The Overnight Report: US Markets Sink

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This story features CHAMPION IRON LIMITED, and other companies.
For more info SHARE ANALYSIS: CIA
The company is included in ASX200, ASX300 and ALL-ORDS

US markets fell following Kevin Warsh's press conference, with bond yields moving higher.

The Nasdaq 100 fell a further -2.1% and is now down -10% from its June 2 closing high.

After the Australian market reached a five-month high yesterday, ASX 200 futures are pointing to a weaker start.

Good Morning,

The Australian share market rallied 1.5% to a five-month high after softer-than-expected inflation data reduced expectations of an RBA rate hike at the August meeting.

On the calendar today, Champion Iron ((CIA)) reports 1Q earnings, while Pilbara Minerals ((PLS)) and Vulcan Energy Resources ((VUL)) are among the companies scheduled to release quarterly updates.

For more details, see the FNArena Calendar https://fnarena.com/index.php/financial-news/calendar/

Today’s Big Picture, J.L. Bernstein extract

The bond market wanted action, not another promise

The Fed held at 3.50 to 3.75, and three officials voted to hike.

That’s the first time three have dissented in the same direction since 2016.

Chairman Kevin Warsh said the market has already done the tightening for him, and long yields went up the moment he said it.

Jeffrey Gundlach put it plainly on CNBC: if you want inflation back at target, you have to raise rates.

Oil back near US$85 on a real escalation

Iran fired missiles at a US base in Jordan, ending the brief pause in fighting, and Trump said the US will hit back hard.

Crude followed. Energy was the single biggest reason June inflation cooled, which is exactly why this move complicates the Fed’s math into September.

Record profits stopped being good enough

SK Hynix posted its best quarter ever and still missed, and Korea’s market wore it for a second straight day.

Seoul called an emergency meeting and is restricting leveraged ETF trading.

Here’s the part getting lost: the miss came from a heavier mix of high-bandwidth memory, the highest-moat corner of memory and the one Chinese rivals are furthest from entering.

Bad print, better business.

ANZ Bank, Australian Morning Focus extract

Northern Hemisphere markets were soggy, but US markets bounced following the Fed hold and then weakened into the close as bond yields rose. 

The S&P500 was down -1.5%. In Europe, the EuroStoxx50 and the FTSE100 indices ended the session down -0.6% and up 0.3% respectively. 

In bond markets, the yield on the bellwether US 10yr Treasury bond was 9bp higher at 4.65%. 

Fed holds in a 9-3 split vote: The US Federal Reserve held policy steady as expected, but there was a vote split, with Hammack, Kashkari and Logan all voting for a 25bp hike. 

The three core paragraphs of the FOMC statement itself (i.e. the parts excluding the date, decision and voting record) were almost identical to the June statement, giving little away, with the only change being a technical tweak to the wording around maintaining ample reserves because of the passage of time rather than a change in policy. 

Given that markets went into the meeting with 35-40% odds of a hike priced in, and a full hike priced in by September, it was no surprise we saw short-end bond yields fall after the decision. 

That said, the press conference that followed echoed a tone that we would call more robust and committed than hawkish in the traditional sense. 

Indeed, Chair Warsh strongly reaffirmed the Fed’s commitment to price stability, adding that there was “nothing inertial” about the transition from the last meeting to today’s meeting, describing the conversation as robust and focused.

Rounding out the committed tone, Warsh described the committee as being in a period of “watchful thinking” not “watchful waiting”, adding that “we will deliver the 2% inflation target” and will “ensure that expectations are centred around the right number”. 

Whilst attention is squarely fixed on today’s FOMC decision, the Bank of England is also due to meet tonight. We expect the Bank Rate will remain on hold at 3.75%, in line with market expectations.

Data since the last meeting has offered no compelling reasons to hike. Looking further ahead we remain of the view the Bank of England is on an extended hold, with the next move more likely to be a cut than a hike, although geopolitical developments remain in the driver’s seat for the policy rate path.

Crude oil surged higher after a resumption of fighting in the Middle East raised concerns of further supply disruptions. 

Following several days of relative calm, Iran launched an attack on a US military base and command centre in Jordan with ballistic missiles. Iran’s Revolutionary Guards said they also struck three tankers that were attempting to transit through the Strait of Hormuz along an unauthorised route. 

Saudi Arabia joined the US in a series of attacks on Iran-backed militant groups in Iraq in retaliation for an attack on Saudi oil facilities in the Eastern Province. 

In signs the conflict is spreading outside the region, a US-owned gas storage tanker in Egypt’s Mediterranean port of Damietta was hit by drones. This comes as the Houthi rebels step up their campaign to disrupt shipping in the Red Sea.

Reuters reported the Houthis are considering charging fees for ships sailing through the Bab al-Mandeb Strait. 

Meantime, the supply disruptions continue to force US refiners to draw down stocks to make products such as petrol, diesel and jet fuel. Commercial crude oil inventories fell by -7.2mbbls last week, while the US Strategic Petroleum Reserve fell by -3.8mbbls. 

The drawdown in commercial inventories was the biggest weekly fall since mid-June. It also reinforces concerns that the supply cushion is nearing its limits. At only 307mbbls, the SPR is at its lowest level in 40 years and is dangerously close to its operational limit of around 200mbbls. 

The escalation in the Middle East conflict also raised concerns of ongoing supply disruptions in the global gas market. The attack on the Damietta LNG terminal in Egypt heightened concerns that supply from the region is likely to remain curtailed for the foreseeable future.

Egypt was previously a major exporter but has since turned to imports to meet increasing domestic needs. It has been active in the LNG spot market as it tries to cope with surging demand amid soaring temperatures. Qatar also remains cautious about any resumption of exports after recently extending the force majeure on LNG shipments to Europe and Asia. 

