By Stan Choe and Lachlan Abbott
The Australian sharemarket is on track to post its biggest weekly loss in two years, falling over 2 per cent as continued concerns about the global economy sparked steep declines on Wall Street overnight.
The ASX 200 lost more than $50 billion in value at its lowest point, sitting at 6,451.9 points at midday, with the tech sector suffering the biggest losses, falling by 3.9 per cent. The big miners have also come under pressure, with both BHP and Rio Tinto dropping by over 3 per cent, following six straight days of declining iron ore prices.
The local sharemarket is now set for its sixth consecutive day of losses, its first six-day slide since the start of the COVID-19 pandemic in February 2020. It fell 0.2 per cent on Thursday.
The lifters: APM Human Services International 6.3%, Evolution Mining 4.4%, Northern Star Resources 3.9%
The laggards: GUD Holdings -21%, Allkem -6.7%, Collins Foods -6.3%
eToro market analyst Josh Gilbert said the ASX 200 opened slightly lower than futures predicted due to falls in commodities and energy stocks overnight, which comprise a large part of the local index.
“I think the biggest sector selloff from the US was probably energy and I think that was the biggest laggard that is spilling over to our market,” Gilbert said.
The energy and materials sectors have both fallen by more than 2 per cent today, with major miner South32 dropping by over 5 per cent this morning.
Gilbert said lingering fears of a US recession were continuing to spook investors, although he said eToro was “a little more confident” the US could avoid a contraction as the Federal Reserve and other central banks balance lifting interest rates to tackle inflation with economic growth.
“Central banks are on the backfoot and are playing catch-up at his point,” Gilbert said.
Wall Street’s benchmark S&P 500 index closed 3.3 per cent lower last night (AEST), more than reversing its blip of a 1.5 per cent rally from a day before. The Dow Jones lost 2.4 per cent and the Nasdaq composite shed 4.1 per cent.
The S&P 500 recorded its sixth loss in the last seven days.
The US market fell along with bourses across Europe after central banks there followed up on the Federal Reserve’s interest-rate hike on Wednesday. The Bank of England raised its key rate for the fifth time since December, though it opted for a more modest increase of 0.25 percentage points than the 0.75-point hammer brought by the Fed.
Switzerland’s central bank, meanwhile, raised rates for the first time in years, a half-point hike. Taiwan’s central bank raised its key rate by an eighth of a point. Japan’s central bank began a two-day meeting, though it’s held out on raising rates and making other economy-slowing moves that investors call “hawkish.”
“The clear read-through here is the FOMC (Fed) has unleashed the central bank Hawkish Genie from the bottle, and we should expect more aggressive follow-through from other central banks except those who are economically challenged,” Stephen Innes of SPI Asset Management said in a commentary.
Such moves and expectations for plenty more have sent investments tumbling this year, from bonds to bitcoin. Higher interest rates slow the economy by design, in hopes of stamping out inflation. But they’re a blunt tool that can choke off the economy if used too aggressively.
“Another concern is that with the change in policy, there’s been weakening economic data already,” said Bill Northey, senior investment director at US Bank Wealth Management. “That raises the odds of a recession in the latter part of 2022 into 2023.”
The worries dragged the S&P 500 into a bear market earlier this week, meaning it had dropped more than 20 per cent from its peak. It’s now roughly 24 per cent below its record set early this year and back to where it was in late 2020. That effectively erases 2021, which was one of the best years for Wall Street since the turn of the millennium.
Not only is the Federal Reserve hiking short-term rates, it also this month began allowing some of the trillions of dollars of bonds it purchased through the pandemic to roll off its balance sheet. That should put upward pressure on longer-term interest rates. It’s another way central banks have been ripping away supports they earlier propped underneath markets to juice the economy.
Even without recession, higher interest rates make investors less willing to pay high prices for investments, particularly those seen as the most expensive or the most risky.
Bitcoin has been threatening to drop to $US20,000 after setting a record at nearly $US69,000 late last year. At 6.26am AEST, it is fetching $US20,946, down 2.8 per cent over the last 24 hours, according to Bitstamp.
Higher rates have been delivering the hardest hits to the investments that soared the most through the pandemic, benefiting from the easy, ultra-low rates. That includes bitcoin and high-growth technology stocks.
It’s all a sharp turnaround from a day earlier, when stocks rallied immediately after the Fed’s biggest hike to rates since 1994. Analysts said investors seemed to latch onto a comment from Fed Chair Jerome Powell, who said mega-hikes of three-quarters of a percentage point would not be common.
Powell said Wednesday the Fed is moving “expeditiously” to get rates closer to normal levels after last week’s stunning report that showed inflation at the consumer level unexpectedly accelerated last month, which dashed hopes that inflation may have already peaked.
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