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Australian shares fell for the third time in four sessions after the Reserve Bank abandoned a key support for low interest rates and walked back its outlook on official rates.
The S&P/ASX 200 briefly halved its fall following the RBA’s afternoon announcement before fading again to a final loss of 46.5 points or 0.63 per cent.
The major banks trimmed their declines after the RBA scrapped its bond yield target and dropped a forecast that the cash rate would not rise until “2024 at the earliest”. Iron ore producers skidded as Chinese ore prices traded “limit down”.
What moved the market
Rate-sensitive banking stocks briefly bounced off their lows when the RBA softened its rates stance. The bank discontinued its yield target to reflect the improving economy and “easier-than-expected progress towards the inflation target”. The decision to scrap the target came after yields surged last week in a sign the market expects higher inflation.
“Given that other market interest rates have moved in response to the increased likelihood of higher inflation and lower unemployment, the effectiveness of the yield target in holding down the general structure of interest rates in Australia has diminished,” Governor Philip Lowe said.
The cash rate was left on hold at a record-low 0.1 per cent, as expected, but the bank no longer expects to keep the rate on hold until 2024. The bank dropped its timeline and reiterated it will not increase the cash rate until actual inflation is “sustainably with the 2 to 3 per cent target range”.
“The Board is prepared to be patient, with the central forecast being for underlying inflation to be no higher than 2½ per cent at the end of 2023 and for only a gradual increase in wages growth,” Mr Lowe said.
The initial reaction from lenders suggested the market saw today’s changes as clearing the way to higher rates. The rebound faltered as the dollar and bond yields both eased. The dollar faded 0.32 per cent to 74.97 US cents. The yield on ten-year government bonds dropped to 1.905 per cent after trading close to 2 per cent pre-announcement.
Commonwealth Bank halved its loss to 0.5 per cent. NAB shed 0.88 per cent and ANZ 1.1 per cent.
AMP‘s chief economist, Shane Oliver, said official rates may rise as soon as next year.
“We remain of the view that the conditions for rate hikes will be in place by late next year and see the first rate hike being in November 2022,” he said.
Westpac was held down by a spurt of downgrades in the wake of yesterday’s full-year earnings report. The bank’s shares sagged 2.73 per cent to an eight-and-a-half month low. Goldman Sachs, Morgan Stanley and Credit Suisse were among those to issue downgrades.
Wall Street showed little evidence of nerves ahead of the Federal Reserve’s two-day policy meeting, which starts tonight. The Dow and S&P 500 edged up overnight to record closes. The Dow put on 0.26 per cent and the S&P 500 0.18 per cent.
Winners’ circle
Industrial property giant Goodman Group climbed 5.57 per cent after raising full-year guidance to reflect strong demand for warehousing. Earnings per share were now expected to grow “in excess of 15%” following a strong start to the financial year. The company is experiencing an occupancy rate of 98.4 per cent as businesses scramble for storage space.
“Customer demand for high-quality properties close to consumers has never been greater. This is resulting in rental growth, increased development activity, stronger than expected performance from our Partnerships and generally higher levels of profitability, leading to upgraded earnings guidance for FY22,” Greg Goodman, Group CEO, said.
Computershare edged up 0.79 per cent after completing the acquisition of US trust and agency services provider Wells Fargo Corporate Trust Services. The $1 billion acquisition will place Computershare among the top four corporate trust services providers in the US.
Investment manager Praemium jumped 14.46 per cent to an all-time high following a merger offer from Netwealth. Praemium shares hit $148.50, close to the implied offer valuation of $1.50 per share. The Praemium board said the unsolicited, non-binding indicative proposal undervalued the business and was not in shareholders’ interests. Netwealth shares eased 2.06 per cent.
Besides Goodman, the pick of the heavyweights were Woolworths +1.41 per cent, Aristocrat Leisure +1.58 per cent and CSL +0.48 per cent.
On the wider market, Charter Hall Group added 3.28 per cent following yesterday’s earnings upgrade. Asset manager Janus Henderson rallied 2.91 per cent to a new record.
Doghouse
Bulk metals miners wilted after Chinese ore prices fell by their daily limit. Reuters reported ore futures broke below US$93.75 a tonne for the first time in almost a year. The most actively traded futures contract on the Dalian Commodity Exchange slumped 10 per cent to a level last seen last November. The declines came as a Mysteel survey showed Chinese steel output declined sharply at the end of last month.
Fortescue Metals shed 2.65 per cent, BHP 2.33 per cent and Rio Tinto 2.54 per cent. Champion Iron sagged 7.22 per cent. Whitehaven Coal gave up 9.54 per cent. Nickel miner IGO dropped 8.42 per cent.
IAG slipped 7.02 per cent to an eight-month low on news last month’s severe storms blew a hole in the insurer’s natural perils allowances. The company said it raised its natural perils allowance this financial year but claims had already “exceeded the assumptions underpinning the increase”. The increase in claims forced the insurer to cut its margin guidance to 10-12 per cent from previous guidance of 13.5-15.5 per cent.
Beach Energy fell 3.93 per cent after CEO and Managing Director Matt Key resigned. Current Chief Financial Officer Morne Engelbrecht will act as CEO until a replacement is found.
Other markets
Asian markets were mixed. The Asia Dow put on 0.1 per cent and Hong Kong’s Hang Seng 0.74 per cent. Japan’s Nikkei fell 0.56 per cent. China’s Shanghai Composite lost 0.62 per cent.
US futures retreated following last night’s record closes. S&P 500 futures dropped ten points or 0.2 per cent.
Oil struggled to build on last night’s rebound. Brent crude inched up three US cents or 0.04 per cent to US$84.75 a barrel.
Gold dipped 60 US cents or 0.03 per cent to US$1,795.20 an ounce.
