$200bn in collateral damage in one week. What comes next for the ASX200?
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Ahead of the release of last Friday's U.S inflation data, the market was hopeful that it would confirm that inflation had or was close to peaking. Thereby allowing central banks to take their foot off the monetary tightening pedal.
Instead, the surprisingly high inflation number accompanied by an "eye watering" rise in 5-10yr inflation expectations in the University of Michigan confidence survey pushed the Federal Reserve to pull down harder on its monetary tightening lever.
The Feds 75bp rate hike, the largest since 1994, is likely to be followed by one of a similar size in July, taking the Feds Fund rate quickly towards 3.4% by year-end.
Back in March, St Louis Fed President Bullard said that he would like to see the Federal Funds rate raised to 3% by the end of this year and compared the current tightening cycle to the tightening cycle of 1994. At the time, most of the market thought he was crazy. However, it piqued our interest, as noted in this article here and thus far, Bullard’s call is playing out as predicted.
This week the RBA Governor also lunged for the tighter monetary policy lever. In an interview on the 7.30 pm report RBA Governor Phillip Lowe said that it is "reasonable" to expect the cash rate to reach 2.5% from the present level of 0.85% and that he expects inflation to reach 7% by the end of the year-end.
The revised inflation target is 1% higher than the "around 6 per cent" RBA forecast from just a month earlier in the RBA's semi-annual Statement of Monetary Policy.
Elsewhere, the Swiss National Bank surprised the market and lifted rates for the first time since 2007. While the Bank of England delivered its first hawkish rate hike in the current tightening cycle and noted inflation would build "to slightly above 11% by October."
If there was still some doubt beforehand, this weeks actions show that central banks are fully committed to raising interest rates and taming inflation at all costs. The $200bn that has been wiped off the ASX200's market capitalisation this week is but one example of the collateral damage.
What does it mean for the ASX200?
Until this week the ASX200 appeared to be in the midst of an orderly and healthy correction, trading just 10% below its all-time highs and within a well-defined range between 7630 and 6750ish.
However, underneath the bonnet, the cracks had begun to appear. In particularly the heavyweight Financial Sector was struggling under the weight of falling house prices, softening consumer confidence and higher interest rates.
This week the Financial Sector plunged through major support at 6000. At the same time the ASX200 fell through its key support zone and range lows near 6850/6750 creating significant technical damage to both indices.
As such, it is imperative that both the ASX200 and the Financial Sector rebound back above the key levels noted above quickly to restore some much-needed confidence to the market.Otherwise, the risks are for the ASX200 to move lower towards 6000 with scope to 5750 in the sessions ahead.
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