Category: Stock Market

The BHP Group Ltd (ASX: BHP) share price has been volatile over the last year. But I think it’s shaping up to be a long-term opportunity due to its portfolio of commodities.

BHP is one of the biggest resource businesses in the world, though it’s now a bit smaller after divesting its oil and gas business to Woodside Energy Group Ltd (ASX: WDS).

Oil and gas still have their place in the world, particularly in the current global energy situation. However, eventually, there may be a transition away from fossil fuels, so it was probably a good idea for BHP to divest while prices are good for those commodities.

I do like the look of what’s left within the ASX mining share’s commodity portfolio and this is what attracts me to BHP’s share price as a long-term idea.

Decarbonisation

Many countries and governments around the world are working on decarbonising and electrifying.

As BHP says, it’s “actively managing” its portfolio for long-term value creation through the cycle.

There are three ‘future-facing’ commodities that BHP is focused on – copper, nickel, and potash.

Media group Reuters reported on comments made by BHP’s chief commercial officer, Vandita Pant, at the FT Commodities Asia Summit late last year. She said:

Some of the modelling that we have done showed that in, let’s say a decarbonised world … the world will need almost double the copper in the next 30 years than in the past 30.

And for a commodity like nickel, that quadruples. So four times nickel needed for the next 30 years than the past 30 years and all to be done as sustainably as possible.

Why are copper and nickel so important for decarbonisation? Nickel is an important commodity for use in electric vehicle batteries. Copper is used for various electrical wiring including inside the electrical vehicle, the charging stations and other renewable energy infrastructure, as noted by Bloomberg.

In terms of its copper resources, BHP says it has the “largest resource endowment of any company globally, and amongst the highest average grade”.

BHP also says it has the second-largest nickel sulphide resource with around 90% of nickel metal sales to the electric vehicle supply chain.

I think BHP has built a very useful commodity portfolio which can help the BHP share price for many years to come.

Potash

The Jansen project in Canada is a key focus for growth for the business. Potash is seen as a lower-emission fertiliser.

BHP says there is significant expansion potential to support up to a century of production in the world’s “best” potash basin.

Management calls Jansen a world-class asset which increases the diversification of the business, customer base and operating footprint.

The demand for potash is expected to grow thanks to “reliable base demand leveraged by population growth and higher living standards”.

BHP believes Jansen will enter the market at the bottom of the global cost curve, delivering 4.35 million tonnes per annum.

The company points to structural competitive advantages for Jansen such as using around 60% less equipment to deliver lower costs, a shaft designed to be 25% to 50% larger than competitors (supporting low capital intensity expansion options), leading equipment and material handling systems, and a continuous, automated loading system.

Final thoughts on the BHP share price

BHP is certainly not a hidden gem. It’s the biggest business on the ASX. But, I think its exposure to commodities with growth potential is attractive for the long term, while iron ore generates big cash flow and dividends in the short term.

The post Why I think the BHP share price is a good buy for the long term appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Treasury Wine Estates Ltd (ASX: TWE) share price has whipsawed in 2022, trading as high as $13.20 and as low as $10.54 in that time.

It has danced between $11 and $12 from March to May and it’s down 11.8% this year to date (below). It’s been trending down since 31 May and today, the Treasury Wine share price is $10.88 — down 0.37% for the day so far.

Analysts stacked on the buy side

Over the past 12 months, the number of buy calls on Treasury Wine has crept upwards. Currently, 58% of brokers covering the stock have it rated as a buy, according to Bloomberg data.

That’s crept up from 33% this time last year.

Another 37% have it rated a hold — that number reducing from roughly 46% a year ago. In terms of price targets, an Evans and Partners note from November 2021 lists a valuation for Treasury Wine of $14.60.

However, a June note from Credit Suisse has it valued at $13.50 per share. Jefferies valued it at $14.50 apiece earlier this month as well.

Macquarie and Goldman Sachs are both neutral at $12.55 and $11.90 respectively.

Those at Barrenjoey aren’t a fan. The team rates the Treasury Wine share price underweight on a $9.50 price objective in May. This is the only sell rating.

The consensus price target is $13.17 from this list. That suggests about a 20% potential upside.

Treasury Wine share price snapshot

In the past 12 months, Treasury Wine stock has slipped about 9.5% into the red. From its 52-week high, it has slipped 18%.

