The ASX200 benchmark jumped 0.73% to close at 8,018 points, a historic high threshold as investors swell with confidence ahead of the impending US Federal Reserve rate cuts. Monday’s rally was driven broadly across the sector, with all 11 industry sectors ending in green and was led by information technology and discretionary stocks at a 1.39% and 1.37% respective increase. From the latest US data in June 2024, the CPI unexpectedly contracted by 0.1% in the month, despite economists expecting a 0.1% increase. Lower energy costs and significant slowdown in rent drove the unexpected decline in inflation. Financial markets priced in an 85% chance of a 0.25% rate cut from in the September meeting later in the year.
Interest rate cuts in the US is likely to widen the interest rate differentials, especially with the RBA poised to increase the cash rate in Australia due to the elevated inflationary environment. Investors would look to shift their capital from investments in US towards the higher interest rate environment in Australia. In particular, the weak AUD would support stronger capital flight into Australian investments that are relatively cheap, leading to higher demand for AUD and an appreciation. The Australian market could become part of the ‘great rotation’ if global investors start to seek opportunities outside of US large cap technology stocks, with potential for another rally.
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