ASX set to dip despite European gains

Stocks and US futures trimmed their advance and European bonds tumbled after hotter-than-expected German inflation numbers added to pressure for action from central bank policymakers to tame rising prices.

European equities pared a fourth day of gains, still on course for the longest winning streak since March. Wall Street was closed for the Memorial Day holiday. Luxury stocks outperformed Monday as China’s reopening plans boosted sentiment. Shares in theatre chain operator Cineworld Group soared after the movie Top Gun: Maverick topped the Memorial Day weekend box office.The Australian sharemarket is set to edge lower, with futures at 5.02am AEST pointing to a slide of 7 points, or 0.1 per cent, at the open.

Nasdaq 100 contracts and S&P 500 futures rose in a sign the bounce in US stocks may have further to run after Wall Street’s best week since November 2020. The S&P 500 wiped out its May losses and snapped a string of seven weekly declines as institutional investors rebalanced portfolios into the end of the month.

The dollar slipped for a third day versus major peers as havens lost their appeal amid the slightly improved mood. Cash Treasuries aren’t trading because of the Memorial Day holiday.

Traders are pondering whether the bottom of the selloff is near as investors have been buying the dip after one of the worst starts to the year for equities. However, a wall of worries remains from hawkish central banks underscoring fears of a recession, escalating food inflation from the war in Ukraine and China’s lockdowns stunting economic activity.

“We are in the middle of a bear-market rally,” Mahjabeen Zaman, Citigroup Australia head of investment specialists, said on Bloomberg Television. “I think the market is going to be trading range-bound trying to figure out how soon is that recession coming or how quickly is inflation going down.” She added that Treasury yields are set to peak this year.

Meanwhile, German inflation hit another all-time high, adding urgency to the European Central Bank’s exit from crisis-era stimulus after numbers from Spain also topped economists’ estimates. The reports came 10 days before a crucial ECB meeting where officials are set to announce the conclusion of large-scale asset purchases and confirm plans to raise interest rates in July for the first time in more than a decade.

Money markets wagered on 113 basis points of rate increases by year-end, up three basis points since Friday. German bonds held declines, with benchmark 10-year yields eight basis points higher at 1.05 per cent.

Traders will be looking to the US payroll numbers later this week to gauge the Federal Reserve’s tightening path as it strives to rein in inflation. Meanwhile, the Fed is set to start shrinking its $8.9 trillion balance sheet starting Wednesday.