This week, things have started on a very different note. The ASX200 is currently trading down -1.85% at 7232.5, wiping out a good chunk of June’s +3.5% gains.
The sudden repricing has come about after the Federal Reserve abandoned its Flexible Average Inflation Targeting (FAIT) and made clear via the dot points that it is concerned about an inflation overshoot and may begin raising rates sooner than expected.
An earlier start to Fed rate hikes means less need for an aggressive rate hike cycle and likely a lower terminal rate. This has resulted in a significant flattening of the US rates curve, best illustrated by yields on US 10 year bonds falling to 1.37%, back to where they were in late February.
While lower long-end yields are a good thing for growth/tech stocks, they are an unwelcome development for value stocks and value indices like our own ASX200.
A case in point the share price of the Commonwealth Bank of Australia (CBA) has fallen over 7% from last week’s $106.57 high, to be trading back below $99 a share.
Further weighing on fragile sentiment, retail sales in Australia rose by 0.1% m/m in May, slowing from 1.1% in April and missing market expectations of a 0.5% rise. This was the softest pace in three months.
While there is a temptation to read into the narrative that central banks are considering raising interest rates at a time growth is slowing, the 14-day lockdown in Victoria is likely behind the softer than expected retail sales number.
Where to 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 timing is consistent with vacation schedules heading into the 4th of July long weekend. Should the S&P500 trade lower it will likely weigh on the ASX200.
Presuming the ASX200 posts a daily close below the 7260/50 support region today, the expectation is for the decline to extend towards the support provided by the highs of April, near 7100.