Australian shares have joined a global retreat, ending almost 3.6% lower, as investors fear central banks will lift interest rates more aggressively, slashing economic growth and companies’ profits.
The benchmark ASX200 share index of the top 200 companies lost just over 5.2% within the first quarter an hour of trading, or more than 360 points. The losses, though, were pared by the end, with the market ending 246 points lower at 6,686. The Australian dollar also remained below 70 US cents.
The ASX200 has ended the day down almost 3.6%, its worst single-day drop since 2020 when Covid was just getting going. pic.twitter.com/nHrn0aKkW0
— Peter Hannam (@p_hannam) June 14, 2022
Australian markets were closed on Monday, sparing them some of the falls from international markets last Friday. Asian markets were also lower on Tuesday but mostly in the 1-2% range after they collected some of their losses on Monday.
The US set another negative tone on Monday, with the broad-based S&P500 share index slumping 3.9% and the tech-dominated Nasdaq index plunging 4.7%.
The three-day loss of 9% on the S&P500 sent that index below 20% from its January peak, sending it into so-called bear market territory.
There's a bear in there... as the S&P500's 20% drop since its January peak put the broad market index firmly into 'correction' territory. pic.twitter.com/dmd0W4W1rw
— Peter Hannam (@p_hannam) June 14, 2022
Investors were spooked by inflation figures, particularly for US consumer prices. Last week the government reported that inflation had increased to an annual rate of 8.6% in May, the most since December 1981, and more than the 8.3% markets had expected.
That news came before the meeting this Thursday morning (eastern Australian time) of the US Federal Reserve’s federal open market committee that investors now expect will decide to lift its key interest rate by 0.75 percentage points to quell inflation.
“The May CPI release undermined Fed expectations that inflation would moderate in [the June quarter], and we fully expect the Fed to make upward revisions to its inflation and fed funds rate projections,” ANZ said in a note on Tuesday. “GDP growth meanwhile is due a downgrade.”
It added: “Higher inflation, slower growth and higher interest rates are a damaging combination for financial assets. Until evidence emerges that inflation is peaking and on a sustained downwards track, financial asset prices will remain under pressure.”
Adding to those concerns were the results of survey by the New York Fed that showed consumers were raising their expectations about coming inflation.
Australia faces similar challenges, although the impact of rising inflation has been lagging many overseas markets.
Still, the Reserve Bank in May lifted its cash rate target for the first time since 2010 and then followed up last week with its biggest increase in more than two decades, showing signs that it, too, plans to act swiftly.
A reminder that investors are pricing in much higher interest rates in coming months in Australia. There's a 95% chance, they say, that the cash rate will be lifted from 0.85% to 1.25% when the Reserve Bank board next meets on July 5th. pic.twitter.com/ybY7zBhU2I
— Peter Hannam (@p_hannam) June 14, 2022
“We now have the [RBA’s] cash rate target at 2.35% by November, some six months earlier than we previously expected,” ANZ said.
The big Australian banks themselves all had another poor day. Despite some analysts saying banks benefit from higher interest rates, a too-rapid increase leaves their profits exposed to rising bad debt tallies and also slower overall economic growth.
CBA, Australia’s biggest bank, was recently trading at $105 a share. On Tuesday, it closed at $91.20, denting the values of many a super fund that holds the stock.
