Middle East conflict leads to $32bn shares wipe-out

Australian shares were poleaxed on the back of another big rise in oil prices after Iran called on Muslim nations to boycott Israel.

Tensions around the world over the Israeli-Palestinian conflict has been felt on sharemarkets.

Australian shares were poleaxed on Thursday as bond yields soared after another big rise in oil prices threatened to worsen inflation, following Iran’s call for Muslim nations to boycott Israel.

The benchmark ASX 200 index closed down 1.4 per cent at 6981.6 points, wiping off $32bn of market capitalisation. It bounced off a two-week low of 6952.3 points in the final 30 minutes of trading.

It was the sixth-biggest one-day fall in the Australian sharemarket this year.

“The ASX 200 has been poleaxed today, with all sectors in the red, as the better tone viewed last week continues to evaporate following an explosion at a hospital in Gaza and hotter-than-expected economic data sending US yields surging to fresh highs,” IG market analyst Tony Sycamore said.

The falls came after a 1.3 per cent fall in the S&P 500 on Wednesday amid a further rise in bond yields.

The US 10-year Treasury bond yield hit a 16-year high of 4.97 per cent in Tokyo trading on Thursday, after Brent crude oil rose 1.6 per cent to a three-week high close of $US91.32 a barrel.

Financial market analyst Kyle Rodda. Picture: Aaron Francis

Australia’s 10-year bond yield jumped to a 12-year high of 4.79 per cent.

The dollar slipped to US63c – near a 12-month low – amid heightened risk aversion in global markets, having retreated from a high of US63.95c on Wednesday.

The global benchmark US bond yield has risen 47 basis points this week after stronger-than-expected US retail sales increased the risk of more rate rises by the US Federal Reserve.

Fed chairman Jerome Powell was due to speak at the Economic Club of New York overnight.

The US 10-year bond yield has soared 1.7 percentage points since early April, as the US economy has held up much better than expected in the face of a massive tightening of US monetary policy since March 2022, and as a huge blowout in the US budget deficit increased the supply of bonds.

US bond yields also rose and stocks fell as investors digested the latest Treasury International Capital data, showing that Chinese investors offloaded the most US bonds and stocks in four years in August.

The bulk of the $21.2bn of sales were in Treasuries and US equities, with funds in China also reducing their holdings of agency debt. “This move has fuelled speculation that Chinese authorities may have built up their reserves to support the weakening yuan,” SPI Asset Management managing partner Stephen Innes said.

“But it mostly supports the ­argument that there’s a genuine concern that the forthcoming supply of Treasuries might overwhelm the typical demand from foreign investors upon whom the US relies.”

The rise in bond yields was also being driven by resilient US growth, profound US deficits and subsequently “onerous” Treasury issuance, supply shocks stemming from the energy markets, and the Fed’s quantitative tightening program, according to Capital.com. “While the crisis in the Middle East is a source of significant uncertainty, a problem running at the markets like a freight train is the continued upward pressure on bond yields,” said the online broker’s senior ­financial market analyst, Kyle Rodda.

“There’s debate about which factor reigns supreme as the primary driver of bond market ­dynamics. Nevertheless, the inescapable reality is that US Treasuries are climbing towards 5 per cent right across the curve, which is weighing heavily on equity market valuations and future global financial conditions.”

National Australia Bank global co-head of foreign currency exchange strategy Ray Attrill.

Adding to concerns about inflation and interest rates in the domestic market, Australian economic data showed that the national labour market remained “tight” despite a 4 percentage point lift in the official cash rate since May last year, Mr Sycamore said.

The number of people employed in September rose by 6600, versus an expected 20,000 rise, with full-time jobs down 39,866 and part-time jobs up 46,526, according to the Australian Bureau of Statistics. But the unemployment rate unexpectedly fell to 3.6 per cent, versus forecasts it would remain at 3.7 per cent. The participation rate unexpectedly fell to 66.7 per cent, from 67 per cent.

The RBA’s latest forecasts implied that the unemployment rate would average 3.9 per cent in the December quarter, 30 basis points above the level reported for September.

“The fall in the unemployment rate in September mainly reflected a higher proportion of people moving from being unemployed to not in the labour force,” the ABS said. “Looking over the past two months, average monthly employment growth was 35,000 people, around the average growth we’ve seen in the past year.”

Monthly hours worked fell 0.4 per cent in September, following a fall of 0.5 per cent in August.

The ABS noted that the recent softening in hours worked, relative to employment growth, may suggest an easing in labour market strength, though it also follows particularly strong growth over the past year.

The cash rate futures market was assigning a roughly 25 per cent chance of another 25-basis-point rise in the cash rate at the November 7 board meeting and a 50 per cent chance of a lift at the December 2 meeting.

September quarter CPI data next Wednesday was the next “flash point” for a further shift in rate expectations, NAB head of FX strategy Ray Attrill said.