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The share market retreated for a second day as a rate rise in New Zealand added to signs the era of easy, market-friendly monetary policy is ending.
Australian stocks were ahead prior to the late-morning announcement from the Reserve Bank of New Zealand, but quickly turned negative. The S&P/ASX 200 faded to a loss of 42 points or 0.58 per cent.
The dollar fell almost a third of a cent. Gains in tech and energy stocks were outweighed by declines in banks and miners.
What moved the market
The market surrendered its gains after the RBNZ announced it was lifting its official cash rate by 25 basis points to 0.5 per cent. The bank cited as causes rising inflationary pressures and policy changes by other central banks.
“Cost pressures are becoming more persistent and some central banks have started the process of reducing monetary policy stimulus,” the bank said in a statement.
“Headline CPI inflation is expected to increase above 4 percent in the near term before returning towards the 2 percent midpoint over the medium term. The near-term rise in inflation is accentuated by higher oil prices, rising transport costs and the impact of supply shortfalls,” the bank added.
The ASX 200, which had been up as much as 31 points, promptly shed almost 40 points in ten minutes, extending its losses as the session went on. Rate hikes are broadly unwelcome for equity investors, due to the impact on consumer spending and borrowing costs for companies.
US futures also sank. S&P 500 futures declined 20 points or 0.46 per cent.
The Kiwi rate hike came a day after the RBA insisted it does not expect to raise the Australian cash rate until 2024 at the earliest. The share market reaction implies investors think the bank will be forced to act sooner. The Federal Reserve in the US recently indicated a majority of committee members expect US rates to rise by the end of next year.
“To be fair, the RBA wants to see inflation lift to target, which is important, but it’s near certain inflation will jump in the year ahead,” tweeted economist Stephen Koukoulas. “Wise folk are preparing for RBA rate hikes in 2022.”
Nomura economist Andrew Ticehurst said the move had implications for the dollar and long-term interest rates.
“We think this news also suggests a steeper Australian bond curve, relative to the NZ and US curves, and supports New Zealand Dollar (NZD) over Australian Dollar (AUD),” he said.
The dollar fell from 72.88 US cents to 72.58 cents. The yield on ten-year Australian government bonds exploded upwards, surging 7.5 basis points to break 1.6 per cent for the first time since late June.
The late-morning slump dashed expectations for a rebound following a positive night on Wall Street. The S&P 500 bounced 1.05 per cent, recouping most of Monday night’s 1.3 per cent loss.
“Investors are now looking forward to Friday’s official employment figures, which could possibly influence the Fed’s decision on when to wind back its massive monetary stimulus,” Kalkine Group CEO Kunal Sawhney said. “At a time when the headline inflation is running close to a 13-year high level in the US, speculations of earlier-than-expected interest rate hikes are also rife in the market.
“With Fed’s officials recently signalling about the end of its ultra-support monetary policies, experts are now anticipating an interest rate hike as soon as next year.”
Winners’ circle
Oil and gas companies tested multi-month highs after US crude hit a seven-year high and natural gas touched a level last seen in 2008. Gas prices have surged amid tightening supply heading into the northern-hemisphere winter.
“Gunvor CEO, Torbjörn Törnqvist, warned that unlike oil, there is no spare capacity in the LNG market. China is ramping up its purchases coming into winter following calls from authorities to secure supply at all cost,” commodities strategist Daniel Hynes said.
Woodside Petroleum hit a seven-month high before rolling over to a loss of 0.16 per cent. Santos gained 2.34 per cent and Oil Search 2.48 per cent.
The tech sector bounced off a two-month low even as long-term rates rose to their highest since late June. Afterpay climbed 2.98 per cent, Technology One 1.77 per cent and Appen 0.82 per cent.
Coal companies rallied following reports China had unloaded Australian coal despite an unofficial ban on Australian imports. Around 450,000 tonnes were reportedly unloaded.
Whitehaven Coal put on 4.06 per cent, New Hope 3.64 per cent and Coronado 1.37 per cent.
Aside from Whitehaven, the session’s best performers were Seven West Media +6.41 per cent, Virgin Money UK +3.86 per cent and Janus Henderson +3.18 per cent.
Doghouse
The banks and miners were the heaviest weights on the index. Commonwealth Bank retreated 1.97 per cent following a downgrade from JPMorgan. ANZ slipped 1.08 per cent, NAB 0.83 per cent and Westpac 0.62 per cent. Rio Tinto gave up 0.6 per cent and Fortescue Metals 0.28 per cent. BHP firmed 0.36 per cent.
News of a class action pushed A2 Milk down 7.67 per cent. The dairy company said it will vigorously defend group proceedings filed by Slater and Gordon in Victoria yesterday alleging it failed to comply with its continuous disclosure obligations.
Fund manager Magellan sank 4.1 per cent to a 19-month low after reporting net outflows of $1.527 billion last quarter. The loss reduced funds under management by 1.3 per cent. The fund said the declines were mostly due to institutional portfolio rebalancing.
The travel and tourism sub-sector met a wave of profit-taking following six weeks of strong gains ahead of ‘Freedom Day’ in NSW next Monday. Flight Centre dived almost 10 per cent before paring its fall to 6.63 per cent. Webjet dropped 6.19 per cent, Qantas 2.09 per cent, Corporate Travel Management 2.41 per cent and Crown Resorts 1.53 per cent.
Lithium miner Pilbara Minerals faded 0.27 per cent despite announcing a 47 per cent increase in the ore reserve at its Pilgangoora project in the Pilbara. The company said the increase reinforced the project’s “position as one of the world’s premier hard rock lithium operations”.
Other markets
Asian markets deteriorated in afternoon trade. Hong Kong’s Hang Seng declined 0.46 per cent, Japan’s Nikkei 1.66 per cent and the Asia Dow 0.57 per cent. Chinese markets remain closed until Friday for Golden Week holidays.
Brent crude edged up five US cents or 0.06 per cent to US$82.61 a barrel. Gold dropped US$7.60 or 0.43 per cent to US$1,753.30 an ounce.
