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Global sharemarkets brace for volatility as the ASX awaits crucial inflation data and major central bank moves
Futures indicate a strong start for the ASX on Monday, with the S&P/ASX 200 expected to rise by 0.8%, buoyed by Wall Street's rebound. This follows a tumultuous week marked by disappointing earnings from Tesla and Alphabet, leading to significant tech sector sell-offs.
Despite a rally on Friday, the ASX 200 ended the week down 0.6% and has lost 1.7% since mid-July. Wall Street’s S&P 500 and Nasdaq Composite fared worse, dropping 3.7% and 6.9%, respectively.
Last Wednesday, the S&P 500 experienced its first daily loss exceeding 2% in nearly a year, driven by weak results from Tesla and Alphabet, fueling concerns over the delayed revenue impact of the AI spending surge.
Attention shifts to upcoming earnings from Amazon, Meta, Apple, and Microsoft, as well as Rio Tinto's half-year results kicking off Australia's profit season on Wednesday.
"We're entering the August results season, which typically brings increased volatility," said UBS strategist Richard Schellbach. "Couple this with pivotal macroeconomic events in Australia and the US, and you have a recipe for choppy market conditions in the coming weeks."
Australia's June quarter inflation data, out Wednesday, will be a key indicator for interest rate directions. Consensus expects a 1% quarterly and 4% annual rise in trimmed mean inflation, with higher figures likely prompting the RBA to raise rates from 4.35%.
UBS predicts an RBA rate hike to 4.6% in August, with positive signs from consumer stocks like Ampol and Universal Stores suggesting potential surprises for bearish investors.
Damien Boey, chief strategist at Barrenjoey, highlights concerns over the Japanese yen's resurgence and China's economic weakness. The yen's unexpected rise has impacted global markets, unraveling popular carry trades and increasing tech sector selling pressure.
Speculation surrounds the Bank of Japan's potential rate hike on July 30-31 and the US Federal Reserve's possible rate cuts at its two-day meeting, adding to currency volatility. The Australian dollar fell from 109 yen on July 10 to 100.65 yen on Friday.
The Bank of England's policy decision on Thursday is also in focus, with a 50% chance of a rate cut to 5%.
Boey remains worried about China's economy, where a recent rate cut failed to alleviate growth fears. China's 10-year government bond yield dropped to a record low of 2.17% on Friday, indicating expectations for further monetary support.
Commodities have also suffered, with copper prices hitting a three-month low and iron ore falling below $100 a tonne, down from $140 at the year's start.
China's economic concerns are accelerating the shift from big tech to smaller US stocks, previously overlooked in the market rally since last November when the Fed hinted at future rate cuts.
Investors also worry about potential tariffs on China from US presidential candidate Donald Trump, if elected in November.
"Markets are incredibly turbulent with many moving parts," Boey said. "Recently, the market has begun to consider these factors more seriously."
Schellbach notes that the current gap between the price-to-earnings ratios of top and bottom market tiers has been seen only three times in history, suggesting a potential shift from high-priced large caps to cheaper small caps.
