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The share market suffered its biggest setback in almost a month as the prospect of tighter monetary policy on both sides of the Pacific brought out sellers.
The S&P/ASX 200 slid 50 points or 0.66 per cent by mid-session. Today’s retreat was the sharpest since a 67-point fall on March 11.
Rate-sensitive growth stocks spearheaded the decline after the Reserve Bank cleared the way for higher rates. Overnight, US stocks fell as the US central bank indicated the bank intends to reduce its balance sheet and increase rates quickly.
Nine of eleven ASX sectors declined. Financials and the defensive consumer staples sector withstood the selling. Tech and mining stocks took the biggest hit.
What’s driving the market
US stocks staggered overnight after the Federal Reserve made it clear this era of easy money is ending faster than some investors anticipated. Future Fed Vice Chair Lael Brainard indicated the central bank is keen as soon as next month to start unloading assets it bought to help the economy during the pandemic.
“It is of paramount importance to get inflation down,” Brainard said. The Fed “will continue tightening monetary policy methodically through a series of interest rate increases and by starting to reduce the balance sheet at a rapid pace as soon as our May meeting.”
While little of this should have been surprising with inflation at a 40-year high, investors baulked at the word “rapid”. Bond markets sold off, sending yields to a three-year peak. The Nasdaq Composite slumped 2.26 per cent. The S&P 500 shed 1.26 per cent.
“Rising rate hike expectations prompted a decline in technology stocks, which weighed down the broader share market. The weaker performance of tech stocks reflected the common premise that higher interest rates are not good for the growth stocks, and the value of the future cash flows of growth stocks falls when interest rates rise,” Kunal Sawhney, chief executive of research group Kalkine, said.
Australian stocks were ripe for a retrace after a month-long rally lifted the ASX 200 more than 500 points to within a few points of this year’s peak. A policy update from the RBA yesterday afternoon unsettled the market. The benchmark gave up three-quarters of its gains for the day after the central bank paved the way for higher rates this year.
Clifford Bennett, chief economist at ACY Securities, was among those questioning the fierce recovery in equity prices over the last month.
“We remain of the view that stocks generally are defying gravity and probably belong to 10% to 20% lower at some point this year. Due to Ukraine, European and possibly US recessions, as well as significant supply chain disruption and inflation,” he said.
Going up
A record quarter helped PolyNovo buck the downtrend in growth stocks. The skin specialist gained 6.02 per cent after reporting revenues increased 59.3 per cent increase last quarter to $12.26 million.
Virtus Health edged up 0.68 per cent after private-equity firm BGH Capital pitched an off-market takeover offer to thwart rival bidder CapVest. BGH offered $8 per share in cash.
A bounce in coal prices lifted miners. New Hope climbed 7.2 per cent to a three-year high. Whitehaven put on 5.53 per cent. Coal and natural gas prices rallied overnight as the European Union mulled additional sanctions on Russia.
The morning’s best performers aside from PolyNovo and Whitehaven were investment manager AMP +3.33 per cent, transport operator Kelsian +2.54 per cent and Flight Centre Travel +1.91 per cent.
At the heavyweight end, CBA firmed 0.73 per cent, Woolworths 0.65 per cent and ANZ 0.43 per cent.
Going down
Yesterday’s roosters were today’s feather dusters as the tech sector flipped from market-leader to the morning’s biggest drag. Afterpay parent Block fell 6.86 per cent, Novonix 6.06 per cent and Life360 6.03 per cent.
The materials sector dropped 1.6 per cent as profit-takers took advantage of Monday’s record close. Gold miner Newcrest fell 2.48 per cent, BHP 1.5 per cent and Rio Tinto 1.39 per cent.
Battery-metal producers retreated for a second day after outperforming last week. Pilbara Minerals shed 4.37 per cent, Lynas Rare Earths 5.07 per cent, Liontown 5.03 per cent and AVZ Minerals 5.31 per cent.
“Some of the best-performing stocks in the Australian share market this year are associated with the lithium space,” Kalkine’s Sawhney said. “ASX lithium stocks, such as Lake Resources N.L., Core Lithium Ltd, Global Lithium Resources Ltd and Arizona Lithium Ltd, have produced spectacular returns in 2022 so far despite prevailing geopolitical concerns.
“The credit goes to sky-high prices for battery-making commodities lithium carbonate and spodumene, backed by an increased shift towards electric vehicles.”
Graphite miner Syrah eased 3.24 per cent after greenlighting a solar and battery power system at its project in Mozambique. The solar battery system is expected to reduce operating costs in a region where grid electricity is not available.
Fund manager Magellan dropped 6.63 per cent as its shares traded without the right to a bonus issue.
Andromeda Metals dived 34.29 per cent after the finalised rate of return on its kaolin project in South Australia came in significantly lower than initial estimates.
Other markets
Asian markets followed Wall Street lower. The Asia Dow dropped 1.44 per cent, China’s Shanghai Composite 0.62 per cent, Hong Kong’s Hang Seng 1.69 per cent and Japan’s Nikkei 1.91 per cent.
US futures continued to weaken. S&P 500 futures eased six points or 0.13 per cent.
Gold added to overnight losses, falling US$1.20 or 0.06 per cent to US$1,926.30 an ounce.
Brent crude declined 28 US cents or 0.26 per cent to US$106.36 a barrel.
The dollar pulled back 0.15 per cent to 75.75 US cents.
