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The share market recouped all of yesterday’s heavy loss, plus more, after the Reserve Bank hinted at a slowdown in rate increases.
The S&P/ASX 200 rallied 119 points or 1.77 per cent during its strongest session since June.
Strong leads from Wall Street were bolstered by an acknowledgement from the RBA that the case for smaller rate hikes had strengthened after four straight hikes of half a percentage point.
Ten of eleven sectors advanced, led by tech, property and mining companies. Energy was the only drag after oil prices slumped to their lowest since January.
What moved the market
A bullish reversal session caught a second wind around lunchtime when RBA Governor Philip Lowe shed more light on the outlook for interest rates. The bank has lifted the cash rate target five times in five months from 0.1 per cent to 2.35 per cent. This year’s pace of increases is the fastest since 1994.
The last four increases have been 50 basis points – twice what is considered standard. The key passage of Lowe’s speech to economists suggested the bank will consider smaller increases from here.
“We are conscious that there are lags in the operation of monetary policy and that interest rates have increased very quickly. And we recognise that, all else equal, the case for a slower pace of increase in interest rates becomes stronger as the level of the cash rate rises,” Mr Lowe said.
“But how high interest rates need to go and how quickly we get there will be guided by the incoming data and the evolving outlook for inflation and the labour market,” he added.
Lowe also reinforced the bank’s commitment to bringing inflation down from levels last seen in the 1990s.
“The Board is committed to doing what is necessary to ensure that inflation returns to target over time. High inflation is a scourge. It damages our standard of living, creates additional uncertainty for households and businesses, erodes the value of people’s savings and adds to inequality,” he said.
“And without price stability, it is not possible to achieve a sustained period of low unemployment. It is important, therefore, that this current surge in inflation is only temporary and that we once again return to the 2 to 3 per cent range.”
Investors liked what they heard. The ASX was already up 70 points, and put on another 50 points by the close.
Interbank futures indicated the market expects a 25 bp increase next month. Equities have struggled this year amid fears of a recession as central banks focus on inflation at the expense of growth.
The early gains followed a strong overnight rebound on Wall Street as two of this year’s major profit headwinds – energy and borrowing costs – temporarily abated. Brent crude dived 5.2 per cent to US$88 a barrel after customs data showed Chinese demand was significantly weaker last month than the same time last year as Covid lockdowns crimped activity.
The retreat in crude halted the upward march of bond yields, which reflect expectations for official interest rates. The faster inflation falls, the lower the peak in interest rates.
The yield on government bonds in the US and Australia backed off three-month highs. The ten-year Australian yield dropped 15 basis points this afternoon to 3.57 per cent.
The S&P 500 bounced 1.83 per cent. The Nasdaq Composite, packed with rate-sensitive growth stocks, soared 2.14 per cent to its first gain in eight sessions. The seven-session losing run that proceeded last night’s rebound was the longest since 2016.
Winners’ circle
Payments platform Tyro soared 27.92 per cent to $1.26 after rejecting an unsolicited takeover offer from private equity firm Potentia Capital Management and a group of investors. Tyro said the non-binding indicative offer of $1.27 per share was “highly opportunistic” and “materially below Tyro’s fundamental value”.
Borrowing-dependent growth stocks benefitted from the retreat in rates. Life360 popped 16.36 per cent, Novonix 11.17 per cent, Megaport 12.57 per cent and Zip Co 8.98 per cent.
Link Administration jumped 6.26 per cent after the competition regulator waved through an acquisition proposal from legal tech firm Dye & Durham. The ACCC said it would not oppose the acquisition provided the Canadian firm divests its existing Australian business.
A rebound in gold helped the battered precious metals sub-sector bounce 2.5 per cent from its weakest level since 2018. The yellow metal rallied 0.7 per cent overnight to its highest in more than a week.
Gold Road Resources gained 5.93 per cent, Silver Lake Resources 5.13 per cent and De Grey 5.43 per cent. Industry heavyweight Newcrest firmed 1.37 per cent.
Lithium has been a pillar of strength through a volatile week. Allkem rose 7.74 per cent to an all-time high. Lake Resources gained 10.74 per cent, Liontown Resources 7.25 per cent and Pilbara Minerals 7.59 per cent.
Doghouse
Fewer than one in ten stocks declined. Woodside Energy dropped $1.87 or 5.5 per cent as its shares traded without the right to a fully-franked dividend of $1.59. Santos fell 0.51 per cent. Beach Energy gave up 1.2 per cent.
Private health insurers Medibank and NIB dropped 1.69 and 0.65 per cent, respectively.
Among companies trading ex-dividend, ASX Ltd shed 0.81 per cent and Perpetual lost 0.45 per cent. G8 Education closed unchanged. Reliance Worldwide rallied 1.38 per cent. Monadelphous gained 0.77 per cent.
Other markets
Most of the major Asian markets advanced. The Asia Dow gained 1.43 per cent, China’s Shanghai Composite 0.02 per cent and Japan’s Nikkei 2.19 per cent. Hong Kong’s Hang Seng shed 0.86 per cent.
S&P 500 futures nudged up four points or 0.1 per cent.
Oil bounced off its lowest level since January. Brent crude rallied 73 US cents or 0.8 per cent to US$88.73 a barrel.
Gold trimmed last night’s 0.7 per cent rebound, reversing 50 US cents or 0.03 per cent to US$1,727.30 an ounce.
The dollar eased 0.2 per cent to 67.4 US cents.
