The Australian sharemarket opened on the back foot on Thursday amid speculation that the Reserve Bank could raise official interest rates to a 12-year-high on Melbourne Cup Day, and after a weak lead from Wall Street.
The S&P/ASX 200 was down 28.7 points, or 0.4 per cent, to 6825.60 as of 11:09am AEDT as all sectors except energy traded in the red. The Australian dollar traded at 62.97 US cents.
The three major US stock indexes declined amid mixed earnings and rising fears that US interest rates will stay higher for longer.Credit: Bloomberg
Lithium miners were among the biggest large-cap decliners as Allkem (down 3.5 per cent) and Pilbara Minerals (down 2.6 per cent) both fell.
Interest rate sensitive sectors including information technology (down 2.7 per cent) and consumer discretionary (down 1.5 per cent) were the weakest on the local bourse. Aristocrat Leisure dropped 3.3 per cent, Xero lost 2.6 per cent, NEXTDC shed 2.5 per cent and IDP Education fell 2.3 per cent.
Meanwhile, energy companies (up 0.6 per cent) were broadly stronger on the back of a 2 per cent increase in Brent crude oil prices overnight, with heavyweights Woodside (up 0.6 per cent) and Santos (up 1 per cent) both stepping up.
Gold miners were also stronger as Northern Star added 1.2 per cent and Evolution gained 0.6 per cent following a 0.7 per cent increase in the spot gold price overnight.
Utilities companies were flat, showing their resilience with Meridian Energy (up 2.5 per cent) and Mercury NZ (up 1.7 per cent) among the biggest large-cap advancers.
Rate bets
Rate fears have dominated the market since the release of higher-than-expected September quarter inflation figures on Wednesday, which some economists said a rate rise next month has become more likely. Reserve Bank governor Michele Bullock warned earlier this week that the central bank’s board would not hesitate to raise interest rates if needed.
Speaking during Senate estimates on Thursday, the new RBA governor left the door open to a rate hike on Melbourne Cup day, but played down fears that the inflation report highlighted a step-up in price pressures that would require even more tightening of monetary policy. The data had come in “pretty much where we thought,” she said.
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Her comments sent the Australian dollar down to the lowest level since November 2022 and saw the policy-sensitive three-year government bond yield pare its opening advance. Money market bets also eased, now implying a 60 per cent chance of a November 7 rate hike, down from 80 per cent after the inflation figures on Wednesday.
Questioned on how she would assess the current inflation picture, Bullock agreed with a senator’s characterisation that the bank remains “wary.”
The board doesn’t “know if the job is done yet” on inflation, she said, adding that “we may need to go again” on interest rates.
Wall Street, oil market
Overnight on Wall Street, all three major US stock indexes declined, weighed down by Alphabet after Google’s parent posted disappointing earnings. At the same time, rising bond yields revived investor fears that the US Federal Reserve could keep rates higher for longer. The S&P 500 lost 1.4 per cent to 4186.77, while the Dow Jones Industrial Average shed 0.3 per cent and interest-rate-sensitive megacaps sent the Nasdaq Composite down 2.4 per cent, its worst drop this year.
“The dominant themes of the day are disappointment with tech earnings and rising interest rates,” said Jay Hatfield, portfolio manager at InfraCap in New York. “Rates continue to be a huge overhang on the market, as they should be.”
In commodities, oil prices rose overnight as Israel mounts preparations for a ground invasion of Gaza and the US readies air defences in the region. Israel’s Prime Minister Benjamin Netanyahu said in a televised speech that the country is in a battle for its existence.
“Crude is trading from headline to headline as the market tries to price in the potential” of war ensnaring multiple countries in the Middle East, said Rebecca Babin, a senior energy trader at CIBC Private Wealth. “Living headline to headline keeps traders on the edge of their seats and likely to react quickly before understanding the full impactions of what is happening.”
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The yields on 10-year Treasury notes also resumed their upward drift, edging closer to the 5 per cent level again, after robust new US home sales data and mortgage rates reaching 23-year highs affirmed market expectations of prolonged elevated interest rates heading into 2024.
Big Tech in focus
On Wall Street, shares of Alphabet plunged 9.5 per cent after the Google parent reported disappointing cloud services revenue, reviving fears of an economic slowdown. The communication services sector, of which Alphabet is a constituent, was on track for its biggest daily percentage drop since February 2022. Microsoft advanced 3.1 per cent following its better-than-expected result.
Social media giant Meta Platforms was next in line, reporting its results after the bell this morning [AEDT]. The owner of Facebook, Instagram and WhatsApp unveiled its strongest growth in two years, but its shares slumped 3 per cent in after-hours trading after its finance chief Susan Li told investors the company’s ad sales depended heavily on a strong economy, warning the “revenue outlook is uncertain” for 2024.
It is a momentous week for earnings in the US, with nearly one-third of the companies in the S&P 500 expected to post third-quarter results. So far, 146 of the S&P 500 have reported. Of those, 80 per cent have delivered earnings above expectations.
“Earnings drive stock prices,” said Howard Ward, chief investment officer of Growth Equities and portfolio manager at Gabelli Funds. “This is where the rubber meets the road. A recession would result in higher unemployment, less consumer spending, slower gross domestic product growth and lower earnings, which implies lower stock prices.”
With Reuters/Bloomberg
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