Stockmarket rebounds with 2.2pc rise as dollar slides and bond yields fall

The local sharemarket has roared back to life at the end of a volatile week shaken by inflation worries while the dollar hit a seven-week low near US70c.

Friday’s buying recovery indicated some investors believe the market correction has delivered a package of long-term bargains. Picture: NCA NewsWire / Damian Shaw

Australia’s sharemarket roared back to life at the end of a volatile week as bond yields cooled slightly after surging on blowout domestic CPI data and expectations of aggressive US interest rate rises, while the Australian dollar hit a seven-week low near US70c.

While losing 2.6 per cent over the week – the third straight weekly decline – the S&P/ASX 200 share index bounced by 150 points, or 2.2 per cent, to 6988.1 points on Friday, adding $50bn worth of market capitalisation. It was the biggest one-day rise in ­almost 16 months.

CBA strategist Phil Brown said there was a “solid bounce” in Australian shares, but the US market remained cautious, having given up strong early gains to close weaker on Thursday.

Still, there were some solid gains elsewhere in the Asia-­Pacific region. Japan’s Nikkei 225 index rose 2.1 per cent and South Korea’s KOSPI gained 1.9 per cent. Markets in Hong Kong and China slipped before Lunar New Year holidays next week.

The big rebound on the local market came after the ASX 200 sank into “correction” territory for the first time since the Covid bear market almost two years ago.

As of Thursday it was down 10.4 per cent from a record high of 7628.9 points in August.

It also came as Apple shares rose 5 per cent in after-hours trading, boosting US futures. Australia’s 10-year bond yield fell eight basis points to 1.94 per cent and the dollar slipped to US70.23c.

There was bargain-hunting for shares following waves of selling caused by margin calls and a reassessment of the outlook for monetary policy after Australian inflation exceeded expectations and US Federal Reserve chairman Jerome Powell refused to rule out rapid rate increases.

“The catalyst for this correction has been rising expectations for interest rates affecting valuation of higher-growth stocks,” Mirova portfolio manager Amber Fairbanks said.

“However, while this was a catalyst, valuations of many tech stocks in the market have been increasing significantly for several years now. Hence a lot of these stocks entered this correction priced for perfection, and with some companies recently reporting less than perfect earnings, investors are selling off tech stocks indiscriminately.”

CSL bounced 3.2 per cent after suffering a 6.5 per cent intraday fall on Thursday. BHP rose 2.7 per cent before its expansion to ­account for almost 11 per cent of the in the ASX 200 – after the unification of its Australian and UK shares – before the market opens on Monday.

According to Morgan Stanley, index tracking funds will need to buy 88.8 million BHP shares, worth $4bn. Bargain hunting was also evident in a range of other major companies after sharp falls.

Macquarie Group leapt 4 per cent after bouncing off its 200-day moving average on Thursday.

Wesfarmers rose 4.2 per cent after hitting a 10-month low of $49.84, and Commonwealth Bank rose 2 per cent after hitting a nine-month low of $92.37. Goodman Group leapt 4.9 per cent and Xero surged 4.9 per cent after hitting a 16-month low of $102.23 on Thursday.

Ms Fairbanks said that for major tech stocks with highly visible cashflows, stable revenue growth, strong customer relations and solid competitive positioning, “this may be an attractive entry point for a long-term investor”.

“Valuation, though, is incredibly important, and we think investors should look beyond the next few quarters to see if the stock is trading at an attractive valuation relative to its long-term positioning before buying a stock just because it is down significantly,” she said.

There is a big week ahead for domestic markets. The Reserve Bank meets on Tuesday, RBA governor Philip Lowe speaks at the National Press Club on Wednesday and updated economic forecasts from the bank are due next Friday. Earnings season also fires up with reports from IGO, Amcor and Westpac.

While RBA communications next week are expected to turn more hawkish, bond yields began to cool on Friday after surging as much as 60 basis points this year in anticipation of faster inflation and the start of interest rate ­increases.

ANZ head of Australian economics David Plank said he expected the RBA next week to say it would wait until wage growth ­accelerated ­further before it lifted the cash rate.

That was despite his prediction that the RBA would forecast ­trimmed mean inflation of 3 per cent by mid-2022 – at the top end of its 2-3 per cent target band – in next Friday’s quarterly statement on monetary policy, with unemployment below 4 per cent by the end of year.

“This will be a complicated message for the market to absorb. But it will be a clear signal the RBA is serious about wanting to see sustainably faster wages growth before it moves,” Mr Plank said.

But while the RBA’s forecast for wages growth is likely to point to a rate rise in the first half of 2023 as its central case, Dr Lowe was likely to admit that a rate rise this year is possible if wages grow faster than forecast.

“This will likely reinforce the market’s belief a rate hike will happen this year,” Mr Plank said.