The share market retreated from record levels as the Reserve Bank left official rates on hold and ignored calls to delay winding back its quantitative easing program until the economic outlook improved.
The S&P/ASX 200 fell 17 points or 0.23 per cent. The fall reversed roughly a sixth of yesterday's rise, the index's strongest in six weeks.
Gains in Afterpay, Coles and bond proxies partly offset weakness in miners and banks. The dollar jumped back above 74 US cents after the RBA stared down calls to extend its bond-buying program.
What moved the market
A soft session temporarily soured further after the RBA announced it would stick to its plan to reduce its bond-buying program from early next month. The bank will reduce its purchases of government securities from $5 billion per week to $4 billion per week until at least mid-November. The cash rate was left on hold at a record low 0.1 per cent.
Several economists had predicted the bank would delay "tapering" its QE program in the face of the economic hit from the Greater Sydney lockdown and other, briefer lockdowns in Melbourne, Queensland, Perth and Adelaide. Governor Philip Lowe acknowledged GDP was likely to decline this quarter, but the impact would be temporary.
"The experience to date has been that once virus outbreaks are contained, the economy bounces back quickly," Mr Lowe said.
The board remained flexible and would review the program in light of the economy and health situation. The bank was "committed to maintaining highly accommodative monetary conditions to support a return to full employment in Australia and inflation consistent with the target," he added.
The dollar spiked around half a cent following the news. The Aussie was last up 0.53 per cent at 74 US cents.
Stocks were already subdued prior to the mid-afternoon announcement as Asian markets declined in the wake of weak US leads. The S&P 500 fell 0.18 per cent overnight after US and Chinese manufacturing gauges fell short of expectations.
Asian markets pared their falls as the session wore on. The Asia Dow more than halved its loss to 0.44 per cent. China's Shanghai Composite eased 0.39 per cent, Hong Kong's Hang Seng 0.57 per cent and Japan's Nikkei 0.57 per cent.
Data this morning showed consumer confidence rebounded last week as Victoria and South Australia emerged from lockdown. The ANZ-Roy Morgan confidence index improved 1.1 per cent. Melbourne and Adelaide saw lifts of 2 and 2.9 per cent, respectively.
Building approvals weakened more than expected. The number of dwellings approved declined for a third month, down 6.7 per cent in June, according to the Australian Bureau of Statistics. The decline was almost twice the consensus among economists.
Afterpay's share price is now firmly tied to Square's performance on the New York Stock Exchange after the board backed the US giant's all-stock bid for the Australian BNPL pioneer. Afterpay jumped 11.37 per cent as US investors welcomed news of the acquisition. Square shares jumped 10.16 per cent. Under the terms of the friendly takeover announced yesterday, Afterpay shareholders will receive 0.375 Square shares for each share they hold in the Aussie fintech.
The wider tech sector rallied as the yield on ten-year Australian government bonds dropped four basis points to a six-month low before halving its fall. Yields are seen by some investors as an indicator of growth expectations: falling yields equal weakening growth expectations.
Appen put on 5.42 per cent, EML Payments 4.35 per cent and Nearmap 3.33 per cent. The halo effect from Afterpay's takeover lifted other BNPL players. Z1p Co rose 7.46 per cent, Sezzle 2.81 per cent and Splitit 4 per cent. IOUpay surged 27.91 per cent.
Bond proxies attracted interest following the decline in yields. Graincorp gained 1.9 per cent, Ansell 1.83 per cent and Metcash 1.49 per cent. Supermarket Coles edged up 0.67 per cent.
Crown Resorts climbed 1.68 per cent as the casino group made its closing submission to the Victorian Royal Commission. The commission is due to report findings and recommendations by October 15. Crown also announced the departure of Crown Melbourne CEO Xavier Walsh.
Brickworks rallied 0.57 per cent towards record levels on news it will acquire the largest independent brick distributor in the US for $70 million. The Illinois Brick Company, currently owned by Southfield Corporation, operates 17 showrooms and distribution yards across two states.
Chalice Mining rose 6.84 per cent following a well-received presentation at the Diggers and Dealers Forum.
Travel and tourism stocks fell after Qantas announced it would stand down 2,500 frontline employees in the face of a sharp decline in air travel. The airline said the stand-down was a temporary measure "for an estimated two months". Shares in the airline fell 0.88 per cent.
“Qantas and Jetstar have gone from operating almost 100 per cent of their usual domestic flying in May to less than 40 per cent in July because of lockdowns in three states," CEO Alan Joyce said.
Corporate Travel Management declined 1.1 per cent, Sydney Airport 1.28 per cent and Flight Centre 0.72 per cent.
The major iron ore producers continued to back off record levels in the wake of soft Chinese factory data. Fortescue Metals shed 1.6 per cent, BHP 1.38 per cent and Rio Tinto 0.63 per cent.
Declines in lending rates sapped interest in banks. CBA eased 0.21 per cent, ANZ 0.71 per cent, NAB 0.79 per cent and Westpac 0.92 per cent.
Energy stocks retreated in the wake of a 3 per cent overnight drop in crude. Woodside Petroleum fell 1.45 per cent. Beach Energy 2.83 lost per cent. Merger partners Santos and Oil Search shed 1.08 and 1.25 per cent, respectively.
PointsBet sank 11.23 per cent to $9.73 after raising $81 million from institutional investors at $8 per share. The fund raise includes an entitlement offer for retail investors at the same price.
US futures rallied as Asian markets came off their lows. S&P 500 futures were recently up 12 points or 0.26 per cent.
Brent crude faded 16 US cents or 0.22 per cent to US$72.73 a barrel.
Gold retreated US$8.40 or 0.46 per cent to US$1,813.80 an ounce.