A not-so-Happy New Year for Aussie markets as investors follow US lead

A sell-off in growth stocks on the S&P 500 in the US has flowed through to the Australian market where the ASX 200 had its worst day in more than three months.

After surging in the past two months, the S&P 500 fell for a third consecutive day. Picture: Getty Images

Cracks are appearing on sharemarkets after a shaky start to the year.

After surging in the past two months, the S&P 500 fell for a second consecutive day.

The sell-off flowed through to the Australian market, where the ASX 200 suffered its biggest-one-day fall in more than three months.

The ASX 200 closed down 1.4 per cent at a five-day low of 7523.2 points on broadbased falls.

The index had tested its record high at the start of the week on surging iron ore prices and expectations of rate cuts in the US and Australia this year, but shied off that level.

While the Dow Jones Industrial Average crept up to a record high on Tuesday amid a switch back to value stocks, growth stocks were under pressure.

A 1.7 per cent fall in the Nasdaq 100 marked its third-worst performance for the first trading day of the year since the dotcom bust of 2001.

Apple dived 3.6 per cent after Barclays warned that iPhone demand was cooling. Other “Magnificent Seven” stocks followed, with Meta down 2.2 per cent and Nvidia down 2.7 per cent.

The first trading day of January in the US has raised concerns about the year ahead. Picture: AFP

Overall it was an inauspicious first trading day in a month that can influence expectations of the annual performance of the S&P 500, according to the so-called “January Barometer”.

In years when January has been positive for the S&P 500, its performance over the rest of year has been positive 71 per cent of the time, versus 63 per cent of the time for all years and 58 per cent of the time when January is negative, ­according to Dow Jones Market Data.

Based on data going back to 1928, the S&P 500 has averaged a gain of 1.2 per cent in January and 6.6 per cent over the rest of the year. When January was positive, it averaged 9.2 per cent for the rest of the year. When January was negative, it averaged just 2.1 per cent for the rest of the year.

US Treasury bonds also lost ground after a strong rally of late, brushing off some weaker than expected economic data on Tuesday as traders trimmed bets of rapid-fire US rate cuts this year.

After a 24 per cent rise in the S&P 500 last year, including a 16 per cent surge since late October, US investors will be motivated to take some profits after holding off for tax reasons, amid tailwinds from year-end window dressing and the Fed’s dovish ­signals on interest rates.

Whether or not profit taking turns into something serious depends on the outlook for the economy and interest rates.

RBC Capital Markets head of global commodity strategy Helima Croft. Picture: Britta Campion

US ISM manufacturing data, FOMC minutes and US non-farm payrolls data this week will be key. With falling inflation expected to allow rapid-fire US interest rate cuts even with positive economic growth, stocks may sag if this “Goldilocks” narrative is questioned. Investors will also be keeping an eye on the Middle East as tensions rise across regional flashpoints.

RBC Capital Markets head of global commodity strategy Helima Croft saw increasing indications that the US and UK were preparing for a more large-scale military operation against the Houthi militants in Yemen after their repeated attacks on commercial shipping in the Red Sea.

“A key question is whether Iran will be a bystander if such a joint operation commences,” Ms Croft said.

The risk of Israel opening a second front against Hezbollah in Lebanon “remains underappreciated by market participants” and was “one of the main conduits for direct Iranian involvement in the ongoing war,” said Ms Croft, who previously worked as a CIA ­analyst focusing on energy ­security.

In recent days, senior Israeli officials have warned that they will target Hezbollah fighters if the fighters do not vacate their ­positions along the Lebanon border, and the Israel Defence Forces has carried out what it called “widespread” strikes on targets in southern Lebanon.

Israeli soldiers walk past battle tanks deployed at a position along the border with the Gaza Strip. Picture: AFP

A more fulsome Iranian entry into the war would “dramatically increase the threat to regional ­energy supplies, not only because of the country’s energy assets, but also its ability to imperil maritime traffic through the Strait of Hormuz,” Ms Croft said.

While much of the current market focus is on the Red Sea and the Bab el-Mandeb choke point, she noted that the Strait of Hormuz was “far more consequential for global energy supplies”, with an average of 15 million barrels of oil a day of OPEC+ crude travelling through the waterway last year.

Iraq may be a “third escalation channel” for the Middle East conflict, according to RBC.

“Since the start of the Israel-Hamas war, Iran-backed militias have fired more than 100 rockets at bases housing US troops or in the vicinity of American personnel in Iraq and Syria,” Ms Croft said.

“We believe that if continuing assaults by Iran-backed forces lead to significant American ­casualties, Washington could find itself drawn back into another round of active fighting in Iraq.”