ASX 200 takes $46bn hit as hawkish Fed chair Jerome Powell rattles markets

Investors wiped $46bn off the Australian sharemarket as a hawkish speech from Fed chair Jerome Powell and strong retail sales data renewed fears of further interest rate hikes.

Investors wiped $46bn off the Australian sharemarket as a hawkish speech from Fed chair Jerome Powell and surprisingly strong domestic retail sales data spark renewed fear of further interest rate hikes.

In an ominous sign ahead of the often volatile September-to-October period for the market, the benchmark S&P/ASX 200 index fell 138.5 points or 2 per cent to a four-day low close of 6965.5, narrowly avoiding closing at a four-week low after hitting an intraday low of 6943.2.

All 12 market sectors finished in the red, with the interest rate sensitive information technology sector the weakest as bond yields surged in response to Mr Powell’s Jackson Hole speech and the strongest rise in domestic retail sales since March pointed to more aggressive rate hikes.

Retail sales rose 1.3 per cent month-on-month versus a 0.3 per cent rise expected by economists, suggesting that consumer spending was holding up despite a sharp rise in interest rates since May.

The retail sales fuelled bets of further large interest rate hikes by the Reserve Bank of Australia.

The market-implied implied chance of another 50 basis point rate hike at the RBA’s meeting next Tuesday rose to 86 per cent after the retail data, while the market-implied target rate for December rose to 3.37 per cent versus 3.15 per cent on Friday and the current target of 1.85 per cent.

Bond yields soared, with the three-year Australian commonwealth government bond yield up 14 basis points to 3.39 per cent after hitting a 10-week high of 3.39 per cent. The benchmark 10-year yield rose 9 basis points to 3.67 per cent.

The worst day for the local market in the past four weeks came after the bourse bounced as much as 11 per cent since mid-June as investors dialled back expectations of further aggressive rate hikes by central banks in response to slightly lower than expected inflation data and what appeared to be a slight cooling of central bank rhetoric on the need for further hikes.

But on Wall Street on Friday the S&P 500 dived 3.4 per cent after Powell told the Jackson Hole Economic Policy Symposium that “restoring price stability will likely require a restrictive policy stance for some time”.

In an ominous sign ahead of the often volatile September-to-October period for the market, the benchmark S&P/ASX 200 index fell 138.5 points or 2 per cent to a four-day low close of 6965.5. Picture: NCA NewsWire / Dylan Coker

The current level of the Fed funds rate, which was in the range of estimates of the “longer-run neutral” policy rate, was “not a place to stop or pause”, the Fed chief told central bankers at the conference.

“Powell’s comments took two of the three rate cuts that were expected in 2023 out of expectations and that was enough to rattle the US markets,” said Bell Potter’s head of institutional sales and trading, Richard Coppleson.

“We are also just a few days away from September – the horror month in the US.”

The global sell-off continued in Monday’s Asia-Pacific trading as investors feared Powell’s speech could spark a renewed period of sustained volatility, rising bond yields and sharemarket weakness.

S&P 500 E-Mini futures were down 0.8 per cent as the Australian market closed after falling as much as 1.3 per cent. Japan’s Nikkei 225 was down 2.7 per cent, but China’s CSI 300 fell 0.6 per cent.

The Aussie dollar fell 0.8 per cent to a six-week low of US68.41c amid heightened volatility and risk aversion in global markets, with iron ore futures down 4 per cent to $US101.15 a tonne.

The sell-off in shares also came as investors digested generally underwhelming guidance on earnings and dividends from corporate Australia in the June half year reporting season.

“Earnings per share continue to beat expectations,” said Macquarie Equities Australian equity strategist Matthew Brooks. “Supported by inflation, sales have tended to be higher than expected, with earnings per share misses often driven by margins.”

Cash flows were better than expected, especially in the resources sector, but inventories were higher than expected, as were accounts payable, which “may be masking a negative working capital impact”. Dividends were disappointing relative to Macquarie’s forecasts.

“We still think it’s hard to make a bullish case for stocks when industrial company price-to-earnings ratios are already high, we are early in an earnings downgrade cycle and the Federal Reserve and RBA are likely to tighten interest rates further to slow inflation,” Brooks said.

He added that while a rise in the amount of liquidity provided by the Fed had supported the recent rally in stocks, a decline in net liquidity in the last two weeks was a “headwind for equities”.

Still, the August reporting season has been “less bad than feared” in a challenging macroeconomic backdrop, with the median company beating earnings consensus estimates by 0.7 per cent, and beats outnumbering misses by a ratio of 3:2.

Similarly, MST Marquee analyst Hasan Tevfik said profits had been resilient in the face of “considerable cost headwinds”.

“Importantly, this period of slower profits growth is against a backdrop of high inflation which has allowed companies to push through meaningful selling price increases,” Mr Tevfik said.

“This is serving to counter much of the current wave of cost inflation and will be an important reason why this profits slowdown does not become a collapse.”

Originally published as ASX 200 takes $46bn hit as hawkish Fed chair Jerome Powell rattles markets