ASX caps off a torrid week as fear returns to the market

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ASX caps off a torrid week as fear returns to the market

By Millie Muroi

The Australian sharemarket has finished a poor week, losing more than $50 billion in the last two sessions, as Treasury yields approached a decade high and conflict in the Middle East continued to weigh on investors.

The S&P/ASX 200 dropped 80.9 points, or 1.2 per cent, to 6900.7 at the close on Friday, with all sectors except energy trading in the red. The Australian dollar remained weak at US63.13¢.

Federal Reserve chairman Jerome Powell says officials will proceed carefully with interest rate rises.

Federal Reserve chairman Jerome Powell says officials will proceed carefully with interest rate rises.Credit: AP

Tribeca Investment Partners portfolio manager Jun Bei Liu said the conflict in the Middle East was creating some fear, weighing on most sectors. The energy sector was a notable exception, with oil prices rising substantially this week over concerns that an escalation of the conflict in Gaza could spill over into the rest of the region.

Santos advanced 1.9 per cent as Brent Crude prices jumped, along with coal miners Whitehaven (up 0.8 per cent) and New Hope (up 0.8 per cent).

Liu also said strong economic data from the US had made markets fearful that there may be another interest rate increase on the horizon.

While mining companies broadly weakened in response to developments in China, Liu said gold stocks remained robust.

“Chinese data shows their economy is turning around but not as strongly as expected, so there’s some volatility in commodity markets,” she said. “However, gold companies are pretty strong at the moment as the gold price rallies.”

Investors tend to flock to safe haven assets such as gold during periods of uncertainty and as a hedge against inflation. Gold miners Northern Star (up 1.3 per cent) and Evolution (up 2.2 per cent) were among the few large-cap gainers after the gold price increased 1 per cent overnight.

Iron ore heavyweights BHP (down 1.8 per cent) and Fortescue (down 2.2 per cent) dropped along with lithium players Liontown (down 31.9 per cent), Allkem (down 4.2 per cent) and IGO (down 3.6 per cent). Shares in Liontown plunged after the collapse of its proposed takeover by US giant Albemarle Corporation as it now looks for other ways to fund its Kathleen Valley Lithium Project.


Rising bond yields have been another major factor moving markets recently, making riskier assets such as equities less attractive for investors.

While geopolitical tensions often see bond yields fall, as investors flock towards traditionally safer assets, GSFM investment strategy advisor Stephen Miller said inflation had thrown a spanner into that trend.

“Over the last three to four decades, inflation hasn’t been a big problem when these geopolitical events have struck,” he said. “But when inflation is a problem, as it is now, it hamstrings central banks’ responses because they can’t cut interest rates.”

Because bond yields tend to move in line with expectations about what central banks will do, they have continued to stay high, Miller said. As the oil price has rallied, that has also fuelled worries about inflation and the prospect of more rate increases.

Structural factors behind the rise in bond yields included the US government’s substantial budget deficit, large demands on investment markets to build infrastructure for climate change, baby boomers running down their retirement savings, and grudging progress on dampening inflation, he said.

At the same time, Miller said cyclical factors were also keeping bond yields higher. “Unless the Federal Reserve overdoes it and sends the economy into recession, there’s nothing there to suggest bond yields will decline soon,” he said. “People are getting tired of that narrative,” he added, noting economic data from the US, including on retail sales and the labour market, have been quite strong.

Domestically, Miller noted the Reserve Bank’s board meeting minutes which he said showed little tolerance for inflation being above the trajectory mapped out in August. “Together with the governor’s comments that services inflation in particular is proving hard to get down, there’s been a switch in the balance of probabilities towards another rate increase and higher bond yields,” he said.

What happens next with yields and the value of the US dollar will depend on whether the US economy can pull off a “soft landing”.

Elsewhere, Wall Street fell on Thursday as it faced the prospect of a 5 per cent yield on the 10-year Treasury for the first time since 2007. Volatility was heightened as Federal Reserve chair Jerome Powell said officials would proceed carefully with interest rate rises, while noting there was evidence that policy wasn’t “too tight”.

The S&P 500 closed 0.9 per cent lower following a mixed set of profit reports from Tesla and other influential companies. The Dow Jones Industrial Average was down 0.8 per cent, and the Nasdaq composite was 0.1 per cent lower.

Stocks felt pressure from the bond market, where rising yields have been squeezing Wall Street since the summer. The yield on the 10-year Treasury touched 4.99 per cent for the first time since 2007, up from 4.91 per cent late on Wednesday, before paring its gain to 4.97 per cent. As the reference point for much of the financial world, the 10-year yield helps set prices for all kinds of investments and loans.

Yields swung after Powell said again that the central bank would watch how the economy and inflation trended before making decisions on interest rates. It’s already pulled its main overnight interest rate to the highest level since 2001, and the 10-year Treasury yield has been catching up.

The 10-year yield has been on a mostly steady march from less than 3.5 per cent during the spring as a resilient US economy forces investors to accept a new normal where the Federal Reserve likely keeps its main interest rate high for a long time.

Powell said in a speech on Thursday that if growth for the US economy appeared persistently strong, it could push the Fed to raise rates further. But he also noted the recent rise in longer-term bond yields, such as the 10-year Treasury’s, had been doing some of the Fed’s work for it by slowing the economy without requiring additional rises.

The Fed is trying to push inflation lower, and high rates do that by dragging on investment prices, corporate profits and the overall economy.

“That’s how monetary policy works, that’s literally how it works,” Powell said about how the Fed’s tightening monetary policy had led to higher yields, which should hopefully take pressure off inflation.


Another report came on Thursday to show the US job market remained remarkably solid despite the much-higher rates. Fewer US workers than expected applied for unemployment benefits last week, which indicates low levels of lay-offs across the country.

While that’s good for an economy that has defied predictions of a recession, it could also give inflation more fuel.

A separate report, though, said manufacturing in the mid-Atlantic region was weakening by more than economists expected. And a third report said sales of previously occupied homes fell last month, though not by as much as economists expected. Mortgage rates have climbed to their highest levels since 2000 in large part because of the 10-year yield’s rise.

What happens next with yields and the value of the US dollar will depend on whether the US economy can indeed pull off what’s called a “soft landing”, where growth slows enough to snuff out inflation but not so much that it causes a bad recession. It will also depend on how sticky inflation is following that landing, according to Athanasios Vamvakidis, foreign-exchange strategist at Bank of America.

Tesla has reported weaker than expected results for the summer.

Tesla has reported weaker than expected results for the summer.Credit: AP

Vamvakidis wrote in a BofA Global Research report that he saw risks of yields and the dollar remaining high after the landing, even if they are both lower than current levels.


High yields hurt all kinds of stocks, but they hit particularly hard on those bid up on expectations for big growth far in the future and those seen as very expensive. That’s often put the spotlight on big tech recently, and some reported a mixed set of profits.

Overall, analysts expect companies across the S&P 500 index to report slight growth in their earnings per share for the summer versus a year earlier. If they do, it would be the first such growth in a year.

Crude oil prices, meanwhile, rose further after erasing losses from the morning. A day earlier, they jumped on worries that war in the Middle East could lead to disruptions of supplies.

In stock markets abroad, indexes fell across Europe after slumping more sharply across Asia.

With AP, Bloomberg

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