That means it must gain about 23% to return to its former highs. Moreover, there’s no telling how long this volatility will last.

The post Despite recent volatility, brokers are bullish on the Treasury Wine share price appeared first on The Motley Fool Australia.

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Motley Fool contributor Zach Bristow has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs. The Motley Fool Australia has recommended Macquarie Group Limited and Treasury Wine Estates Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Yesterday, Westpac Banking Corp (ASX: WBC) unveiled Australia’s consumer confidence measurement for June.

A combination of persistent inflation and more expected interest rate increases significantly dampened the average consumer’s sentiment in the latest quarter. The unsettling data was accompanied by further weakness in the S&P/ASX 200 Index (ASX: XJO), as the benchmark sunk another 1.27% on Wednesday.

At face value, the consumer sentiment index hitting recessionary lows is worrisome. Though, there might be a silver lining to be found.

Let’s dive deeper into the data.

How bad is it?

The consumer sentiment index, often referred to as consumer confidence, is an economic indicator that aims to convey how consumers are feeling about their financial situation. In short, it’s an approximate reflection of how likely people are to spend their money.

Consumers are more likely to spend their money on goods and services when they are optimistic about their financial future. In contrast, consumers are more likely to tighten their belts during economic uncertainty.

According to the June report, consumer confidence in Australia fell 4.5% from the prior quarter to 86.4. A reading below 100 is considered a pessimistic outlook held by the consumer.

The deterioration in sentiment follows the Reserve Bank of Australia (RBA) lifting the cash rate by 50 basis points on 7 June, making debts more expensive in the process.

Westpac chief economist Bill Evans highlighted that this figure is in close proximity to some of the worst financial periods for the country. In the June report, Evans stated:

Over the 46-year history of the survey, we have only seen Index reads at or below this level during major economic dislocations. The record lows have been during COVID-19 (75.6); the Global Financial Crisis (79.0); early 1990s recession (64.6); the mid-1980s slowdown (78.7) and the early 1980s recession (75.5). Those last three episodes were associated with high inflation; rising interest rates; and a contracting economy – a mix that may be threatening to repeat.

Additionally, consumers are likely putting off household purchases, based on the report’s findings. The ‘time to buy a major household item’ sub-index slipped 3.3% to 89.5. Such a number has only been recorded prior to a severe economic contraction.

Potential positive in Australia’s falling consumer confidence

The consumer confidence data might sound like a lot of doom and gloom, but perhaps there’s a bright side.

Ultimately, the RBA is jacking up interest rates in a bid to tame the raging beast that is inflation. In a sentence, inflation is the evaporation of our dollar’s purchasing power due to increasing prices.

This can either be attributable to increased demand (more dollars competing for the same number of goods/services), or reduced supply (the same amount of dollars competing for a smaller number of goods/services).

While both supply and demand are creating issues, interest rate increases ‘force’ consumers to spend less on inflationary items, and more on debts.

Essentially, the fall in consumer confidence might be an early sign that the RBA’s rate hike is starting to work on lowering inflation. If so, it might mean Australia won’t require the feared interest rates of 3% to 4% to bring inflation back in line.

AMP chief economist Shane Oliver noted this in a tweet yesterday, as shown below.

Aust Westpac/MI consumer confidence -4.5% in June to a well below average 86.4% and rising cost of living/rising rates impact. Broad based falls in components but particularly in “family finances”. This will ultimately cap how much rates can rise… pic.twitter.com/aKu3cR2K7Z

— Shane Oliver (@ShaneOliverAMP) June 15, 2022

https://platform.twitter.com/widgets.js

As Oliver states, the notable collapse in consumer confidence in Australia hints at an upper bound for interest rates.

Much of the share market is pricing in peak interest rates of ~4%. If Oliver is right, a lower peak in rates could result in a more positive outlook for equities.

The post Westpac says consumer confidence is falling. Could this actually be good news? appeared first on The Motley Fool Australia.

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Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Humm Group Ltd (ASX: HUM) share price is sliding on Thursday. It comes as the battle to sell the company’s consumer finance leg – housing its buy now, pay later (BNPL) business – heats up.

The company’s director and largest shareholder Andrew Abercrombie – who opposes the sale of the company’s consumer finance segment – has labelled the transaction “nothing but a garage sale”. He urged the company’s board to inform shareholders of the sale’s falling value yesterday afternoon.

