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The share market suffered its biggest setback in three months after unexpectedly hot US inflation data forced investors to reassess the outlook for interest rates.
Equity markets from Europe through to Asia turned sharply lower as risk assets plunged and bond yields and the US dollar surged. The sell-off on Wall Street was the ninth worst in history, according to Bloomberg.
The S&P/ASX 200 fell almost 3 per cent this morning before paring its fall to 181 points or 2.58 per cent. The decline was the largest since June 14.
All 11 sectors retreated. Just five of the Australian benchmark’s 200 component companies advanced. The dollar fell towards two-year lows.
What moved the market
Australian investors went to bed complacently expecting August US consumer prices to confirm the downward trend in inflation since June. They woke to a horror show after headline inflation ticked higher and core inflation increased by twice the consensus expectation.
The S&P 500 dived 4.32 per cent to its worst loss in more than two years as economists priced in bigger rate rises this year.
“Before the inflation print, the interest rate market was priced for 75/50/25bp rate hikes in September, December and November that would have seen the Feds Fund rate end the year in a range of 3.75-4%. Post the inflation release, the rates market has moved towards a 75/75/50bp sequence of rate rises that would take the Fed Funds rate to a 4.25-4.50% range into year-end,” Tony Sycamore, market analyst at City Index, said.
The Dow tumbled 1,276 points or 3.94 per cent. The Nasdaq Composite shed an eye-watering 5.16 per cent.
Australian stocks fell as analysts reassessed the domestic rates outlook. Japanese bank Nomura raised its prediction for next month’s RBA meeting to an increase of half a percentage point from a previous forecast of a quarter of a percentage point. The bank also raised its forecast for the top of the cycle to 3.5 per cent by February from 3.1 per cent in December.
The August employment report tomorrow could intensify pressure on the Reserve Bank if it comes in stronger than expected. Economists expect jobs growth of around 35,500, leaving the unemployment rate steady at a 48-year low of 3.4 per cent.
“The state of employment in Australia is highly optimistic, and the jobs market is likely to stay robust, thanks to the labour crunch that the world is facing right now. Unemployment is at a record low level, and even if August jobs data reveals a little contraction in the market as it did in July, RBA’s hawkish stance is unlikely to change,” Kunal Sawhney, chief executive of research group Kalkine, said.
Despite the scale of today’s fall, the index was still higher than it was last Wednesday. The ASX 200 closed at a seven-week low that session.
Winners’ circle
The winner’s podium was a lonely place for much of the session. Computershare was the only stock on the Australian benchmark to rise in the first hour. The share registry finished best in class with a slim bounce of 1.19 per cent from a sharp fall yesterday.
ResMed turned positive late morning, rising 0.29 per cent as traders sought havens from the carnage among risk assets.
The day’s other gainers were miners: Coronado +0.89 per cent, Whitehaven Coal +0.24 per cent and South32 +0.23 per cent.
Outside the index, Australian Pacific Coal jumped 33.33 per cent following a joint-venture proposal from privately-owned Tetra Resources and Javelin Private Capital. The bidders seek to establish a joint venture and an agreement to manage the Dartbrook coal project in the Hunter Valley. The AQC board said the proposal was non-binding, conditional and at an extremely early stage.
Altech Chemicals rallied 31.25 per cent on news of a joint venture with a “world-leading German battery institute” to develop solid state batteries. Altech will have 75 per cent ownership of the venture, with Fraunhofer IKTS owning the other 25 per cent.
Doghouse
Borrowing-dependent property stocks led the selling as bond yields jumped in expectation official rates will go much higher. The yield on ten-year Australian government bonds climbed seven basis points to 3.656 per cent.
Industrial property giant Goodman Group slumped 5.03 per cent. Charter Hall Group shed 4.82 per cent, Stockland 4.7 per cent and Abacus Property 5.78 per cent.
Technology was the day’s other major loser for similar reasons: increased borrowing costs mean lower valuations. Megaport skidded 10.01 per cent, BrainChip 6.47 per cent and Xero 4.88 per cent.
Other growth stocks to feel the heat included Clinuvel -6.91 per cent, Zip Co -6.42 per cent and Novonix -5.35 per cent.
The ASX gold index fell 3.8 per cent after precious metals failed to provide protection from the market turmoil. Gold dropped 1.9 per cent overnight and shed another 0.3 per cent this morning.
Gold Road Resources shed 7.19 per cent, West African Resources 6.56 per cent, Regis Resources 5.93 per cent and Silver Lake Resources 5.75 per cent.
A dispute with a joint venture partner knocked Lake Resources down 16.54 per cent. The lithium miner said it was in dispute with Lilac Solutions over the timeline for meeting milestones for the Kachi Pilot Plant in Argentina.
Rio Tinto announced a joint venture with its largest customer, China Baowu Steel, to develop a $2 billion iron ore project in the western Pilbara. Construction is expected to begin early next year, with production to follow in 2025. The share price eased 1.98 per cent.
The big four banks lost between 1.85 and 3.55 per cent. Wesfarmers shed 4.25 per cent, Transurban 3.6 per cent and Coles 3.47 per cent.
Other markets
Asian markets joined the global retreat. The Asia Dow dropped 2.42 per cent, China’s Shanghai Composite 0.95 per cent, Hong Kong’s Hang Seng 2.57 per cent and Japan’s Nikkei 2.62 per cent.
S&P 500 futures bounced four points or 0.1 per cent.
Oil added to its overnight loss after a brief morning recovery faded. Brent crude dropped 53 US cents or 0.6 per cent to US$92.64 a barrel.
Gold extended last night’s retreat, falling US$5.90 or more than 0.3 per cent to US$1,711.60 an ounce.
The dollar dived more than 2 per cent overnight and continued lower this afternoon. The Aussie was lately off 0.2 per cent at 67.27 US cents.
