ASX falls as oil surges on rising Middle East tensions; NAB warns on home loans

The Australian sharemarket dropped in early trade after oil prices resumed their war-triggered rally and a slump in tech stocks dragged Wall Street down overnight amid jitters about what the Federal Reserve will do to get inflation under control.

The S&P/ASX 200 slipped 59.30 points, or 0.7 per cent, to 8979.40 just after 11am AEST, paring most of its 1 per cent gain on Wednesday, which had been fuelled by a surprise easing of inflation in the Australian economy. The Australian dollar traded at US69.57¢.

Falls in the mining heavyweights and consumer stocks weighed on the local market in early trade amid concerns about the outlook for the global economy and energy costs as the war in the Middle East widened further, with Houthi rebels in Yemen threatening a blockade of Saudi Arabia, while Riyadh’s forces joined with the US to hit targets in Iraq linked to Tehran-backed militants.

Traders were also assessing the possible implications for maritime security and energy flows after two ships were struck by projectiles at Egypt’s Mediterranean port of Damietta.

“Markets have jumped the gun on hopes of renewed peace, especially considering Iran’s insistence on controlling the strait under any potential deal,” said Bart Melek, global head of commodity strategy at TD Securities. “We continue to see reduced flows and global tightening of the energy market.“

BHP, the world’s largest miner, was down 1 per cent in morning trade, and Fortescue dropped 0.6 per cent, while Rio Tinto edged up 0.3 per cent. Goldminers Northern Star and Evolution Mining were down 1.4 per cent and 0.6 per cent, respectively.

Among consumer-related stocks, Bunnings and Officeworks owner Wesfarmers dropped 1.5 per cent, furniture retailer Harvey Norman lost 2 per cent, Flight Centre dropped 1.4 per cent and the supermarket giants Woolworths and Coles were down 1.1 per cent and 0.8 per cent, respectively.

Energy stocks limited the market’s declines, with oil prices holding on to their jump from Wednesday as US President Donald Trump vowed fresh strikes in Iran and US stockpiles fell. Brent traded near $US90 a barrel after rallying almost 8 per cent in the previous session.

Oil and gas giant Woodside rose 1.1 per cent and Santos added 0.8 per cent. Ampol rose 1.8 per cent after the company said its refiner margins at its Lytton refinery jumped to $US30.93 in the latest quarter, from $US8.71 a year ago, in the fuel shortage created by the closure of the Strait of Hormuz.

Brent oil’s price had swung as low as $US72 early this month and as high as $US102 last week on uncertainty about whether the US and Iran can reach a deal to allow oil tankers to move freely again from the Middle East to customers worldwide.

Domino’s Pizza was a standout in early trade, jumping 7.5 per cent after the company confirmed its underlying full-year profit would come in as flagged at between $118 million and $122 million, with markedly improved free cash flows, even as about $300 million in mostly non-cash writedown would drag it to a statutory net loss for the year.

The big four banks were also slightly higher, buffering the ASX from bigger losses. CBA, the nation’s biggest bank, edged up 0.1 per cent. Westpac rose 1.1 per cent and ANZ added 0.2 per cent. National Australia Bank climbed 0.6 per cent.

In an update to investors on its flagship business bank this morning, NAB said applications for home loans have slumped 15 per cent in the June quarter, compared to March, in a sign of the slowdown in the mortgage market sparked by the slump in property prices. It comes after Westpac last month said investor loan applications had fallen 20 per cent after the government’s changes to negative gearing and capital gains tax concessions.

Property developers Lendlease and Mirvac fell 2.2 per cent and 1.1 per cent, respectively.

On Wall Street overnight, the S&P 500 fell 1.5 per cent after swinging sharply between gains and losses in the last hour of trading. The Dow Jones Industrial Average dropped 2.2 per cent, and the Nasdaq composite slumped 1.7 per cent to close in correction territory, having fallen more than 11 per cent from a recent peak.

The latest oil price swings have raised worries that inflation will accelerate again, and traders came into the day betting on a roughly 34 per cent probability that the Fed would raise its main interest rate in the afternoon, according to data from CME Group.

Higher rates can keep a lid on inflation, but they can also slow the economy and undercut prices for stocks and other investments.

Fed officials instead voted to keep the federal funds rate steady, though three members of the policymaking committee did want to raise rates. The Fed’s chairman, Kevin Warsh, implied the bond market may already be doing some of the work to restrain inflation, and he pointed to how yields have climbed since the central bank’s last meeting six weeks ago.

He reiterated his commitment to get inflation back to 2 per cent following years of faster-than-hoped increases in prices, but he also stuck to his plan of giving financial markets fewer clues about what the Fed may do with interest rates in the near future.

With less guidance from the Fed, financial markets may be set for more volatile trading amid the uncertainty.

“Did the Fed take an explicit change in its policy rate today?” Warsh asked rhetorically in a press conference following the Fed’s decision. “No, but I think that’s the beginning of the story.”

Treasury yields swivelled up and down following the Fed’s decision and Warsh’s insistence on not guiding the market.

The yield on the two-year Treasury, which closely tracks expectations for Fed action, fell to 4.24 per cent from 4.26 per cent late Tuesday.

But the 10-year Treasury yield, which moves more with expectations for inflation and economic growth in upcoming years, went in the opposite direction. It jumped to 4.68 per cent from 4.61 per cent late Tuesday.

That’s up from 3.97 per cent before the war with Iran sent oil prices much higher, and the increase has already sent long-term US mortgage rates to their highest level in nearly a year.

Higher rates particularly hurt stocks seen as the most expensive, and scrutiny has already been rising on makers of computer chips and other winners of the frenzy around artificial-intelligence technology.

The recent surges for sellers of computer processors and memory are backed by real revenue and profits, but the exceptional growth won’t be sustainable if AI does not produce as much profit and productivity as hoped.

The scepticism has hit South Korea’s stock market in particular because it’s dominated by two tech giants, Samsung Electronics and SK Hynix. Seoul’s Kospi index tumbled 6 per cent Wednesday, a day after it plunged 10.8 per cent, and trimmed its gain for the year so far to 34.4 per cent.

SK Hynix’s stock in Seoul dropped 9.6 per cent. It reported record amounts of revenue and profit for a quarter thanks to strong demand because of AI. But its 257 per cent growth in revenue still wasn’t enough to meet analysts’ expectations.

On Wall Street, Nvidia was the heaviest weight on the S&P 500 after the chip company fell 3.6 per cent. KLA Corp., whose products and services help make semiconductors, lost 10.8 per cent even though it reported stronger-than-forecast profit and revenue for the latest quarter. Expectations were high after its stock surged nearly 150 per cent in this year’s first six months.

On Tuesday, gains for stocks outside of AI helped offset weakness for tech companies. Analysts have been saying such a rotation in the market from AI to less-loved areas could be healthy, but the majority of US stocks fell with tech on Wednesday.

Hims & Hers Health tumbled 14.7 per cent, for example, after the Federal Trade Commission, Utah and California alleged it shared consumers’ sensitive health information about medical conditions with third-party advertising platforms despite claiming its services maintain consumers’ privacy. Hims & Hers said their lawsuit is contorting “the law to try to manufacture claims,” which it called baseless.

In stock markets elsewhere around the world, indexes were mixed. Hong Kong’s Hang Seng rose 2 per cent, and Japan’s Nikkei 225 fell 1.5 per cent for two of the bigger moves.

with AP, Bloomberg

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