Queen’s birthday close heralds majestic falls tomorrow

After some hefty falls on US markets – felt across blue-chip industrials and technology stocks - the close of the ASX today for the Queen’s Birthday holiday may only delay what is shaping up to be an ugly open tomorrow.

The Dow Jones, NASDAQ and S&P 500 indices were down -2.73%, -3.52% and -2.73% respectively.

If the ASX/SPI 200 is any proxy, down -1.62%, investors can expect the market to reopen lower on Tuesdsay.

Is US Recession inevitable

What’s spooking the market is the expectation that the Federal Reserve (The Fed) has little choice but to remain aggressive with its rate hiking regime.

With the US having recently recorded the highest rate of inflation in 40 years – an annualised rate of 8.6% in April - investors on Wall Street expected corporate earnings to remain somewhat muted.

To make matters worse, over the last few weeks the US market believes The Fed is hell bent on hurtling the US economy into an unavoidable recession.

Interestingly, the chairman of The Fed Jerome Powell has been careful not to let the ‘R’ word slip out.

Nevertheless, there’s widespread belief that The Fed now has little choice but to push the US economy into recession in order to regain control of prices.

Earnings fears

Economists and analysts appear more comfortable with an each-way bet on The Fed’s ability to bring the US economy into a soft landing, hence resulting in a share market recovery in the second half of the year.

But there’s mounting concern over where earnings estimates will go to from here.

Anthony Saglimbene, global market strategist at Ameriprise Financial believes analysts are going to need to adjust their earnings.

“I think the market reaction to that could be a little bit more negative,” Saglimbene noted in Bloomberg.

Next hike to be higher

While The Fed has been careful to broadcast policy shifts well in advance, Barclays economists now believe the US central bank has good reason to surprise markets by hiking more aggressively than expected in June.

With bond markets now pricing in a super-sized rate hike of 75 basis points by The Fed on 15 June, Barclays has revised its forecasts accordingly.

It’s 28 years since the Fed raised rates by a similar level.

Closer to home, local economists foresee our own central bank hiking rates by another 50 basis points when it next meets in July.

Shift back to quality

Within a recent investment update, Daniel Moore portfolio manager at Investors Mutual (IML) highlighted the recent momentum shift away from speculative markets into dividend-paying defensive stocks with strong balance sheets, and good earnings fundamentals.

The fund manager is bullish on Amcor (ASX: AMC) – a core holding within its portfolio - and is impressed by the packaging company’s ability to upgrade guidance within an inflationary environment.

While Nine Entertainment (ASX: NEC) was IML’s worst performing stock for the quarter, Moore reminds investors the stock now looks incredibly cheap, trading on 6x earnings when breaking out the 60% holding it has in Domain Holdings (ASX:DHG).

Electricity price exposure

In light of heightened inflationary pressure, Macquarie recently flagged shares suspected of being most exposed to rising energy costs.

At the sector level, the broker believes those in the eye of rising energy costs are: Data centres, materials, metals and mining, food products and supermarkets, oil refiners, telcos, casinos and REITs.

While Boral (ASX: BLD) and Coles (ASX: COL) may not be as susceptible to the impacts as others, Macquarie reminds investors that NextDC’s (ASX: NXT) earnings per share (EPS) is highly sensitive to electricity prices due to its power-hungry data centres.