The Australian share market is set for a positive start on Wednesday, following a strong rally on Wall Street. US stocks recovered from a sharp sell-off triggered by the launch of AI models by Chinese startup DeepSeek, with technology shares leading the charge. The Australian dollar continues to weaken, hitting five-year lows against the US dollar, potentially adding fuel to inflation concerns and making a February rate cut by the Reserve Bank of Australia more likely.
A rally on Wall Street is anticipated to propel Australian stocks higher. At 11:30am AEDT, the Bureau of Statistics is set to release the December quarter inflation data, which some economists believe will be pivotal in determining the likelihood of a February RBA rate cut. The Australian dollar has been under significant pressure since October 2023, recently plummeting to five-year lows against the US dollar.
The local currency's decline can be attributed to a confluence of factors, including a robust US dollar, sluggish domestic performance, and Australia's close economic ties to the weakening Chinese economy, which has resulted in lower commodity prices. For instance, the price of iron ore has fallen from its 2021 peak of nearly $US220 per tonne to just over $US100 per tonne. A weaker Australian dollar exacerbates the inflationary pressures and complicates the task of reducing interest rates, as it drives up the cost of US imports. The Aussie dollar has been depreciating against a range of currencies in recent months, including the pound, euro, and US dollar. While this weaker currency presents a boon for businesses engaged in exports to countries like the US, it can strain the budgets of travelers and negatively impact import-dependent companies. The unpredictable nature of President Donald Trump and the uncertainty surrounding US interest rate cuts contribute to the Australian dollar's vulnerability to further depreciation. Meanwhile, US stocks experienced a rebound on Tuesday, with artificial intelligence-linked and other technology shares recovering from sharp losses incurred the previous day as investors seized upon bargain opportunities. The Nasdaq led the gains. Nvidia, a leading AI chip manufacturer, surged by 6.8%, providing the index with its most significant boost, a day after its 17% plunge wiped out approximately one trillion dollars from its market value, marking the largest single-session loss for any company. The S&P 500 technology sector rose by 3%, the most notable gain among all S&P 500 sectors, while an index of semiconductor shares climbed by 0.5%. Investors eagerly awaited earnings reports from prominent companies like Apple, Microsoft, and others scheduled for this week. Apple's shares advanced by 3.9%. The tech sector sell-off followed the launch of AI models by Chinese startup DeepSeek, which claimed to be on par with or even superior to industry-leading US rivals at a fraction of the cost. 'We're witnessing the typical bounceback rally you'd expect when news lacks specificity and hints at a potential future change,' remarked Rick Meckler, partner at Cherry Lane Investments, a family investment office in New Vernon, New Jersey. 'A segment of the tech market, particularly in the realm of AI, was primed for a pullback, and this news provided the catalyst. Today, bargain hunters are returning, and those who downplay the significance of DeepSeek's news due to its ambiguity are also contributing to the rally,' he added. Nvidia's forward price-to-earnings ratio, a widely used valuation metric, earlier dipped to its lowest point since December 2023. On Wednesday, the Federal Reserve is widely anticipated to maintain its lending rate steady in its inaugural interest-rate decision for the year.
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