Gold initially found some support after the FOMC decided to hold rates unchanged. Treasury yields and the USD moved lower after the rate decision, helping lift the precious metal higher as it does not pay interest.

However, it trimmed some of those gains after it became clear that there is support for higher borrowing costs as officials assess the inflationary impact of the Middle East conflict. 

Copper ended the session lower as risk appetite was suppressed by the escalation in fighting in the Middle East. Traders were also cautious ahead of the FOMC meeting on concerns that tighter monetary policy would weigh on economic growth and thus demand.

This comes as the recent sell-off across AI-related stocks had already weighed on sentiment, with spending on infrastructure within the sector being a key driver of demand for the metal.

However, the rising tensions in the Middle East helped push aluminium prices higher. Any acceleration in the restart of exports from Emirates Global Aluminium’s plants in Abu Dhabi looks unlikely in the near term. 

Iron ore was steady after Rio Tinto said that demand in China remains resilient and stable.

Fed keeps Funds rate steady, CBA US Economics, Joseph Capurso

As widely expected, the Federal Reserve (Fed) left the Funds rate unchanged at 3.50% to 3.75% for a fifth consecutive meeting. The decision was not unanimous, with Beth Hammack, Lorie Logan and Neel Kashkari voting in favour of a 25bp rate increase. The Fed also maintained its policy of keeping ample reserves in the banking system.

The post-meeting statement was almost identical to the previous release and remained brief at just 115 words. The Fed described economic growth as “solid” and noted job gains have “kept pace with the workforce”.

Chair Kevin Warsh has abandoned the Fed’s long-standing practice of providing forward guidance, leaving markets to rely more heavily on incoming economic data and comments from FOMC members. As a result, the gap between market pricing and Fed decisions could remain wider than under previous Fed chairs, making policy meetings a greater source of market volatility.

The absence of forward guidance meant markets had priced around a one-third probability of a 25bp rate increase at this meeting. The decision to remain on hold saw US two-year Treasury yields ease and the US Dollar Index fall by -0.7%.

With the post-meeting statement limited to 115 words, Chair Warsh’s press conference provided greater insight into the committee’s thinking. Warsh confirmed he intends to hold press conferences after each meeting for the remainder of 2026, without committing to continuing the practice in 2027.

Warsh reiterated the Fed’s commitment to returning inflation to target, stating: “Let me reiterate, there is no soft inflation target. There is no soft implicit target, not on this committee’s watch.” He noted inflation in consumer services has remained persistently elevated.

Warsh also indicated higher interest rates remain a possibility, commenting: “If inflation continues to be elevated through the forecast period, interest rates could well be part of that solution, but I wouldn’t say it’s in isolation.”

At the same time, he explained the Fed did not raise rates at this meeting because market interest rates have already increased since June. For example, the 30-year mortgage rate has risen 15bp to 6.7% since the previous meeting.

Since March we have expected the Federal Reserve to begin an interest rate hiking cycle in December 2026. However, we acknowledge the tightening cycle could begin earlier, in either September or October, should inflation continue to rise and the unemployment rate keep falling.

We continue to forecast three, and possibly four, 25bp rate increases, compared with the consensus expectation among US economists for two rate cuts beginning in the third quarter of 2027.

With unemployment continuing to trend lower, we expect the current moderation in wage growth will eventually reverse. Stronger wage growth would lift business costs and consumer inflation, increasing the likelihood the Fed will tighten monetary policy further.

Inflation has remained above the Fed’s 2% annual target since 2021.

The US economic outlook is not without risks. The US-Israel-Iran conflict and the possibility of a sharp slowdown in artificial intelligence capital expenditure remain the key downside risks.

However, US retail sales have remained resilient despite higher energy prices, with tax cuts more than offsetting the increase in petrol prices.

In addition, the hyperscalers have continued to increase their AI capital expenditure forecasts for 2026 and 2027.

Corporate news in Australia:

• Perpetual ((PPT)) rejected EQT’s $2.6bn takeover proposal but granted limited due diligence access to support further discussions
• Infrastructure investors are exploring the acquisition of stakes in Perth Airport as shareholders restart a sale process
• Private equity firms are competing to acquire oOh!media ((OML)) as the takeover process advances
• Morrison is in talks to acquire a minority stake in Optus from Singapore Telecommunications in a private investment deal valued at more than $2bn
• AirTrunk secured US$2.3bn in green financing to support the expansion of its Malaysian data centre operations
• Novigi is seeking a new private equity investor to fund its next phase of growth
• Nicolab is seeking to raise $6m ahead of a planned ASX listing

On the calendar today:

-NZ July ANZ business confidence

-AU June Building approvals

-EZ 2Q GDP

-EZ June Unemployment

-UK BoE rate decision

-US 2Q GDP

-US June PCE

-US June personal income/spend

-BOSS ENERGY LIMITED ((BOE)) Qtrly update

-CHAMPION IRON LIMITED ((CIA)) Q1 earnings report

-PLS GROUP LIMITED ((PLS)) Qtrly update

-PERSEUS MINING LIMITED ((PRU)) Qtrly update

-RESOLUTE MINING LIMITED ((RSG)) Qtrly update

-STRIKE ENERGY LIMITED ((STX)) Qtrly update

-VULCAN ENERGY RESOURCES LIMITED ((VUL)) Qtrly update

FNArena’s four-weekly calendar: https://fnarena.com/index.php/financial-news/calendar/

The Australian share market over the past thirty days…

For more detail go to FNArena’s Australian Broker Call Report, which is updated each morning, Mon-Fri.

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