Investors brace for sharp falls on ASX after US rout

The Australian sharemarket is expected to open sharply lower today after Wall Street’s biggest sell-off since Brexit.

The Dow Jones Industrial index plunged 394.46 points, or 2.1 per cent, to 18085.45.

The Australian sharemarket is expected to open sharply lower today, after Wall Street experienced its biggest one-day sell-off since the Brexit decision on the back of a senior US central bank official flagging that interest rates could soon be raised.

Futures trading on the S&P/ASX200 last night indicated that the benchmark index could open up to 79 points — or 1.5 per cent — lower today after the US market sell-off on Friday night.

The Dow Jones Industrial index plunged 394.46 points, or 2.1 per cent, to 18085.45. The S&P 500 declined 53.49 points, or 2.5 per cent, to 2127.81. The percentage drop was the biggest for both indexes since June 24. The Nasdaq Composite Index lost 133.57 points, or 2.5 per cent, to 5125.91. Yields on 10-year US Treasury notes jumped to 1.671 per cent, their highest level since June 23. Bond yields rise as prices fall.

Across the region, the major Hong Kong and Tokyo markets are expected to open in negative territory, which would end the recent run of equity gains.

The tone was set after Federal Reserve Bank of Boston president Eric Rosengren, normally considered a ‘‘dove’’ by central bank watchers, said it was likely that interest rates in the US would be tightened shortly.

The Federal Open Market Committee, the branch of the Federal Reserve Board that determines the direction of monetary policy, is due to meet on September 20-21, and Mr Rosengren’s comments have brought forward the financial markets’ expectations of a rate hike.

Some analysts believe the next meeting in a few weeks, or the December meeting, could have a live case for monetary policy tightening.

“A reasonable case can be made for continuing to pursue a gradual normalisation of monetary policy,” Mr Rosengren said.

UBS Asset Management head of fixed income, Anne Anderson, said the current bout of volatility in financial markets was likely to continue over the next few weeks.

“The market is starting to expect that interest rates are going to be raised even though there have been soft employment and manufacturing figures over the past week,” she said.

“People had pared back the chance of tightening, but now September or December is now a chance.

“The volatility could go on for a couple of weeks. We will see how it plays out over the next little while.”

Citigroup equity sales desk director Karen Jorritsma said Australian shareholders could start to switch their investment portfolios if the US central bank began to raise interest rates.

“People are overweight in yield stocks right now because there has been a lack of global growth,” she said.

“I think we are reaching a point where they will start to rotate their portfolio to a more cyclical position if the Fed starts to raise rates, but a 25 basis point move is not a game changer.”

Ms Jorritsma said she believed the Federal Reserve would take a ‘‘slowly, slowly’’ approach to raising interest rates for fear of spooking financial markets.

“I don’t think we are going to see them be too aggressive,” she said.

“The question is if they need to move, how much more will they do. If we see one rate cut, we will be seeing two or three more.”