Australian shares fall for a second day as sentiment cools

A rally in the energy and utilities sector was not enough to lift the Australian sharemarket, which has had a slow start to the year following the negative lead of Wall Street after Federal Reserve meeting minutes indicated interest rates could stay restrictive for longer.

The S&P/ASX 200 fell 29.1 points, or 0.4 per cent, to 7494.1 at the close, weighed down by nine out of the 11 sectors.

The ASX has followed Wall Street’s lead.Credit: Louise Kennerley

Energy lifted 1.4 per cent, tracking the higher price of Brent crude, which rose to $US78 a barrel amid ongoing tensions in the Middle East and an OPEC statement stressing its commitment to stabilising prices.

Woodside, Santos, Ampol, Whitehaven Coal, Yancoal and Viva Energy all soared in response, firmly placing themselves in the top 10 large-cap advancers on Thursday.

Meridian Energy (up 4.4 per cent) was the best performing large-cap stock, followed by Infratil (up 3.9 per cent) and Mercury Nz (up 2.8 per cent). Meridian and Mercury buoyed the utilities sector, which rose 0.3 per cent.

On the flipside, consumer staples (down 1 per cent) were the weakest performing stocks, followed by mining (down 0.8 per cent).

Lithium miner Lynas Rare Earths led the large-cap decliners after its shares fell 3.3 per cent, followed by Pro Medicus (down 2.8 per cent) and Northern Star Resources (down 2.8 per cent).

Iron ore heavyweights BHP and Rio Tinto were down 0.4 per cent and 0.2 per cent, despite the price of the steel commodity lifting 0.6 per cent to $US142.55 a tonne. Shares in Fortescue Metal Group, however, rose 0.3 per cent.

The focus on Thursday night will return to the US labour market ahead of ADP payroll data and weekly jobless claims. The markets dialled back expectations of a March cut by the Fed from over 85 per cent to 68 per cent after Federal Reserve minutes released overnight showed policymakers agreed in December that it would be appropriate to maintain a restrictive stance “for some time”, while acknowledging they were probably at the peak rate and would begin cutting in 2024.

Capital Idea senior financial analyst Kyle Rodda in a note to investors said the dour start to 2024 continued in Asian markets.

“The markets are readjusting expectations for the depth and timing of US rate cuts, with the momentum behind the ‘Powell-pivot’ narrative losing steam and [perhaps] reversing,” he said.

“Asian indices were broadly lower, with only energy stocks rising, in line with energy prices, as supply risks and inclement weather in Europe boost oil and natural gas prices, respectively.

“Sentiment towards Chinese assets remains depressed owing to ongoing fears about the strength of the property sector and broader financial stability. A prominent Hong Kong developer said it would reduce its investment in the mainland.”

On Wall Street, the S&P 500 lost 38.02, or 0.8 per cent, to 4704.81, though it remains within 2 per cent of its record set exactly two years ago. The Dow Jones Industrial Average dropped 284.85 points, or 0.8 per cent, from its own record to 37,430.19. The Nasdaq composite led the market lower with a drop of 173.73, or 1.2 per cent, to 14,592.21.

Some of last year’s biggest winners again gave back some of their gains to weigh on the market. Tesla fell 4 per cent after more than doubling last year, for example. It and the other six “Magnificent Seven” big tech stocks responsible for the majority of Wall Street’s returns last year have regressed somewhat following tremendous runs.

The question hanging over the market is whether all the enthusiasm that sent stocks broadly rallying for nine straight weeks into the start of this year was warranted. It was built on expectations that inflation has cooled enough for the US Federal Reserve to not only halt its hikes to interest rates but to cut them several times this year. Hopes are also high the economy can escape a recession, even after the Fed hiked its main interest rate to the highest level since 2001.

A couple of reports released on Wednesday morning indicated the overall economy may indeed be slowing from its strong growth last summer, which the Federal Reserve hopes will keep a lid on inflation. A big danger is if it slows too much and begins shrinking.

One report showed US employers were advertising nearly 8.8 million job openings at the end of November, down slightly from the month before and the lowest number since early 2021. The report also showed slightly fewer workers quit their jobs during November.

The Fed is looking for exactly such a cooldown, which it hopes will limit upward pressure on inflation without necessitating widespread layoffs across the economy.

“These data will be welcome news for policymakers,” said Rubeela Farooqi, chief US economist at High Frequency Economics.

A second report from the Institute for Supply Management showed the US manufacturing industry is improving by a touch more than economists expected, but it’s still contracting. Manufacturing has been one of the hardest-hit areas of the US economy recently, while the job market and spending by American households have remained resilient.

Treasury yields slumped immediately after the reports and then yo-yoed through the day. The yield on the 10-year Treasury eventually slipped to 3.91 per cent from 3.94 per cent late Tuesday (US time). It’s been generally falling since topping 5 per cent in October, when it was putting strong downward pressure on the stock market.

In the afternoon, yields swung again after the Federal Reserve released the minutes from its latest policy meeting. It was at that meeting in December that policymakers hinted their dramatic campaign to hike interest rates to get inflation under control may be over. They also released projections showing their median official expects the federal funds rate to fall by 0.75 percentage points through 2024.

The minutes from the meeting revealed “almost all participants” indicated a drop in rates this year would likely be appropriate. But they also said their forecasts were hampered by an “unusually elevated degree of uncertainty”. A re-acceleration of inflation, which is still a possibility, could push them to actually raise rates further.

Fed officials also noted in their meeting how stock prices have rallied recently and Treasury yields have eased. Such conditions can rev up the economy and add upward pressure on inflation.

While the Fed doesn’t like that, “the worst they’ll do is push out the date when they first cut,” said Brian Jacobsen, chief economist at Annex Wealth Management.

Traders are largely betting the first cut to rates could happen in March, and they’re putting a high probability on the Fed cutting its main interest rate by least 1.50 percentage points through the year, according to data from CME Group. The federal funds rate is currently sitting within a range of 5.25 per cent to 5.50 per cent.

Critics say that’s likely too bold a prediction. “The only way the Fed will cut more than four times in 2024 is if the economy is skidding out of control” into a recession, Jacobsen said.

Even if the Federal Reserve pulls off a perfect landing to shimmy away from high inflation without causing an economic downturn, some critics also say the sharemarket has simply run too far, too fast in recent months and is due for at least a pause in its run.

Indexes also fell across much of Europe and Asia. Losses were particularly sharp in France, where the CAC 40 fell 1.6 per cent, and in South Korea, where the Kospi sank 2.3 per cent. Stocks in Shanghai were an outlier, rising 0.2 per cent.

with AP

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.