ASX likely to rise, Fed prepares to raise rates as European markets falter
Local stocks could start the day higher, despite heavy losses in European markets overnight and a widely expected rate hike by the Reserve Bank of Australia (RBA).
ASX futures rose 0.1 percent, to 6,840 points by 6:45 AM ET, while Wall Street was closed for a public holiday.
The Australian dollar slipped to 67.97 US cents, near a seven-week low against the dollar.
Many economists expect the Reserve Bank of Australia to raise its cash rate target by 0.5 percentage point. This would raise the new cash rate to 2.35 percent, the highest level since December 2014.
With inflation rising at its fastest pace in nearly 30 years, and wages struggling to keep up, the Reserve Bank of Australia has no choice but to raise rates. They are also under pressure to slow the economy without causing much pain to businesses and families.
A person with a $500,000 variable mortgage, and 25 years left to pay it off, will see their monthly payment rise by about $140, according to comparison site RateCity.
However, when one considers the impact of five rate increases – including today – this borrower would have to pay an additional $600 per month.
European stocks fall after Russia shuts down gas pipeline
European stock indices fell overnight, while the euro fell below 99 US cents for the first time in 20 years after Russia said its main gas pipeline to Europe will remain closed indefinitely.
Gas shipments were due to resume on Saturday, but Russia scrapped that deadline on Friday and did not set a new timeframe for reopening. The news sparked fears of a recession in Europe, as higher energy prices hit businesses and households.
European gas prices jumped as much as 30 percent as the market opened.
On Sunday, Germany announced about $65 billion in subsidies to help protect Germans from rising costs.
Finland and Sweden also announced plans to provide liquidity guarantees to electricity companies.
Finland’s Minister of Economic Affairs, Mika Lentela, warned of the potential for “some kind of Lehman Brothers impact” on the energy industry, citing the collapse of what was then the fourth-largest US investment bank.
It is uncertain to what extent support packages from European governments will ease the energy crisis, said George Buckley, an economist at Nomura.
“The impact of what’s going on from the energy is so massive, so I think the biggest risk is that it simply isn’t possible: Like COVID, you can do a lot to help but you can’t make up for it,” Buckley said.
The pan-European Stoxx 600 index fell 0.8 percent, having recovered slightly after approaching a seven-week low earlier in the session.
London’s FTSE 100 was 0.1 percent higher. With that said, Germany’s DAX fell 2.3 percent on the day.
The European Central Bank (ECB) meets later this week and is expected to introduce a second major rate hike in an effort to combat inflation, which is more than four times its 2 per cent target.
“Extremely high energy prices, the risk of gas shortages and the fiscal and regulatory response will shape the outlook for eurozone GDP and inflation far more than anything the ECB might do on prices,” Berenberg chief economist Holger Schmieding said in a note to clients. .
In the United Kingdom, Liz Truss has been named Britain’s next prime minister, as she takes power at a time when the country is grappling with a cost-of-living crisis, industrial unrest and recession.
In her victory speech, Truss said she plans to cut taxes and deal with energy bills.
Oil prices jump with supply cuts
In the oil markets, Brent crude jumped 2.4 percent, to $95.23 a barrel, extending gains as OPEC + producers agreed to a small cut in oil production to support prices.
The Organization of the Petroleum Exporting Countries and its allies (OPEC+) cut 100,000 barrels per day, amounting to just 0.1 percent of global demand.
This group also agreed that they could meet at any time to adjust production before the next meeting scheduled for October 5.
“It’s a symbolic message the group wants to send to markets more than anything else,” said Oanda analyst Craig Erlam, adding that the 100,000 bpd that OPEC+ raised last month was not a big deal.
“What we’ve probably seen from the markets has been pricing in most of the worst-case scenario,” he added.
Russian Deputy Prime Minister Alexander Novak said that expectations of weak global economic growth were behind the decision of Moscow and its OPEC allies to cut oil production.
“The bigger picture is that OPEC+ is producing well below its production target and that is unlikely to change, given that Angola and Nigeria, in particular, appear unable to return to pre-pandemic levels,” the chief commodities economist at Capital Economics said. Caroline Payne.