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Australian shares retreated ahead of a likely interest rate rise this afternoon following a tumble on Wall Street.

The S&P/ASX 200 declined 17 points or 0.23 per cent by mid-session.

Slim gains in industrials and defensive sectors were outweighed by declines in growth and resource stocks.

What’s driving the market

Interest rates have been the main driver on financial markets over the last 24 hours as investors try to assess how high benchmarks in the US and Australia will rise. US stocks slumped overnight as unexpectedly robust growth in services sector activity suggested the Federal Reserve has more work to do to rein in inflationary pressures.

The Wall Street Journal’s influential writer Nick Timiraos said the likely top of this rates cycle could be higher than market pricing suggests. The Fed is expected to raise the target federal funds rate by half a percentage point next week. Timiraos said a “hot” inflation reading next week could tip the Fed towards another half-point rate hike in February.   

The S&P 500 skidded 1.79 per cent as the market priced in a higher terminal rate. The Dow shed 1.4 per cent.

“A new week has reversed a good chunk of what we saw last week with equities down, yields up and the USD stronger. The key driver initially was a WSJ article by Fed whisperer Timiraos in which he hinted the US Fed could see the terminal rate higher than what markets currently price,” NAB’s head of market economics, Tapas Strickland, said.

Australian investors were also focussed on rates as the RBA gathered for the last policy meeting of the year. Every one of thirty economists surveyed by Reuters expect the bank to raise the cash rate by 25 basis points this afternoon to 3.1 per cent.

Interbank cash futures movements imply a 46 per cent chance of a rates pause today, but Strickland and other economists think another rise is a near-certainty.

“The RBA is widely expected to hike rates by 25bps,” Strickland said. “The RBA may be contemplating a pause soon, but it is still too early and it is worth noting that a 50bp hike was considered in November due to the ‘current inflation environment and the upside risks to inflation from the labour market, rents and energy costs’. Data since then only underscores those risks.”

Going up

A six-month high in Newcastle coal prices helped coal miners resist broader pressures on commodity stocks. Prices at Newcastle firmed 2.43 per cent.

Coronado added 3.08 per cent. Whitehaven Coal climbed 2.51 per cent. New Hope gained 1.77 per cent.

The downturn in risk appetite helped lift defensive assets. CSL firmed 0.7 per cent, Domino’s Pizza 2.31 per cent and Nufarm 1.82 per cent.

Among the market behemoths of the ASX 20, Telstra advanced 1.5 per cent, Coles 0.3 per cent and Woolworths 0.1 per cent.

Bank of Queensland firmed 0.1 per cent as Executive Chair Patrick Allaway defended the board’s decision to dump CEO George Frazis. Allaway told today’s AGM the bank required “a different capability and leadership style to build a simpler and more resilient bank”.

“We recognise the immediate departure of a CEO and the associated uncertainty is not ideal, but we felt a longer transition would not be in the best interest of BOQ. We considered it would be sub-optimal and destabilising for George to continue in the CEO role knowing he did not have the ongoing support of the Board while the search for his successor was underway,” Allaway said.

Going down

Beach Energy slid 6.2 per cent after contractor Clough fell into administration. Clough was engineering, procurement and construction contractor for the Waitsia Stage 2 gas plant, a joint venture between Beach and Mitsui.

Gold miners had been among the best performers since September as the US dollar backed off a 20-year high. The yellow metal reeled back from a three-month high overnight as the greenback rebounded on revised expectations for the top in this interest rate cycle.

Ramelius Resources reversed 5.39 per cent. St Barbara gave up 5.11 per cent. Industry heavyweight Newcrest lost 1.78 per cent.

Tech and other growth sectors declined in the wake of a jump in the cost of long-term borrowing. Afterpay’s US parent company Block fell 4.79 per cent, Megaport 4.13 per cent and BrainChip 3.13 per cent.   

Aside from Newcrest, the heaviest drags on the index were James Hardie -2.22 per cent, Macquarie Group -1.86 per cent and Santos -1.29 per cent.

Other markets

A mixed morning on Asian markets saw the Asia Dow lose 0.51 per cent, China’s Shanghai Composite 0.36 per cent and Hong Kong’s Hang Seng 1.57 per cent. Japan’s Nikkei index edged up 0.07 per cent.

S&P 500 futures firmed nine points or 0.22 per cent.

Gold clawed back US$4.80 or 0.27 per cent of last night’s US$28.30 loss, rising to US$1,786.10 an ounce.

Brent crude rebounded 76 US cents or 0.9 per cent to US$83.43 a barrel.

The dollar bounced 0.23 per cent to 67.22 US cents after sliding more than 1.7 per cent overnight.

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