Investor optimism surrounding a potential interest rate cut in the United States is driving the Australian sharemarket, with forecasts suggesting the S&P/ASX 200 Index may reach a record high this week. This surge in sentiment follows disappointing jobs figures from the US, which revealed an increase of only 22,000 jobs outside the farming sector in August, significantly below the expected 75,000.
While futures indicate a modest opening decline of 0.2 percent or 15 points for the ASX, this assessment was made prior to a notable rally on Wall Street. The Dow Jones, S&P 500, and Nasdaq all experienced gains close to 1 percent, with the Nasdaq leading the way as investors positioned themselves for a shift in Federal Reserve policy.
Market Reactions and Future Projections
Hugh Dive, chief investment officer at Atlas Fund, expressed confidence that the ASX is well-positioned to achieve record highs this week, especially as many investors receive dividends during this period. Diana Mousina, deputy chief economist at AMP, echoed this sentiment, attributing the positive outlook to US President Joe Biden’s inclination towards market-friendly policies and the anticipated return of the Federal Reserve to interest rate cuts.
Following the release of the jobs report, traders adjusted their expectations, now calculating a 10 percent chance of a double rate cut at the Fed’s upcoming meeting, while fully pricing in a standard quarter-point reduction. This speculation caused US Treasury yields to fall, with the 2-year note yield dropping 8 basis points to 3.51 percent and the 10-year benchmark yield declining 9 basis points to 4.09 percent.
The positive sentiment in the market also propelled gold prices to reach a record high, nearing $3,600 per ounce, marking a 4 percent increase for the week and a significant 37 percent rise year-to-date. These gains are attributed to geopolitical uncertainties, a weaker US dollar, central bank acquisitions, and a global trend towards policy easing.
Implications for Australian Markets
Lower interest rates typically benefit stock markets as they lead to reduced borrowing costs for businesses. The ASX has already seen a boost from a stronger-than-expected earnings season and favorable economic data within Australia. George Boubouras, head of research at K2 Asset Management, stated that anticipated rate cuts by the Reserve Bank of Australia (RBA) could enhance consumer spending, particularly benefiting large banks listed on the ASX.
Market projections currently indicate a 75 percent likelihood that the RBA will reduce the cash rate to 3.35 percent in November, following three rate cuts this year aimed at stabilizing inflation within the target range of 2 percent to 3 percent. Investors will closely monitor consumer and business confidence surveys due on Tuesday for further signs of easing from the RBA.
In addition to the surveys, a series of investor meetings are scheduled this week for companies including Novonix, Brickworks, Soul Patts, and Metcash, along with Strike Energy. Approximately $723 million in dividends is expected to be disbursed to investors, further stimulating market activity.
Internationally, attention will pivot to the upcoming consumer price index report on Thursday, which is anticipated to show an acceleration to 2.9 percent year-over-year in August, up from 2.7 percent. Economists, including Carrie Freestone from the Royal Bank of Canada, suggest that tariffs may soon influence prices, impacting core goods.
In Europe, investors will scrutinize the European Central Bank’s policy decision, also scheduled for Thursday. Economists expect the ECB to maintain its deposit rate at 2 percent, having already implemented significant cuts. Carol Kong from the Commonwealth Bank noted the possibility of one more 25 basis point reduction in December, contingent on economic conditions and inflation rates.
As financial markets react to these developments, the potential for record highs in the ASX remains a focal point for investors, underscoring the interconnectedness of global economic policies and their implications for local markets.
