ASX slumps as bond market rattles Wall Street, oil prices jump

The Australian sharemarket plunged in early trade on Thursday, as oil prices rallied back over the $US100-a-barrel mark and a surprisingly strong report on the US economy sent bond yields sharply higher.

The S&P/ASX 200 was down 113.30 points, or 1.3 per cent, at 8652 as of 10.50am AEST, having closed flat in the previous session. Australia’s unemployment data for August will be released at 11.30am AEST, with investors looking for clues for the Reserve Bank’s next steps on interest rates. The central bank’s board convenes to decide on rates next week.

The Australian dollar edged down 0.1 per cent to US70.30¢.

Last month, Australia’s unemployment rate rose to 4.5 per cent, which was its equal highest for the past five years. RBA governor Michele Bullock said this week an unemployment rate of “between 4.5 and 5” per cent would probably be needed to “ease” inflationary pressures.

The morning’s losses were paced by the mining and financial heavyweights, which account for more than half of the ASX. Copper and iron ore giants BHP and Rio Tinto fell 2.6 per cent and 1.3 per cent, respectively. Gold producers also suffered as bullion prices fell as renewed strength in oil prices reinforced bets that the Fed will raise interest rates to fight inflation. Northern Star fell 2.6 per cent, and Evolution Mining dropped 1.9 per cent.

The big four banks were all down sharply, with Commonwealth Bank losing 2.2 per cent, National Australia Bank down 2.3 per cent, Westpac down 2.2 per cent and ANZ down 2.1 per cent.

Real estate investment trusts also struggled in the face of the looming rate hikes, which makes them less attractive in the face of bonds’ rising returns. Data centre and warehouse owner Goodman Group fell 2.1 per cent and Westfield shopping centres landlord Scentre dropped 1.2 per cent.

Other interest-rate-sensitive sectors such as consumer discretionary and tech stocks also declined. Officeworks and Bunnings owner Wesfarmers lost 1.8 per cent and furniture seller Harvey Norman dropped 1.2 per cent, while on the tech front, software maker WiseTech shed 1.1 per cent and AI data centre operator NextDC slumped 2.8 per cent.

Nine Entertainment, the owner of this masthead, plunged 8.3 per cent after it said Amanda Laing, the managing director of its streaming and broadcast unit, is leaving after less than two years in the job. The surprise move came a day after the media group said Australian Financial Review editor-in-chief James Chessell was leaving to join independent media website Rampart.

Premier Investments jumped 3.3 per cent even after the owner of chains such as Smiggle and pyjama brand Peter Alexander said its overall profits more than halved to $129.2 million as parents pulled back on buying Smiggle’s stationery for children in the cost-of-living crisis. Total revenue fell 2.1 per cent to $795.5 million. The company announced a final fully franked dividend of 36¢ a share, bringing the year’s total dividends to 81¢ a share.

Defensive utilities such as power company Origin (up 1.2 per cent) and energy stocks were the only green sectors in the morning’s sea of red.

Oil and gas giants Woodside and Santos gained 0.7 per cent and 1.3 per cent, thanks to the higher oil price, while refiner Ampol climbed 1.6 per cent.

On Wall Street overnight, pressure from the bond market hit a new level after a surprisingly strong report on the economy raised worries about inflation, while oil prices halted their slide. The squeeze caused US stocks to sink.

The S&P 500 fell 0.8 per cent after finishing the previous day just 0.4 per cent below its record set last month. The Dow Jones Industrial Average dropped 352 points, or 0.7 per cent, while the Nasdaq composite sank 1.1 per cent from its own all-time high.

Stocks wilted after the yield on the 10-year Treasury jumped to 5.10 per cent from 4.96 per cent, which is a considerable move for the bond market. High yields undercut prices for stocks and other investments, while also slowing the economy by making it more expensive for everyone to borrow money.

Wednesday’s jump briefly sent the 10-year yield near to 5.14 per cent, back to where it was in 2007 before the global financial crisis caused yields to crater. Yields have been climbing since bottoming out in the COVID pandemic, and they’ve accelerated recently because of worries about high inflation, the US government’s heavy debt and other concerns.

Worries about inflation got a jolt after a preliminary report suggested growth in US business activity surged to its strongest level in more than five years. That’s an encouraging signal, to be sure, but it indicates the economy may have plenty of fuel for more inflation.

The report also suggested costs for businesses are leaping at the fastest rate in four years, in part because of more expensive oil, according to Chris Williamson, chief business economist at S&P Global Market Intelligence. That could mean businesses will pass those higher costs on to their customers in coming months.

Oil prices are high because of worries that the war with Iran will keep oil bottled up in the Middle East for a long time.

The price for a barrel of Brent oil to be delivered in November rose 3.9 per cent to $US103.08 overnight, though it eased to $US102.10 in the morning. That reversed a decline for the international oil benchmark, which had been falling since it neared $US110 last week. Peace talks are continuing with mediators between US and Iranian officials, but nothing concrete has come from them yet. Even with its recent decline, the price for a barrel of Brent remains much higher than the roughly $US72 it cost before the war with Iran began.

Inflation in the world’s largest economy has remained so stubbornly high that the Federal Reserve raised its short-term interest rate last week for the first time in three years in the hopes of slowing down increases in the cost of living.

Federal Reserve Governor Michael Barr said in a speech on Wednesday that further rises “are likely to be needed” to get inflation to the Fed’s 2 per cent target. Traders now see better than a 50 per cent probability that the Fed will raise its federal funds rate at each of its next two meetings, in October and December, according to data from CME Group.

So far, strong growth in profits for US companies has helped support the US sharemarket despite higher interest rates and more expensive oil.

KB Home became the latest to deliver a stronger profit for the latest quarter than analysts expected. But the home builder’s stock nevertheless swung between losses and gains after its executive chairman, Jeffrey Mezger, said conditions got even tougher for the industry over the past three months. It finished with a loss of 3 per cent.

Potential customers are becoming more cautious because of higher mortgage rates caused by the rise in the 10-year Treasury yield. They are also feeling pressure from “geopolitical uncertainty and broader economic headwinds”, Mezger said.

General Mills likewise reported a stronger profit for the latest quarter than analysts expected. But the company behind the Cheerios and Progresso brands said it also expected growth this fiscal year to fall below its historical track record “driven by a continued challenging consumer backdrop”, and it did not raise its forecast for profit over the full fiscal year.

Its stock flipped between gains and losses before rising 1 per cent.

In other international markets, indexes slipped across much of Europe and Asia.

Stock indexes fell 1 per cent in Hong Kong and 0.4 per cent in Shanghai ahead of Chinese President Xi Jinping’s state visit to Washington, which kicked off on Wednesday.

The leaders are expected to attempt to steady fragile ties in their third meeting since US President Donald Trump returned to the White House. That is despite the world’s two largest economies seeking the upper hand on artificial intelligence developments and trade, while pushing for leverage in persistent hot spots such as Iran and Taiwan.

With AP, Bloomberg

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