Market wrap: A flat night in Europe and the US and a surprise interest rate rise in China point to a subdued start to local trade this morning.
The June SPI futures contract ended the night session 3 points or 0.06% weaker at 4923 after a rally in the US spluttered out as Federal Reserve officials signalled interest rate rises later this year. Gold hit a record high, oil pulled back and industrial metals closed mixed following China's fourth interest rate increase since October.
US stocks rallied in early trade on take-over action in the tech sector but sagged after the minutes from the last Federal Reserve meeting showed this era of cheap cash in the US may be nearing an end. The S&P 500 closed 0.02% weaker, the Dow lost 6 points or 0.05% and the Nasdaq clung on to a narrow gain, up 0.07%.
The Fed minutes showed disagreement among reserve members over the outlook for the US economy and raised the prospect of interest rate increases from record low levels after the QE2 stimulus program has run its course in June. "A few participants indicated that economic conditions might warrant a move toward less-accommodative monetary policy this year," read the minutes, according to a report on CNN. Rising interest rates are generally seen as negative for stocks because low rates allow investors to borrow cheaply to invest in equities.
The Fed has been fretting about the same inflationary pressures that encouraged China's central bank to raise interest rates by a quarter of a percent yesterday. News of the rise was released after close of trade yesterday in Asia during a public holiday in China and Hong Kong that continues today. Share markets in Shanghai and Hong Kong re-open tomorrow.
Gold pushed to a new record, fuelled by worries over a Federal budget stand-off in Washington, another debt downgrade for Portugal, rising inflation and on-going strife in North Africa and the Middle East. Gold for June delivery was recently ahead $24.10 or 1.7% at $1,458 an ounce. May silver marked a new 31-year high, rising 83 cents or 2.1% to $39.32 an ounce.
"Sovereign debt issues continue playing across Europe, and the bigger concern is that these debt issues will spread outside of Europe, including to the elephant in the room, the US," an analyst with Casey Research told MarketWatch.
Oil eased from yesterday's 30-month high as China's rate rise raised demand concerns for the world's second-largest economy. Crude futures were recently off 62 cents or 0.6% at $107.87 a barrel.
Industrial metals were mixed but mostly resilient against China's rate news. In London, copper rallied 0.4%, snapping a two-day losing run, lead added 0.4% and tin 0.2%. Zinc fell 1.3%, nickel 0.4% and aluminium was near flat. US copper was recently down 0.3%.
"You're hoping for a soft-landing scenario, where [China] tighten just enough to keep speculation under control while not materially slowing their economy," the co-manager of the US Global Investors Global Resources Fund told Reuters. "It's kind of a balancing act that looks to be working right now."
The major European markets closed little changed ahead of an expected interest rate hike by the European Central Bank tomorrow. Britain's FTSE fell 0.16%, Germany's DAX closed flat and France's CAC lost 0.03%.
TRADING THEMES TODAY
WEIGHING THE NEGATIVES: This virtually unbroken three-week rally may come under pressure this morning as traders weigh the implications of another rate rise in China and evidence of pending rises in the US against next week's US earnings season and the wave of mergers and acquisitions currently sweeping the globe. The share market's recovery from the global financial crisis was built with cheap money from the US Fed and the end of that era has to be a negative for stocks - when it comes. In the meantime US traders want exposure to what is expected to be another solid quarterly earnings season, starting next week, so that should limit the downside this week.
PRECIOUS METALS: Inflation is one of the few certainties in these uncertain times and that should support gold and silver in the months ahead. Add a sagging US dollar, conflict in the Middle East and European debt and it's hard to find many arguments against further gains.
ECONOMIC NEWS: Monthly home loans are due at 11.30 am. An atypically quiet session tonight in the US includes weekly crude oil inventories.