However, Humm chair Christine Christian noted the segment has been underperforming in 2022 and will continue to struggle if not sold.  

At the time of writing, the Humm share price is 65 cents, 3.7% lower than it was at its previous close. However. it was up by almost 4% at 70 cents in early trade before retreating.

Let’s take a closer look at the clash emerging over the future of Humm’s BNPL business.

Directors disagree on proposed BNPL sale

The Humm share price is sinking on Thursday as Abercrombie continues his campaign against the sale of the company’s consumer finance business despite its tumbling earnings.

In a trading update released to the market this morning, the finance provider outlined the extent of the segment’s suffering.

Its cash net profit after tax plummeted 61% over the fiscal year to date to May. Meanwhile, its net receivables slipped 3.6% between 31 December and 31 May.

 â€œThe trading environment is very tough for [Humm consumer finance], with intense competition, rising interest rates, and weakening consumer sentiment,” Christian told the market.

“Without enhanced scale, which the [Latitude Group Holdings Ltd (ASX: LFS)] transaction will deliver, the outlook for [the segment] will be even more challenging.”

The company has previously flagged not selling the business could pose a “significant risk” for the Humm share price.

Latitude has offered Humm shareholders $35 million cash and 150 million Latitude shares in exchange for the business. When the offer was initially tabled, the scrip portion of the sale was valued at $300 million.

However, the Latitude share price has since fallen 25%. As of its previous close, the offer is, therefore, valued at around $225 million.

Yesterday Abercrombie reconfirmed his belief that the proposed transaction was “a dud deal from the very beginning”.

He continued: “[It] undervalu[es] what I believe is a great business which the very same board confirmed was profitable just seven months ago.”

Abercrombie is calling for the company to outline the current value of the transaction. He says doing so will allow shareholders to place an informed vote when they go to the ballots on the sale next week.

“When I speak to shareholders, some of them continue to believe that the consideration payable by Latitude is worth $335 million,” he said.

“I think it is only fair for the chair to inform all shareholders of this huge drop in value.”

Humm share price snapshot

The Humm share price is currently 27% lower than it was at the start of 2022. It has also slipped 36% since this time last year and is down 5% over the past month.

The post ‘A dud deal’: Why is the Humm share price falling on Thursday? appeared first on The Motley Fool Australia.

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Motley Fool contributor Brooke Cooper has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Humm Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Chalice Mining Ltd (ASX: CHN) share price has nosedived by more than 60% since November but it’s captured the attention of investors today.

Chalice Mining opened strongly, rising to $4.11 shortly after the open. This was 6.5% higher than its previous close. It has since settled at a gain of 4% with shares trading at $4.01.

In wider market moves, the S&P/ASX 300 Metals & Mining (ASX: XMM) index is up 1.75% today.

What’s up with the Chalice Mining share price?

Chalice Mining shares have been gliding downwards in a persistent trend since November 2021. Since that time, Chalice Mining shares have lost more than 60% of its value.

The shares rapidly declined from 20 May and also suffered during the wider market sell-off in recent weeks.

An institutional placement in May saw the company raise $100 million. However, market pundits weren’t impressed, as seen on the chart.

But investors are piling into Chalice Mining today in sync with the mining index, suggesting broad sector strength.

Notably, commodity markets for most metals are rallying in today’s session. Copper is up 1.27% and steel is up by 1.57%. Nickel is up 2.39% and gold has dipped 0.02%.

Metal prices remain buoyant amid an ongoing commodity boom.

In the past 12 months, the Chalice Mining share price has slipped 49% into the red.

The post Chalice Mining share price spikes 6%, reversing series of losses appeared first on The Motley Fool Australia.

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Motley Fool contributor Zach Bristow has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The BHP Group Ltd (ASX: BHP) share price is pushing higher this morning.

At the time of writing, the mining giant’s shares are up over 1% to $44.43.

While this is positive, it is a touch softer than the gains being made by some of its large cap rivals.

What’s going on with the BHP share price?

The relative underperformance of the BHP share price today in comparison to its peers may have been driven by news that the Big Australian will not be selling its New South Wales Energy Coal (NSWEC) portfolio.

Following a coal divestment review, the mining giant appears to have decided that holding onto these assets would create more value than selling them even if it ruffles the feathers of some of its ESG-focused shareholders.

