The Australian sharemarket has closed only modestly higher despite an early rally. Picture: Getty Images.
The Australian sharemarket has closed only modestly higher despite an early rally. Picture: Getty Images.

The Australian sharemarket sold off on heavy volume after the US Federal Reserve spooked markets with a "hawkish" view on global borrowing costs and the Chinese yuan tumbled to a one-year low.

Following the negative lead from Wall Street the S&P/ASX 200 index fell 61.6 points, or 1.15 per cent, to 5394 as Fed tapering sent investors scrambling for the sidelines following Fed chairman Janet Yellen's admission the Fed had been "overdid the optimism" in December and January.

The Australian dollar fell US1� to US90.20� and gold fell 1.3 per cent to $US1330 an ounce after the Fed cut its bond purchasing program by $US10 billion to $US55 billion and said more "measured" cuts were expected at future meetings.

Government 10-year yields jumped .8 points to 4.128 per cent while global benchmark US 10-year treasuries leapt 10 points to 2.77 per cent.

The Fed also abandoned its 6.5 per cent unemployment threshold for the trigger to end stimulus, but markets were most spooked by the Fed's view that rates could begin to rise in as little as six-months.

"While we remain of the view that the first rate hike from the Fed should be expected around mid-2015, financial markets will need to continue to adjust to the fact that a stronger US economy means a generalised increase in interest rates across the yield curve over the years ahead," Colonial First State analysts said.

The Chinese yuan fell 200 points to 6.2230 to the US dollar as analysts continued to downgrade the country's growth outlook based on the view that it had reached debt saturation point and risked destabilisation from a strong of debt defaults.

The Shanghai composite index, however, was up 0.4 per cent at the close of the ASX as property stocks rallied after officials allowed the first initial public offering by a property developer since 2010.

Bloomberg also reported that the China State Council would speed up constructions projects to support economic growth and offset default risks.

Underscoring the volatility risks surrounding assets linked to China, copper dived to a fresh five-year low of $US6321 a tonne last night before soaring to $US6580/t and then falling another one per cent to $US6480/t in Asian trade. Spot iron ore was flat at $US110.50 a tonne yesterday.

In Tokyo the Nikkei index was off 1.3 per cent.

More to come…

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