Rate hike concerns dent investor sentiment in Australian share market

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Highlights

  • The Australian share market plummeted into the correction territory today.
  • The Fed’s indication of an interest rate hike in March 2022 dented market sentiment.
  • A potential increase in interest rates could hurt stock and other asset prices.

The Australian share market followed Wall Street lower today, heading into the red territory after early gains. The market seems to be responding to the Fed’s latest indication of an interest rate hike as soon as March. The Fed unfurled its hawkish wings as the US consumer prices jumped last year by the most in nearly 40 years. Along with high inflation, the strong job market has prompted the central bank to embrace an earlier-than-expected rate hike.

Investors are probably concerned that the Fed’s policy changes might rapidly slow down the economy amidst the latest COVID-19 wave driven by the Omicron variant. Meanwhile, a potential increase in interest rates could hurt stock and other asset prices, prompting investors to shift away from riskier holdings.

Must Read: Will RBA follow the US Fed & hike rates?

The recent pullback in the Australian share market was driven by technology shares, which seem to be bearing the brunt of rising bond yields. The bond yields surged as the Fed signalled of a rate hike for the first time in three years, reducing the attractiveness of expensively priced tech stocks. It is worth noting that an increase in bond yields disproportionately punish growth stocks as their potential earnings growth appear less attractive as interest rates rise.

Meanwhile, investors seem to be concerned that the Australian central bank might walk in the footsteps of the Fed in winding back pandemic-era stimulus. The expectation is stronger after the consumer price index broke above the RBA’s target midpoint in the December quarter.

Related Article: Australia records another quarter of high inflation

On the positive side, energy and utilities shares were seen to be limiting losses in the Australian benchmark index. Energy shares rallied as the oil price recently hit $90 for the first time in nearly seven years amid growing geopolitical tensions between Ukraine and Russia. At a time when the oil market is observing an already tight supply, rising political tensions is fuelling concerns of further disruption on the supply side. 

Here is a list of some energy and mining stocks that were riding high on the ASX charts today:

 


 


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