This follows a trade sale process for NSWEC that was conducted but did not result in a viable offer being tabled.

According to the release, an assessment of the resource economics, geotechnical profile, and future investment requirements determined that continued mining in the near term and moving to a closure in 2030 provides the optimal financial outcome when compared to alternate options.

Though, plans to continue operating NSWEC to FY 2030 are subject to obtaining relevant approvals to enable mining beyond the current consent of 2026. Work is now underway to prepare the application for the relevant approvals with the New South Wales and Australian governments.

BHP advised that this will include plans for closure of the operations, including rehabilitation and determining the most appropriate post-mining land use.

It is expected that continued work on rehabilitation will take 10 to 15 years following the cessation of mining. The provision for closure of the mine as at 31 December 2021 was approximately US$700 million.

Management commentary

BHP’s Minerals Australia President, Edgar Basto, commented:

We thoroughly reviewed potential options for NSWEC including divestment and future investment requirements. Seeking approval to continue mining until 2030 avoids closure in 2026 and enables BHP to balance the value and risk of those considerations and our commitments to our people and local communities.

NSWEC’s Vice President, Adam Lancey, added:

We will work with our people, local business partners, Traditional Owners and local and state governments to operate safely and productively, prepare for closure and sustainable rehabilitation of the site, and ensure the pathway to closure is managed in a way that meets community and regulatory expectations.

The post BHP share price pushes higher despite coal sale fail appeared first on The Motley Fool Australia.

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More reading

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Link Administration Holdings Ltd (ASX: LNK) share price is sinking in early trading today.

Investors are selling amid news of the ACCC’s “preliminary competition concerns” over Dye & Durham’s (D&D) proposed acquisition of the administration services company.

Meanwhile, shortly before that announcement this morning, the company issued a release noting a potential litigation in an English Court.

At the time of writing, the Link share price is trading at $3.39, down 9.36% on the previous close.

In wider market moves, the S&P/ASX All Technology Index (ASX: XTX) is lifting 2.07%, while the S&P/ASX 200 Financials Index (ASX: XFJ) is up 0.78%.

Here’s how the Link share price stacks up against the two indices in recent months.

Link share price sinks amid ACCC probe

The Link share price is falling after the ACCC outlined “significant preliminary competition concerns” with Dye & Durham’s proposed acquisition of the company.

These concerns relate to the conveyancing sector. The ACCC alleges:

The proposed acquisition would align PEXA, a near monopoly provider of Electronic Lodgment Network services, with D&D, a significant supplier of software to lawyers and conveyancers, significantly increasing vertical integration in this industry.

ACCC Deputy Chair Mick Keogh said the acquisition was “relevant to everybody”.

“Given PEXA’s position as the only fully operational Electronic Lodgment Network, the ACCC will closely scrutinise any transaction that would result in vertical integration between PEXA and other industry participants,” he said.

We have significant preliminary concerns that this transaction would enable D&D and PEXA to engage in mutual preferential dealing that would hinder existing competition or raise barriers to entry in one or more markets in the conveyancing workflow.

The Link board responded with a release immediately, noting the probe is a “preliminary view….and is not a final decision”.

“The Link Group Board continues to unanimously recommend that Link Group shareholders vote in favour of the proposed acquisition,” it said.

“Accordingly, Link Group will continue to work closely with D&D to progress the competition approval process and all other regulatory approvals required for implementation.”

Litigation proceedings

In other news also possibly affecting the Link share price, the company this morning said it had been notified by solicitors that proceedings had been filed within the English High Court.

“[Link] has been notified by Harcus Parker and Leigh Day that an application for a Group Litigation Order has been filed in the English High Court,” it said.

“It is expected that the application papers will be served on [Link] shortly.”

Link notes that the claim relates to its role as “authorised corporate director” of the LF Equity Income Fund, formerly the LF Woodford Equity Income Fund.

Link started winding up the Woodford fund in 2020, returning cash to investors.

The Financial Conduct Authority (FCA) website shows a long list of history and an ongoing investigation with the fund.

Despite the pressure, the company isn’t backing down.

“[Link] will vigorously defend itself against the proceedings,” it said.

Meanwhile, the Link share price has slipped 32% into the red over the past year, and almost 40% this year to date.

The post Double whammy: Link share price sinks 9% amid ACCC probe, litigation news appeared first on The Motley Fool Australia.

