ASX200 falls back to earth with a thud
This week things started on a very different note. The ASX200 is currently trading down -1.85% to 7232.5, erasing a good chunk of June’s + 3.5% gains.
The sudden price revision came after the Federal Reserve abandoned its flexible average inflation target (DONE) and made it clear via dot-points that it fears inflation will exceed and may start raising rates. earlier than expected.
An earlier start to the Fed’s rate hikes means less need for an aggressive rate hike cycle and possibly a lower final rate. This resulted in a significant flattening of the US yield curve, best illustrated by yields on 10-year US bonds falling to 1.37%, back to their level at the end of February.
While lower long-term returns are a good thing for growth / tech stocks, they are an unwanted development for value stocks and value indices like our own ASX200.
As an example, the Commonwealth Bank of Australia (CBA) stock price has fallen more than 7% from last week’s high of $ 106.57, only to return below $ 99 by action.
Further weighing on the fragility of sentiment, retail sales in Australia rose 0.1% m / m in May, slowing from 1.1% in April and falling short of market expectations of a 0. 5%. This is the slowest pace in three months.
While it’s tempting to read in the story that central banks are considering raising interest rates at a time of slowing growth, the 14-day lockdown in Victoria is likely behind the number of retail sales lower than expected.
Where from here for the ASX200?
Seasonally, the last two weeks of June are the worst two weeks of the year for the S&P since 1950. The schedule is consistent with the vacation schedules leading up to the July 4th long weekend. If the S & P500 drops, it will likely weigh on the ASX200.
Assuming the ASX200 posts a daily close below the 7260/50 support region today, the decline is expected to extend to the support provided by the April highs near 7100.