The steady withdrawal of global investor funds from emerging markets broadened to include Australia today as the dollar tumbled and the Australian sharemarket finished a roller coaster session deep in the red.
Heightened fears of US Federal Reserve tapering its bond purchase program pushed US stocks 0.6 per cent lower last night, and the S&P/ASX 200 index opened one per cent down. However, bargain hunters lifted it to a 0.2 per cent loss after the Reserve Bank minutes conveyed willingness to cut rates further if necessary, but selling returned to leave the benchmark index 34.3 points, or 0.67 per cent, down at 5078.2 points.
Most of the action is in emerging market currencies and stocks. The Indian rupee continued to plunge and Bombay’s Sensex dropped another one per cent to enter a technical bear-market with a 20 per cent fall in the past four-week, while the Indonesian rupiah extended losses to 20 per cent in the past three months.
The dollar fell 1.6 per cent to US90.50¢ while the euro held steady against the US dollar as investors repatriated cash to the safety of developed market assets.
“US bond yield have scaled new cycle highs overnight and this has coincided with a renewed sell off in many emerging markets,” National Australia Bank global head of currency strategy Ray Attrill said.
He said investors should remember the dollar fell in May and June because it was seen as a “proxy hedge” against emerging market weakness, and although Chinese growth concerns had abated, the dollar was suffering collateral damage.
US 10-year yields hit a fresh two-year high of 2.87 per cent but Australian government 10-year yields slipped 4 points to 3.975 per cent after the Reserve minutes said the “bank should neither close off the possibility of reducing rates further, nor signal an imminent intention to reduce rates further”.
“A key will be how business confidence evolves post the September 7 election,” Royal Bank of Scotland currency strategist Greg Gibbs said. “At this stage further rate cuts in Australia remain in the balance. The RBA appears to much prefer further easing to come via the currency.”
The Shanghai composite index was off 0.8 per cent at the close of the ASX as expectations for higher government spending on infrastructure were offset by the sell-off in Asian markets.
In Tokyo the Nikkei index fell 2.6 per cent.
Gold dropped $US30 to $US1354 an ounce as the greenback rallied against most risk assets, and copper extended overnight per cent loss, losing 0.3 per cent to $US7287 a tonne, while spot iron ore rose 0.9 per cent to $US139.20 a tonne yesterday.
The broader All Ordinaries index was down 33.5 points, or 0.66 per cent, at 5,068.8.On the ASX 24, the September share price index futures contract was 29 points lower at 5,059, with 24,153 contracts traded.
IG markets strategist Chris Weston said a sharp rise in US Treasury bond yields was squeezing demand for assets in developing markets.
“It’s a story of emerging market weakness, basically,” he said.
“The move we’ve seen in the developed market bond market is killing the emerging market trade right now: places like India, Malaysia, Indonesia, Brazil; all their currencies are getting absolutely smashed.”
The resource giants were affected, with BHP Billiton losing 50 cents to $36.54 as Rio Tinto ditched 63 cents to $59.51.
After the local market closed, BHP announced a 29.5 per cent fall in full-year net profit to $US10.9 billion ($A12.03 billion).
The big four banks had mixed fortunes, with National Australia Bank gaining 21 cents to $31.57 after posting a $1.7 billion net profit for the three months to June.
ANZ was also up, adding 12 cents at $29.56, but Commonwealth Bank was down 88 cents at $70.27, and Westpac shed 43 cents at $31.14.
Investors appeared to overlook minutes from the Reserve Bank of Australia’s (RBA) August meeting, where members agreed the possibility of closing off more rate cuts should be considered.
Meanwhile, QBE Insurance Group shares lost 93 cents, or 5.46 per cent, to $16.10 after posting a 37 per cent fall in half-year net profit to $US477 million ($A526.29 million), following a fall in demand for US mortgage insurance.
National turnover was 1.7 billion securities worth $4.3 billion.