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Motley Fool contributor Zach Bristow has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Link Administration Holdings Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Flight Centre Travel Group Ltd (ASX: FLT) share price is heading north today.

This follows the company’s latest announcement regarding an incentive plan for its staff around the world.

At the time of writing, the travel agent shares are climbing 1.84% to $17.73.

Flight Centre set to reward its global staff

Investors are bidding up the Flight Centre share price which dropped almost 15% in the past week. Bargain hunters are taking advantage of the share price weakness following 4 trading days of consecutive losses.

After yesterday’s market close, Flight Centre advised that a number of employees will be part of a multi-million-dollar retention initiative.

Roughly 10,000 sales and support staff will receive additional share rights under the extended Global Retention Rights (GRR) program. However, this will be granted on the proviso that they continue their Flight Centre careers during the COVID-19 recovery phase.

Introduced during FY22, the GRR program aims to offset COVID-19’s impact on businesses and their people for another 12 months.

The proposed FY23 offering will see a one-time grant of share rights valued at $3,750 to each eligible staff member. For those workers who aren’t located where the company doesn’t operate share plans, a similar cash benefit will be paid.

The FY23 rights are expected to be issued to employees in August 2022. This will vest when the company releases its half-yearly results in February 2024. From there, GRR participants who meet the conditions will be able to convert the rights to Flight Centre shares.

The GRR program is expected to cost between $30 million and $35 million.

What did management say?

Flight Centre managing director, Graham Turner commented:

The GRR program is a material investment in the people who are integral to both our recovery and our future success and we believe it is contributing to the healthy overall retention rates we are seeing.

It is first and foremost a retention program that encourages our people to continue their careers with us during what we believe will be an important period in our recovery. Travel is rebounding but there is added complexity, which once again underlines the value of our people and their expertise.

Flight Centre share price summary

Since this time last year, Flight Centre shares have travelled 16% higher as the travel sector begins to recover.

Although when looking at year-to-date, its shares have remained relatively stagnant following the latest market downturn across international markets.

On valuation grounds, Flight Centre commands a market capitalisation of roughly $3.55 billion.

The post Flight Centre share price climbs amid $30m investment in staff appeared first on The Motley Fool Australia.

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Motley Fool contributor Aaron Teboneras has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Flight Centre Travel Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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It feels like the world is in chaos at the moment.

Share markets are plunging from inflation, interest rate and energy fears. Last week, NSW and Queensland residents sat in blackouts as power companies took generators offline, and now the national regulator has suspended the wholesale electricity market.

Many experts are warning that even for long-term investors, it may take a while for everything to settle down again.

The only sure bet this year seems to be energy.

Oil and gas prices were already rising. Then Russia stamped into Ukraine in February, which deteriorated supply and turbo-charged the price hikes.

Energy inflation won’t abate for a while because the structural issues facing Australia and the world can’t be fixed quickly. 

If you want to get in on this thematic, here are two energy ASX shares one expert recommended as buys this week:

Gas prices to stay high for foreseeable future

Shares for South Australian oil and gas company Santos Ltd (ASX: STO) have enjoyed a nice 22% gain since the start of the year.

Fairmont Equities managing director Michael Gable is bullish on the stock.

“We expect gas prices to remain high this year due to the Ukraine war,” he told The Bull.

“It will take time for gas supplies in Australia to increase, which should lift company earnings.”

Gable noted that, between March and May, the Santos share price couldn’t quite break the $8.40 barrier.

But this month, it broke through, giving him confidence that it would elevate to another level.

Just a fortnight ago, analysts at Wilsons named Santos as its “preferred Australian energy exposure”.

“Santos is still one of the cheapest large-cap energy stocks on the ASX – Santos is trading with the lowest implied oil price at US$63/bbl.”

The stock that’s almost doubled this year

The fuel shortages this year have advanced the cause of renewable energies. Nations around the world are realising how valuable such sources could be to avoid their reliance on oil producers.

But the irony is that the 2022 energy crisis has made coal producers very wealthy.

Whitehaven Coal Ltd (ASX: WHC) is no exception, with its shares rising an incredible 85% since the start of the year.

Gable sees the tailwinds continuing for the company.

“Coal prices are expected to remain high due to supply constraints, and we expect this will flow through to Whitehaven’s earnings.”

He advised investors not to worry about the huge leap in the valuation.

