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The share market was poised to add to yesterday’s losses after the threat of fast-tightening monetary policy this year triggered sharp falls on Wall Street.

US stocks sank after the minutes from last month’s Federal Reserve policy meeting indicated policymakers were ready to raise interest rates as soon as March, and start reducing the central bank’s balance sheet shortly after.

The Dow retreated from a record level. The S&P 500 and Nasdaq added to earlier losses. Bond yields jumped to their highest since last April.

ASX futures declined 61 points or 0.82 per cent, signalling further pressure following yesterday’s 24-point decline on the S&P/ASX 200.

Wall Street

A market ripe for profit-taking was handed a trigger when the December Fed minutes indicated policymakers were more hawkish about the year ahead than the market anticipated. The minutes firmed up the March meeting as a likely launch date for the first increase in official rates. Some officials want the bank to start offloading bonds shortly after.

The Dow Jones Industrial Average quickly turned negative, falling 392 points or 1.07 per cent. The blue-chip average earlier traded at an all-time high as investors rotated out of growth stocks into cyclicals.

The S&P 500 was already underwater, finishing 93 points or 1.94 per cent lower. The Nasdaq Composite shed 523 points or 3.34 per cent.

Market odds on a March rate hike rose to 80 per cent following the 6 am AEDT release of the meeting summary.

“Participants generally noted that, given their individual outlooks for the economy, the labor market, and inflation, it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated,” the minutes said.

Bonds sold off and yields rallied as investors prepared for the central bank to start reducing the US$8.3 trillion in bonds it purchased to support the economy. While no starting date was announced, the minutes showed some members of the Federal Open Market Committee think the bank should start running down its enormous holdings as soon as possible.

“Almost all participants agreed that it would likely be appropriate to initiate balance sheet runoff at some point after the first increase in the target range for the federal funds rate,” the meeting summary stated.

“Some participants also noted that it could be appropriate to begin to reduce the size of the Federal Reserve’s balance sheet relatively soon after beginning to raise the federal funds rate,” they added. 

The yield on ten-year US treasury notes surged to 1.711 per cent, a level last seen eight months ago. Growth stocks bore the brunt of the selling as analysts downgraded future earnings to reflect the impact of higher rates.

“It’s not just that they’re not injecting liquidity, they’re taking liquidity out,” Infrastructure Capital Management CEO Jay Hatfield said. “You don’t want to be in the stock market when the Fed is taking liquidity out of it – it’s like being in Coke when Warren Buffett is selling his position.”

Nvidia shed 5.76 per cent, Tesla 5.35 per cent and Alphabet (Google) 4.59 per cent. Microsoft lost 3.84 per cent, Apple 2.66 per cent and Meta (Facebook) 3.67 per cent.

Australian outlook

The complacent festive mood on financial markets was shattered overnight by an unexpectedly hawkish outlook from the US central bank. American investors were ready for rate rises and an end to quantitative easing this year. They had not anticipated how quickly the Fed wants to reduce its balance sheet.

The net result was a sell-off on bond and equity markets and a breakout in yields. Tech and other growth stocks copped the brunt of the selling, alongside bond proxies – safe, steady dividend-payers that attract buyers when yields are low.

All 11 sectors declined. The US real estate sector dived 3.22 per cent, technology 3.13 per cent, consumer discretionary (Tesla, Amazon) 2.64 per cent and communication services (Google, Twitter) 2.94 per cent.

The financial sector fell 1.25 per cent. Materials was among the least-worst affected with a loss of less than 0.1 per cent. BHP and Rio Tinto advanced in overseas trade (more below).

Back home, cracks started to appear in the Santa Rally yesterday. The S&P/ASX 200 drew within 13 points of its August peak before rolling over to a loss of 24 points or 0.32 per cent.

Further downside today appears inevitable. The market looks over-extended in the short term and will likely give back more of its 4.5 per cent gain across the holiday season.

China releases a measure of December services-industry activity at 12.45 pm AEDT.

There are no IPOs scheduled today.

The dollar declined 0.3 per cent overnight to 72.16 US cents.

Commodities

An on-going stealth rally in iron ore shielded BHP and Rio Tinto from the turmoil on Wall Street. Benchmark 62% Fe fines imported into northern China climbed 1.4 per cent to US$124.89 a tonne. The most-traded contract on the Dalian Commodity Exchange rose 2.1 per cent to US$108.94 a tonne.

Prices have risen steadily since the turn of the year despite the reimposition of production caps in Tangshan. Pollution controls were reinstated ahead of next month’s Winter Olympics.

BHP‘s US-listed stock advanced 1.14 per cent after its UK-listed stock gained 2.07 per cent. Rio Tinto rallied 1.78 per cent in the US and 1.95 per cent in the UK.

Oil settled at a six-week high before the release of the Fed minutes, but gave up most of its gains in their wake. Brent crude settled 80 US cents or 1 per cent ahead at US$80.80 a barrel. In recent trade, the March contract fell 74 cents or 0.92 per cent to US$80.06.

Gold logged a second night of gains before the Fed minutes triggered a reversal. Gold for February delivery settled US$10.50 or 0.6 per cent higher at US$1,825.10 an ounce. The yellow metal was trading at US$1,810.20 in late action.

“The Fed minutes were hawkish, showing greater concerns that inflation would be persistent and generally indicating an accelerated schedule for rate hikes,” Brien Lundin, editor of Gold Newsletter, told MarketWatch. “Thus, they were bearish for gold, as confirmed by the immediate market reaction in the gold price.”

The NYSE Arca Gold Bugs Index of US gold miners fell 1.73 per cent.

Surging power prices helped lift aluminium to a two-month high. Producers in Europe have been forced by crippling gas prices to reduce output. Benchmark aluminium on the London Metal Exchange rallied 2.57 per cent to US$2,912 a tonne.

Copper eased 0.78 per cent, zinc 0.15 per cent, nickel 1.64 per cent and lead 0.48 per cent. Tin gained 0.29 per cent.

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