ASX smashes in $57bn wipe out as bond vigilantes wreak havoc
Investors have wiped $57bn from the Australian sharemarket as surging bond yields trigger the worst ASX sell-off since April.
The bond vigilantes are back with a vengeance, and Australian investors are paying the price.
Investors wiped $57bn off the ASX on Wednesday as soaring bond yields tested stretched valuations after a lacklustre reporting season.
The ASX 200 plunged 1.8 per cent to a four-week low of 8738.8 points, marking its third straight decline and worst day since April. The index had hit a record high of 9054.5 points early last week.
Investors rushed for the exits in some of Australia’s biggest and most overvalued companies ahead of what is often the worst month of the year for stocks.
The financials sector dived 2.9 per cent, led by a 3.5 per cent fall in Commonwealth Bank.
Goodman Group tumbled 3.7 per cent. Technology darlings Xero and WiseTech Global were hammered, down 6.2 per cent and 4.6 per cent respectively.
Origin Energy fell 3.6 per cent as its shares traded ex-dividend.
The carnage came as Australia’s 10-year bond yield rose as much as 8 basis points to a seven-week high near 4.438 per cent, with global bond markets under siege from fiscal deficit concerns and a major new threat to central bank independence in the US.
“The decline is primarily driven by surging bond yields and the return of the bond vigilantes, fuelled by concerns over large fiscal deficits, central banks expected to cut rates into persistent inflation, and President (Donald) Trump’s dovish reshaping of the FOMC,” said IG market analyst Tony Sycamore.
Simultaneous falls in stocks and bonds may crimp returns for investors in balanced growth funds that often aim for target allocations of 60 per cent to growth assets like stocks and 40 per cent to defensive assets like bonds.
Bond yields are rising amid large fiscal deficits in developed markets, an intensifying campaign by the US Administration to undermine Federal Reserve independence, and a US court ruling that most of President Trump’s tariffs were illegal.
The rise in Australian bond yields continued after national accounts data for the June quarter showed the economy grew 1.8 per cent year-on-year, exceeding an expected 1.6 per cent rise in a move that shaved about 10 basis points off the amount of interest rate cuts by the Reserve Bank expected over the next 12 months.
“Today’s strong GDP was primarily attributable to a sharp rise in household spending,” said Citi global inflation trading strategist Ben Wiltshire. “The reduction in savings ratio is further evidence that confidence and momentum are returning to Australian households.”
With the prospect of an increased inflation risk premium pushing up long-term bond yields and an increased “risk-free rate” hitting the stock market at a time of stretched valuations, investors are flocking to gold.
Spot gold has jumped more than 5 per cent since Trump moved to fire Fed governor Lisa Cook early last week for alleged mortgage fraud.
The price of gold has risen every day since then, and by Wednesday had reached a record high of $US3,546.96 per ounce.
“The Fed’s independence has come back into question following US President Trump’s move to fire Federal Reserve governor Cook,” said CBA head of commodities and sustainable economics Vivek Dhar.
“These drivers bring back into focus the preference for gold over traditional safe haven assets like the US dollar and US bonds.”
Dhar said his forecast for gold futures to average $US3,500 per ounce in the December quarter is “already looking too low”. He now sees upside risk to that forecast, with $US3,650 a “real possibility”.
The global sell-off began in European trading as yields on long-dated UK, German and French government bonds all rose to decade-plus highs.
In Japan, 30-year government bond yields soared to a multi-decade high of 3.288 per cent.
“Australian 10-year bonds have underperformed 10-year US treasuries by 20 basis points in the last three weeks,” Wiltshire noted. “Today’s AU GDP number is unlikely to buck this trend, with the market now likely to challenge the 2 RBA rate cuts priced into the market.”
The selling has been particularly brutal for interest rate-sensitive sectors. “It’s noticeable that the interest rate sensitive IT, Financials and Real Estate sectors have worn the brunt of today’s falls,” said IG’s Sycamore.
September has historically been the worst-performing month for the S&P 500 and the ASX 200 over the past decade. An average loss of 2 per cent sets an ominous tone for the month.
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