Australian shares slumped on Thursday to their lowest close in over seven months as investors reacted badly to the Federal Reserve's historic decision to take tentative steps to wind back its massive balance sheet.
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The S&P/ASX 200 index declined 53 points, or 0.9 per cent, to end the day at 5655, its lowest close since February 6.
The selling was broad, with more than three quarters of the top 200 stocks ending the day in the red. Investors were especially harsh on gold miners and bond proxies following resolutely hawkish signals from US Federal Reserve chair Janet Yellen early Thursday morning. The Fed held rates steady at 1-1.25 per cent, but reiterated its determination to lift rates in December, while Ms Yellen gave the greenlight to winding down the central bank's $US4.3 trillion balance sheet.
The Australian dollar fell on the Fed announcement before continuing to drop through Thursday's session to fetch US79.62?? after briefly crossing above US81?? ahead of the Fed announcement early that morning.
Gold struck a three-week low at $US1298 an ounce, hitting ASX-listed miners of the precious metals. The All Ordinaries Gold Index lurched 3.5 per cent lower, with Newcrest Mining dropping 2.9 per cent.
The broad downward move for the Australian market reflects its "inner workings," IG's Chris Weston said - specifically its big weightings to commodities and housing.
Commodity plays are now exposed with the US dollar perhaps heading for a bit of a renaissance, Mr Weston said, which he said tends to lead to investors going cold on mining.
In theory, Australian banks should benefit from a higher interest rate environment if they can reprice their loans but that path to profit may be limited due to the high levels of household debt in Australia, Mr Weston said.
On the day, banks dragged on the bourse. NAB fell 0.5 per cent, ANZ lost 0.9 per cent, while Westpac shed 0.4 per cent. CBA announced the sale of it life insurance division and a review of its asset management business, and traded 0.3 per cent lower.
Australian 10-year government bond yields rose for the ninth straight day, as investors fretted about the potentially new central bank regime of tighter policies. The 10-year rate traded at 2.83 per cent in late Thursday at around six-month highs.
Against that backdrop, stocks considered alternatives to bonds such as utilities and infrastructure names also came under pressure. Sydney Airport fell 1.1 per cent, Spark Infrastructure 2.4 per cent, pipeline operator APA Group 2.3 per cent and AGL Energy 1.8 per cent.
Away from the Fed, and gambling giants Tabcorp and Tatts fell 1.3 per cent and 1.4 per cent, respectively, after insisting their planned $11 billion merger will proceed in line with its original timetable despite a significant setback in the Federal Court.
Alumina shares bucked the downward trend for metals firms, surging 0.9 per cent to hover around levels not seen since 2011 as aluminium soared to its highest in five years on reports that mammoth Chinese producer Chinalco was cutting output two months early and would soon pare back stocks of available metal.
Stock watch
Transurban
Transurban shares dropped 2.1 per cent on Thursday, losing ground for the first time in four sessions, after analysts raised the prospect of big equity raisings to fund its Westgate Tunnel Project in Melbourne and/or a potential bid for Westconnex. Transurban is "in the box seat to acquire WestConnex" in what would be a "complex, unique and relatively risky" deal, RBC Capital analyst Paul Johnson wrote in a note to clients. "We estimate a Transurban equity raise of $1.8 billion." Meanwhile, Morgans analyst Nathan Lead wrote in a note dated Wednesday that the toll-road operator may need to raise $740 million by year-end to help fund West Gate Tunnel Project in Melbourne. The analyst also noted that a successful bid for Westconnex would require more capital.
Bond selling
Australian 10-year government bond yields lifted for the ninth straight session on Thursday, as bond traders renewed their selling after this morning's announcement from the US Federal Reserve. Yields on the securities, which move inversely to the price, hit a six-month high of 2.89 per cent before settling around 2.83 per cent in late trade. The 10-year rate is now up 10 per cent from its recent low of 2.55 per cent less than two weeks ago, outpacing the gains in US yields.
Yen
The US dollar advanced to a two-month high against the Japanese yen on Thursday, as investors once again focused on the divergent monetary policy paths of the two countries' central banks. While US Fed chair pushed on with plans to hike rates in December and thrice more in 2018, the Bank of Japan flagged it stayed committed to it easy money policy. "The Bank of Japan ensured it maintained a clear contrast with the Fed," Westpac currency strategist Sean Callow said. "The cautious stance today leaves the [US] dollar free to follow US yields higher."
Oil
The West Texas oil price held gains above $US50 a barrel on Thursday after a decline in US fuel inventories on Wednesday night countered a bigger-than-forecast increase in crude stockpiles. Gasoline supplies dropped a third week to the lowest level since November 2015, while distillate stockpiles fell by the biggest amount since 2011, the Energy Information Administration said. The WTI crude benchmark lifted a further 0.5 per cent over the Asian session to $US50.64 after climbing 1.9 per cent overnight. Brent crude, the international benchmark, eased on Thursday to $US56.17 in late trade after jumping 2.1 per cent the night before.
Still easy
With the Federal Reserve to start shrinking its $4.5 trillion stockpile of assets next month, the divergence in policy with the Japanese and European central banks looks set to continue. The ECB is looking to wind down its purchases, although nothing has been announced as to when, or by how much. And the Bank of Japan confirmed Thursday it could still be looking at years of purchases, saying it will continue until inflation reaches its 2 per cent target. The BOJ says that will happen in 2019, although most economists disagree.