Australian shares to drop after US rally runs out of steam

The news: The Australian sharemarket is expected to drop in early trading, building on a tepid session on Wall Street, where investors turned cautious after a sharp run-up in recent days.

The numbers: The Dow Jones index was trading just 0.06% higher, with the broader S&P 500 edging up 0.01%, and the tech-heavy Nasdaq adding 0.22%. In the local market, ASX 200 futures were trading 47 points or 0.62% lower at 7504 points at 7.00am AEDT on Thursday.

The context: US stocks were muted overnight after recent gains that have been driven by falling interest rates and the Federal Reserve's dovish turn, with a gloomy outlook by a gloomy FedEx indicative of a potential slowdown. Markets are still pricing in a 69.6% likelihood of a rate cut arriving as soon as March, but traders are looking for clues from the US Personal Consumption Expenditures report on Friday, which will provide further insight on income growth, consumer spending, and inflation.

What they said: "We've had this aggressive rally in December and investor sentiment is high, it went from bearish to bullish in almost record time," Thomas Martin, Senior Portfolio Manager at GLOBALT in Atlanta told Reuters. "So the markets are asking 'now what?'”