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A sharp sell-off on Wall Street ahead of tonight’s US inflation report points to further pain for Australian investors at the end of a challenging week.

The S&P/ASX 200 looked set to retest last month’s lows after the S&P 500 slumped almost 2.4 per cent.

ASX futures dropped 55 points or 0.78 per cent to 6964. The ASX 200 has not traded below 7000 since May 13.

Oil backed off a three-month high. Iron ore and metals retreated as Chinese authorities reimposed Covid restrictions in parts of Shanghai. The dollar plunged 1.2 per cent, back under 71 US cents.

Wall Street

US stocks spiralled lower in the final hour of trade amid fears tonight’s May consumer price index may further the case for aggressive rate increases. China-facing stocks fell after Covid outbreaks prompted “stay home” orders in the nation’s commercial hub.   

The S&P 500 lost 98 points or 2.38 per cent. The Dow Jones Industrial Average gave up 638 points or 1.94 per cent. The Nasdaq Composite shed 332 points or 2.75 per cent.

Stocks were modestly underwater for much of the night before unravelling into the close. Wall Street’s “fear gauge”, the VIX, climbed more than 9 per cent.  

A rebound in energy prices in recent weeks has undermined hopes tonight’s May consumer price index will continue the recent downtrend in inflation from a 40-year high. A White House official said they expected a strong reading. A further uptick in inflation would increase pressure on the Federal Reserve to raise rates higher and faster.

“The fact that people have literally been talking about this report for the last several days illustrates how much of an issue inflation has become for the market over the last six months since Fed Chair Powell first started to take a more hawkish approach,” Bespoke Investment Group told clients.

Big Tech led the selling as the cost of long-term borrowing continued to rise. The yield on ten-year US treasuries touched its highest since May 11.

Facebook owner Meta Platforms skidded 6.43 per cent. Netflix shed 4.96 per cent, Amazon 4.15 per cent and Apple 3.6 per cent.

US-listed Chinese stocks retreated after authorities shut down Shanghai’s Minhang district for Covid testing. The area is home to more than two million people. Several other districts issued two-day “stay home” orders while testing resumed.

“The latest round of restrictions are targeted, they’re not as widespread as previously, but when people see the headlines, the initial reaction would be to sell the rallies we had recently,” Xiao Fu, head of commodity market strategy at Bank of China International, told Reuters.

Earlier, European stocks sank after the European Central Bank announced it will raise its benchmark rate next month for the first time since 2011. The pan-European Stoxx 600 index fell 1.36 per cent.

Australian outlook

One of the worst weeks of the year for Australian stocks looks set for a bearish conclusion. The S&P/ASX 200 has fallen for three out of four sessions this week, closing yesterday at a four-week low.

The retreat has dragged the benchmark down more than 200 points or 3 per cent for the week. Futures action suggests losses will blow out further this session. Last month’s closing low of 6941 should offer some support if the selling accelerates.

Covid developments in China yesterday are a clear negative for a market leveraged to the Chinese economy. Commodity prices cooled overnight, albeit at elevated levels.

The dollar slumped 1.2 per cent to 70.99 US cents. The Aussie is viewed by some forex traders as a proxy for commodity prices.

If there is a positive in recent developments, it is that the reaction on Chinese equity markets yesterday was mild. The Shanghai Composite index dropped 0.76 per cent. Hong Kong’s Hang Seng index shed 0.66 per cent.

All 11 US sectors declined, leaving no obvious havens. Consumer staples was least worst with a fall of 1.5 per cent. Declines in Big Tech pulled the tech and communication services sectors down 2.7 per cent.

Financials lost 2.61 per cent. Materials gave up 2.39 per cent. The NYSE Arca Gold Bugs Index slumped 3.67 per cent.

China and Japan release inflation data this morning. Chinese figures at 11.30 am AEST are most likely to sway Australian trade if they surprise. Economists are looking for a slowdown in wholesale price inflation and a mild uptick in consumer inflation.

IPOs: Cavalier Resources lists at 11 am AEST. Cavalier is an explorer with gold and nickel projects in WA.

Commodities

Commodity prices cooled as the reinstatement of Covid restrictions in parts of Shanghai revived fears of a wider return to lockdown as the government pursues zero Covid.

The spot price for iron ore landed in China declined US$2.06 or 1.4 per cent to US$143.82 a tonne. The most-traded September ore contract on the Dalian Commodity Exchange dipped 0.22 per cent.

On the London Metal Exchange, benchmark copper dropped 1.2 per cent to US$9,620.10 a tonne. Aluminium slid 2 per cent, nickel 2.9 per cent, lead 1.6 per cent, zinc 1.8 per cent and tin 1.2 per cent.

BHP‘s US-traded depositary receipts slid 3.42 per cent. The miner’s UK-listed stock shed 2.68 per cent. Rio Tinto gave up 2.72 per cent in both US and UK trade.

Oil backed off Wednesday’s three-month high. Brent crude settled 51 US cents or 0.4 per cent lower at US$123.07 a barrel. The US benchmark dipped 0.5 per cent to US$121.51.

Gold ticked lower for the first time in three sessions. Metal for August delivery settled US$3.70 or 0.2 per cent in the red at US$1,852.80 an ounce.

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