to act on its words and decrease the cash rate in May. In the span of a week, the AUD has fallen from 71.5 US cents on Good Friday down to 70.1 US cents yesterday morning.
Sources: The AFR, The Sydney Morning Herald, Yahoo Finance, and Bloomberg