ASX Under Pressure as Fed Turns Hawkish and Morgan Stanley Calls RBA Hike
Rising US rate hike expectations weigh on global markets, while Morgan Stanley predicts the RBA will raise rates to 4.6% in September
The Australian share market is set for a weaker start to the week after Wall Street closed lower as investors increased their expectations of further interest rate rises in the US. ASX 200 futures pointed to a 0.4% decline, suggesting the local market could follow the weaker lead from US equities.
The shift in sentiment came after Federal Reserve Chair Kevin Warsh reiterated the central bank's focus on bringing inflation back to its 2% target. His comments reduced confidence that US interest rates would fall soon, with markets increasing the probability of a September rate hike to 56% from 35% on Thursday.
Wall Street falls as rate concerns return
US equities gave up earlier gains following Warsh's comments, with the S&P 500 falling 0.25%, the Nasdaq declining 0.5% and the Dow Jones slipping 0.02%. Despite the Friday losses, the S&P 500 still finished the week 0.5% higher, while the ASX 200 gained 0.4%, snapping a two-week losing streak.
Higher rate expectations also pushed bond yields higher. The US 10-year Treasury yield rose to 4.728%, while the two-year yield climbed sharply to 4.36%, reflecting increased expectations around Federal Reserve policy.
Technology stocks faced pressure, with Nvidia falling 4.3% and Marvell Technology dropping more than 10%. Meanwhile, Alphabet and Apple gained 1.7% and 1.6%, respectively.
The stronger US dollar also weighed on commodities, with gold falling more than 3% and silver declining 4%.
Morgan Stanley expects RBA to raise rates
Rate expectations are also shifting in Australia, with Morgan Stanley now forecasting a 25-basis-point RBA rate increase to 4.6% at the September 29 meeting.
The investment bank changed its previous view after Australia's July inflation result came in stronger than expected. Morgan Stanley said the increase was broad-based, including stronger growth in important market services categories.
The firm believes the latest inflation result meets the threshold for the upside risks the RBA highlighted at its August meeting.
However, market expectations still favour the RBA leaving rates unchanged in September, meaning investors are now facing a more uncertain interest-rate outlook.
What it means for investors
For investors, the renewed possibility of higher US and Australian interest rates could keep pressure on equities, particularly growth and technology stocks whose valuations are more sensitive to borrowing costs. Higher bond yields may also make fixed-income assets relatively more attractive.
The key focus will be upcoming inflation and economic data, which could determine whether the Fed and RBA maintain their current stance or move towards further rate increases. For the ASX, the performance of banks, miners and technology stocks will be important as investors reassess the impact of a potentially higher-for-longer interest-rate environment.
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