The Australian share market has experienced a significant downturn, with the S&P/ASX 200 index plummeting by 1.57% by midday. This sharp decline puts the index on track for its lowest close in nearly four months, following a challenging overnight session on global markets. Several key factors have contributed to this bearish sentiment, including hawkish remarks from the US Federal Reserve, unexpectedly high inflation data, and a surge in oil prices.
Overnight Session Recap
The negative sentiment was palpable across major US indices:
* S&P 500: Down 1.36%
* Dow Jones Industrial Average: Down 1.63%
* Nasdaq Composite: Down 1.46%
* Russell 2000: Down 1.64%
The US Federal Reserve, as anticipated, maintained its benchmark interest rate within the 3.50%-3.75% range. However, comments from Fed Chair Jerome Powell during the subsequent press conference injected a hawkish tone into the market. Powell indicated that the Fed was “not making as much progress on inflation as we had hoped,” suggesting a more protracted fight against rising prices.
Adding to the concerns, the US Producer Price Index (PPI) for February revealed hotter-than-expected inflation. Headline PPI figures rose by 0.7% month-on-month, significantly exceeding the 0.3% consensus estimate. The annualized core PPI pace over three months reached its highest level since May 2022. The PPI report specifically highlighted a substantial 1.1% month-on-month increase in goods prices, the largest jump since August 2023. Notably, over 20% of this final demand goods rise was attributed to a staggering 48.9% surge in the prices of fresh and dry vegetables.
Further compounding the global economic anxieties, an Iranian strike on Qatar’s Ras Laffan Industrial City, a critical hub for the world’s largest LNG export plant, reportedly caused “extensive damage.” This incident has contributed to a significant rally in oil prices.
Oil Prices Surge Amid Geopolitical Tensions
The price of Brent crude oil experienced a significant overnight rally, climbing 5.9% to US$109.64 per barrel. This marks the highest closing price since July 2022, and oil prices are now up an impressive 83% year-to-date.
The escalating geopolitical situation in the Middle East, coupled with supply chain disruptions, has sent shockwaves through global financial markets. The impact of higher energy costs is expected to ripple through various sectors, increasing operational expenses for businesses and potentially feeding into broader inflation.
Global Central Banks Shift to Hawkish Stance
The market’s outlook on central bank policy has undergone a dramatic reversal. Swaps markets are now fully pricing in a 50 basis point rate hike from the European Central Bank (ECB) this year. Furthermore, there is a 50% probability of a rate hike by the Bank of England (BoE) by December, a stark contrast to earlier expectations of two rate cuts. This shift reflects growing concerns about persistent inflation and the need for tighter monetary policy to curb it.
ASX 200: Erasing Year-to-Date Gains
The S&P/ASX 200 has now wiped out its entire year-to-date gain of 5.6% in just over two weeks, swinging into negative territory at -2.5%. The index has fallen below its recent low of March 9th and is currently trading at its weakest level since November 21st of the previous year.
S&P/ASX 200 daily chart
The market breadth is currently weak, with a significant 89.5% of constituents trading lower. Most sectors are experiencing declines of 1.0% or more.
Sector Performance: A Tale of Two Halves
In stark contrast to the broader market decline, energy stocks have been the standout performers, buoyed by the surge in oil prices. The S&P/ASX 200 Energy Index has climbed 3.7% to reach its highest point since April 2024.
Leading Energy Stocks:
- Viva Energy Group (VEA): Up 12.3% to $2.37, with a year-to-date gain of 14.5%.
- Yancoal Australia (YAL): Up 5.9% to $7.96, boasting an impressive year-to-date gain of 59.8%.
- Ampol (ALD): Up 5.2% to $33.15, with a year-to-date gain of 3.9%.
- Whitehaven Coal (WHC): Up 5.0% to $9.19, up 18.3% year-to-date.
- Woodside Energy (WDS): Up 4.9% to $32.98, with a significant year-to-date gain of 39.0%.
- New Hope Corporation (NHC): Up 3.4% to $5.43, up 35.4% year-to-date.
- Santos (STO): Up 3.3% to $8.03, with a year-to-date gain of 29.9%.
- Beach Energy (BPT): Up 3.0% to $1.27, up 8.7% year-to-date.
On the other end of the spectrum, growth and yield-sensitive sectors are bearing the brunt of the sell-off. The Materials, Technology, and Real Estate sectors are all down by more than 2%. Utilities and Staples are showing relative outperformance, signalling a defensive shift in investor sentiment.
S&P/ASX 200 sector performance as at 11:05 am AEDT
Miners Under Pressure
The S&P/ASX 200 Materials Index, which had rallied approximately 22% between late December and early March, has seen all those gains rapidly erode in just over two weeks. The Materials Index is down 4.0% today, reflecting a challenging overnight session for most commodities.
Recent Commodity Performance:
- Palladium: Down 7.8% to US$1,476
- Platinum: Down 5.0% to US$2,025
- Copper: Down 5.0% to US$5.49
- Silver: Down 5.0% to US$75.36
- Gold: Down 3.7% to US$4,818
- Zinc: Down 2.8% to US$3,136
- Aluminium: Down 1.1% to US$3,351
- Nickel: Down 1.0% to US$17,278
Mining companies are facing a double whammy of deteriorating economic growth concerns, which dampen demand for commodities, and soaring input costs exacerbated by the conflict in the Middle East.
Rising Input Costs for Miners
The impact of the geopolitical tensions extends beyond crude oil. Refined fuel costs are rising faster than crude alone, with crack spreads widening. Air New Zealand, for instance, recently flagged a dramatic increase in jet fuel prices, soaring from US$85-90 per barrel before the conflict to US$150-200.
Electricity costs are also expected to rise, irrespective of the generation source, whether it be gas, coal, or diesel/heavy fuel oil. Furthermore, labour and logistics costs are on an upward trajectory, affecting fly-in fly-out operations and the transportation of products to ports. The cost of explosives is also facing upward pressure, as Saudi Arabia accounts for roughly 20% of global DAP production, and Gulf nations are significant suppliers of chemicals, reagents, and acids essential for ore processing.
The Road Ahead: Uncertainty and Volatility
The current market environment is fraught with uncertainty. The conflict in the Middle East shows no signs of de-escalation, with ongoing attacks on vital energy infrastructure heightening supply concerns. Oil prices continue their volatile ascent, sending tremors through supply chains and impacting consumers at the pump.
The US Federal Reserve’s decision to hold rates and Chairman Powell’s hawkish commentary have further dampened market sentiment. Powell’s concerns about persistent inflation pressures suggest that the fight against rising prices may be longer than initially anticipated. Just a few weeks ago, the market was pricing in at least two 25 basis point rate cuts by year-end. Now, the prevailing expectation is for no cuts at all.
For a market that was trading at record highs only three weeks ago, investors are now grappling with a deluge of negative news. Concerns about rising yields, a weakening economic growth outlook, and escalating cost inflation are all weighing heavily on sentiment. Such market unwinds can be aggressive and often overshoot. With the Middle East conflict showing no immediate signs of abatement, the situation could potentially worsen before it improves. As the saying goes, “you can’t print energy.”
