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Australian shares suffered their biggest setback in at least seven weeks after the Federal Reserve startled financial markets by warning interest rates may go higher than previously forecast.

The S&P/ASX 200 plunged more than 150 points before trimming its decline to 132 points or 1.9 per cent. Today’s fall was the heaviest since a 181-point plunge on September 14.

Mining and tech stocks spearheaded a reversal that dragged all sectors lower. Barely one in twenty of the index’s component companies resisted the sell-off.

What’s driving the market

Stocks tanked after the US central bank dashed hopes of a pause or pivot towards lowering interest rates any time soon. The Fed hinted at a slowdown in the current cycle of  increases, but the euphoria proved short-lived when Chair Jerome Powell used a press conference to temper expectations.

“We still have some ways to go and incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected,” Powell said.

The message appeared to be that the Fed might take smaller steps from next month, but rates will continue going up and the terminal rate could be significantly higher than markets expected.  

“The US Federal Reserve did pivot overnight, from hawkish to even more hawkish, which isn’t the type of pivot most in the market were expecting,” quipped Peter Esho, economist at property investment platform Wealthi.  

“It’s clear now that the Fed is in a Mexican standoff with inflation and it won’t blink until the numbers start to suggest otherwise. We won’t see the Fed change course until we start to see jobs and inflation falling. End of story.”

The prospect of a slowdown in the current rates cycle fuelled the Dow’s best month  since 1976. A chunk of October’s 14 per cent gain evaporated overnight. The blue-chip average shed 1.55 per cent.

Falls in Wall Street’s other benchmarks reflected their greater exposure to rate-sensitive growth stocks. The S&P 500 lost 2.5 per cent and the Nasdaq Composite 3.36 per cent.

Going up

Fund manager Perpetual jumped 7.36 per cent to $28.88 after rejecting an unsolicited takeover offer from a consortium including Regal Partners. Perpetual said the conditional, non-binding indicative proposal of $30 per share “materially undervalues” the business. Shares in Regal Partners rallied 5.6 per cent.

A2 Milk was the index’s second-best performer after gaining clearance from the US regulator to import infant milk formula into the US. The company said it expected to sell up to one million cans of formula this fiscal year. The share price jumped 6.17 per cent.

The announcement of a share buyback lifted coal miner New Hope 3.48 per cent. The miner will buy back up to $300 million of its shares on-market.

Downer EDI rose 4.38 per cent after reaffirming guidance at today’s AGM despite the impact of severe weather on the east coast and in New Zealand. CEO Grant Fenn said very few of the company’s businesses had been unaffected by the big wet.  

The only other stocks on the index to advance more than 1 per cent this morning were Nanosonics +1.2 per cent and Computershare +1.42 per cent. Telstra, Suncorp and Qantas also nudged higher.

Going down

Gold miners took some of the biggest hits as the US dollar and bond yields – assets that compete with precious metals for investment flows – surged in the wake of this morning’s rates shock. Gold dropped US$7.40 or 0.4 per cent in recent trade to US$1,642.60.

Silver Lake Resources skidded 5.93 per cent. Ramelius gave up 6.13 per cent, St Barbara 5.88 per cent and Regis Resources 5.82 per cent. Sector heavyweight Newcrest lost 3.92 per cent.

Elsewhere in the resources space, lithium miner Lake Resources shed 4.93 per cent, uranium miner Paladin 4.6 per cent and ore miner Champion Iron 4.23 per cent. Among the heavyweights, BHP lost 2.85 per cent, Fortescue Metals 2.1 per cent and Rio Tinto 2.2 per cent.

The major banks gave up between 1.46 and 2.12 per cent. Wesfarmers lost 3.3 per cent, Woodside Energy 2.26 per cent and CSL 1.84 per cent.

Woolworths dropped 3.64 per cent to a two-year low after reporting a dip in Q1 food sales as inflation lifted Australian food prices by 7.3 per cent. Gains in B2B and Big W helped lift group sales 1.8 per cent.  

“Inflation continued to accelerate in Q1 compared to the prior year with average prices in Australian Food increasing 7.3%, and 5.3% in New Zealand Food. We continue to see early signs of customer purchasing habits changing, but it remains unclear how much of this relates to cost-of-living pressures compared to COVID normalisation,” CEO Brad Banducci said.

Bravura Solutions saw almost half its market capitalisation evaporate following a massive earnings downgrade and the suspension of dividend payments. Shares in the management software maker plunged 49.81 per cent on news full-year earnings would be $10-$15 million. Analysts had expected a figure closer to $50 million.

Bega Cheese dropped 3.86 per cent on news the dairy producer was unhappy with the valuation offered for its 49 per cent stake in Vitasoy Australia. Hong Kong-listed Vita International offered $27.5 million as “fair value” for Bega’s stake. The sale price of Bega’s stake will now be decided by an independent expert.

Other markets

Asian markets took their cues from US weakness. The Asia Dow gave up 1.1 per cent, China’s Shanghai Composite 0.74 per cent and Hong Kong’s Hang Seng 2.19 per cent. Trade in Japan was suspended for a bank holiday.  

US futures edged higher as the morning wore on. S&P 500 futures were recently ahead seven points or 0.19 per cent.

Risk-off action drove Brent crude down 67 US cents or 0.7 per cent to US$95.49 a barrel.

The dollar regained a little of the ground it lost overnight, bouncing 0.27 per cent to 63.55 US cents.

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