Is the worst over? ASX200 opens -0.60% lower

Following a more benign session of trading in the US overnight, with the Dow Jones and the S&P500 only down -0.50% and -0.38% respectively, and with the NASDAQ up slightly at 0.18%, local investors can expect a better trading day ahead.

After Tuesday heralded the worst day since May 2020, down -3.6%, the local bourse is now -12.4% below its August peak.

However, investors can take some comfort in the fact the ASX SPI 200 is pointing to falls today of less than -1%.

What appears to be protecting the local market from the heftier falls recently witnessed in the US is an overexposure to resource stocks, which have been on a tear courtesy of soaring commodity prices.

Does ‘lower’ mean cheap?

While the energy sector is up 33%, the tech and bank sectors are down -37% and -10% respectively.

At face value, everything may look oversold.

However, with financials, consumer discretionary and tech sector earnings facing headwinds, Saxo Markets warns that the local market isn’t as cheap as the recent sell-down might suggest.

The market’s 12-month forward price-to-earnings ratio fell to about 13 times, which is considerably lower than the two-decade average of about 14.7 times.

With market fundamentals looking decidedly shaky, Saxo Markets expects aggregate earnings to continue falling.

The broker notes while the commodities sector is clearly the outlier, the consumer sector – the biggest part of the economy – is very weak.

Aping the Fed

What’s clearly hanging over the market today like the 'Sword of Damocles' is whether or not the US Federal Reserve (The Fed) will in the early hours of Thursday announce a 75-basis-point interest rate rise, its biggest since 1994.

Given that the Reserve Bank (RBA) delivered a bigger-than-expected rate hike of 50 basis points (bps) last Tuesday, there’s growing concern our central bank may ape the Fed, and ratchet up the next rate hike when it next meets.

While the market is now pricing in a Fed rate hike of 0.75% tomorrow, some economists suggest a 100pbs hike is not an impossibility.

Three at 50bps then back to 25bps

Having assessed the underlying rhetoric from the RBA governor Philip Lowe last Tuesday, Goldman Sachs now expects the central bank to lift rates by 50bps in July, August and September.

Thereafter, the broker expects the tightening pace to slow, with monthly 25bps increases between September and year’s end.

Assuming the broker is right, the cash rate will peak at 3.1% by year-end, up from 2.6% previously.

While Goldman’s revised terminal rate forecast is significantly above the latest consensus forecast of 2.35% by first quarter 2023, it remains below market pricing of around 3.9% by first quarter 2023.

Avoid the dummy spit

Despite US stocks entering a bear market, First Trust chief market strategist Bob Carey warns investors not to panic sell.

Carey doesn’t believe the perception that investors are exposed to surrendering gains achieved over time to negative events, such as wars, inflation and the occasional black swan, holds water.

While nothing is guaranteed, Carey also reminds investors that the S&P 500 Index has never failed to fully recover the losses sustained in a bear market.