“Despite big share price increases this year, the strong uptrend looks sustainable, as there’s no signs of it slowing at this point.”

Plenty of others agree with Gable. 

According to CMC Markets, 10 out of 13 analysts currently recommend Whitehaven shares as a strong buy.

The post 2 energy ASX shares to buy while inflation is killing everything else: expert appeared first on The Motley Fool Australia.

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More reading

• 5 things to watch on the ASX 200 on Thursday
• The Santos share price is up 27% this year. Is it too late to buy?
• ‘Resilient growth profile’: Why this broker is tipping Santos shares to outperform
• This fund manager is optimistic on these 2 leading ASX 200 energy shares
• 5 things to watch on the ASX 200 on Wednesday

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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S&P/ASX 200 Index (ASX: XJO) shares are charging higher in early trade today, up 1.0%

Investors will welcome the change in momentum after ASX 200 shares dropped 1.3% yesterday, bringing the benchmark’s year-to-date losses to 13.0% at Wednesday’s close.

Today’s gains come in the wake of the biggest interest rate hike delivered by the US Federal Reserve in 28 years.

Overnight the Fed announced a 0.75% rate increase, lifting the target range for the federal funds rate to 1.5% to 1.75%.

And almost every sector is joining in the rally.

ASX 200 shares by sector

Here’s how ASX 200 shares are performing this morning by sector:

• S&P/ASX 200 Energy Index (ASX: XEJ) down 0.6%
• S&P/ASX 200 Resource Index (ASX: XJR) up 1.0%
• S&P/ASX 200 Financials Index (ASX: XFJ) up 1.2%
• S&P/ASX All Technology Index (ASX: XTX)* up 1.3%  (*This index contains some stocks outside of ASX 200 shares)

So, why are markets rallying after the world’s most influential central bank upped rates by the most since 1994?

‘Flexibly hawkish’ Fed chair

ASX 200 shares are following US stocks higher, with the S&P 500 Index (SP: .INX) closing up 1.5% yesterday (overnight Aussie time) and the tech-heavy Nasdaq Composite (NASDAQ: .IXIC) finishing up 2.5%.

The Fed’s 0.75% rate hike was higher than the 0.50% most analysts had predicted last week. But by Monday, many analysts were predicting the larger increase. This saw markets selling off earlier in the week, pricing in the outsized rate hike.

Fed chair Jerome Powell also placated markets by indicating further rate hikes of this size would be uncommon.

“Clearly, today’s 75 basis-point increase is an unusually large one and I do not expect moves of this size to be common,” he said.

Commenting on Powell’s remarks, Evercore ISI’s Krishna Guha and Peter Williams said (quoted by Bloomberg): “Powell’s press conference came across much less hawkish than the initial message. Flexibly hawkish came across as a risk-friendly combination in asset markets.”

The Fed now forecasts that the official rate will hit 3.4% in December and lift to 3.8% in 2023, significantly higher than what the central bank had forecast as recently as March.

That, as you’re likely aware, is due to hot-running inflation in the world’s top economy.

“One of the factors in our deciding to move ahead with 75 basis points today was what we saw in inflation expectations,” Powell said.

Separately, the Fed stated:

The invasion of Ukraine by Russia is causing tremendous human and economic hardship … In addition, Covid-related lockdowns in China are likely to exacerbate supply chain disruptions. The Committee is highly attentive to inflation risks.

US inflation is climbing at its fastest pace in 40 years. After slipping in April to 8.3%, from 8.5% in March, inflation surprised to the upside last Friday, with May’s figures coming in at 8.6%.

Despite the big rate increases and large monthly reductions in the Fed’s massive balance sheet, Powell indicated that the US isn’t likely to nosedive into a recession.

“It does appear that the US economy is in a strong position, and well positioned to deal with higher interest rates,” he said.

That strength should help support both US stocks and ASX 200 shares in the year ahead.

The post Why ASX 200 shares are charging higher following super-sized US Fed rate hike appeared first on The Motley Fool Australia.

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More reading

• 5 things to watch on the ASX 200 on Thursday
• The Santos share price is up 27% this year. Is it too late to buy?
• Why is the WAM Capital share price down 20% in June?
• Despite recent volatility, brokers are predicting big things for the Telstra share price. Here’s why
• Falling ASX share prices = bigger dividend yields. Here’s what you need to know

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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