Investors brace for further falls with rough start to week expected for ASX 200

Investors are bracing for a rough start to trade on Monday, with the Australian sharemarket set to extend its decline after last week suffering its worst performance in more than a year.

The Australian sharemarket is expected to decline at the start of trade on Monday. Picture: AAP

Investors are bracing for a rough start to trade on Monday, with the Australian sharemarket set to extend its decline after last week suffering its worst performance in more than a year on inflation and interest rate jitters.

The SPI futures index is pointing to a 0.7 per cent drop at the open, building on Friday’s 2.3 per cent plunge, which pushed the S&P/ASX 200 to its worst week in 15 months.

Chief among the drivers of the negative sentiment is US Federal Reserve’s meeting on Tuesday and Wednesday, with investors looking for guidance from the central bank on looming interest rate rises.

The Fed was widely expected to pivot to a more hawkish tone, as flagged in recent comments from various Fed officials, with the focus shifting from boosting growth to controlling inflation, AMP chief economist Shane Oliver said. “Inflation has now been above the 2 per cent target for some time and jobs data indicates that its objective of maximum employment is likely to have been reached,” Dr Oliver said.

“While it’s not expected to raise rates (this week), there is a good chance it will announce the end of quantitative easing this month and signal that the first rate hike will come in March, followed by several more and the commencement of quantitative tightening later this year.”

AMP expects the Fed to hike rates four or five times this year.

While lift-off is widely expected in March, the Fed could move before that, CommSec chief economist Craig James warned.

“But they won’t be closing too many doors. They will likely say there’s a degree of uncertainty about Omicron and the way that it’s playing out. They may even indicate that inflation’s rise is tempering a little bit,” he said.

Growth stocks in the local market are likely to come under further pressure on Monday, according to Mr James.

“The (selling) focus has been on growth rather than value stocks, and that’s centred around concerns about interest rates rising,” Mr James said.

“There’s still the expectation that here in Australia we won’t be lifting rates until later in the year but I notice a number of economists are now talking about the hikes coming earlier, potentially in August.”

With Australia’s 2.3 per cent market plunge on Friday getting ahead of the declines seen on Wall Street, Mr James expects Monday’s drop to be more muted.

“We saw most of our selling on Friday, we pre-empted the European and US sessions, so we probably had the worst of the sell-off off on Friday. But the expectation is that we’ll still be down at the start of trade.”

In the US on Friday, the Dow slumped 1.3 per cent and the S&P 500 fell 1.9 per cent, while the Nasdaq dropped 2.7 per cent.

From their highs, US shares have tumbled as much as 8.3 per cent in the biggest retreat since 2020, with the Nasdaq down 14.2 per cent and global shares down 5.3 per cent. Australian shares are down about 6 per cent so far this year.

Mining stocks could provide a reprieve in Monday’s trade, with iron ore miners likely to lift after the iron ore price jumped 2.8 per cent. Lead and nickel also saw gains on Friday, while the oil price, though lower on Friday, was still in the black for the week.

“The oil price remains fairly buoyant amid concerns around short-term supply chains and demand seems as though it‘s being relatively supported here,” Mr James said.

Looking ahead on the data front, all eyes will be on December quarter inflation data due on Tuesday, with AMP expecting it will show a 0.9 per cent quarter-on-quarter lift, pushing annual inflation up to 3.1 per cent year-on-year. Underlying inflation is expected to rise 0.8 per cent quarter on quarter.