The Australian sharemarket fell the most in nine months on heavy volume, erasing $32 billion in shareholder value, after the US Federal Reserve Board minutes flagged risks posed by quantitative easing, raising fears the "punch bowl" would be taken away from liquidity-dependent financial markets sooner than expected.
The S&P/ASX opened 0.9 per cent in the red, then rallied as investors initially bought the dip in the major banks, but a steady wave of selling soon set in, driving the index down 118.6 points, or 2.33 per cent, to the low of the day of 4980.1 points, with the major miners leading the plunge. The small ordinaries index slumped 2.6 per cent while the drop in the benchmark index erased seven day's of gains.
Yield hunters' favourite stock Westpac registered classic bearish "key-day reversal" after reaching new high of $30.72 before tumbling 2.8 per cent to close below yesterday's trading low at $29.49.
The US dollar rallied against most risk assets after the Fed minutes said "many" board members voiced risks over more quantitative easing, "several" said more easing could prompt "excessive risk" and it was suggested that "tapering" or varying the $US85 billion a month of stimulus should be used because the economy was on a "moderate growth path".
The news sent the S&P 500 down 1.24 per cent and gold slumped 2.3 per cent to $US1555 an ounce and copper dropped 1.2 per cent to a seven-week low of $US7900 a tonne, while global benchmark US 10-year treasury yields which have been signalling a turnaround for weeks gained only 2 points to 2.02 per cent.
The Australian dollar fell 1.2Â¢ to $US1.0235 as foreign investors bailed out of domestic stocks, while 10-year bond yields fell 4.8 points to 3.538 per cent on a wave of safe-haven demand and ramped up expectations of an official rate cut next month.
Royal Bank of Scotland currency strategist Greg Gibbs said there were no actual policy changes, but the market was un-prepared for the shifts in the discussions and voting patterns and this has created "considerable uncertainty".
He said the prevailing view was that Fed chairman Ben Bernanke and deputy chairman Janet Yellen "rule the roost" and that other members would fall into their more "dovish" line.
"The bottom line is that the (Fed) is not as comfortable with open-ended QE as the market had thought," he said.
Negative sentiment was compounded by comments from Chinese Premier Wen Jiabao calling on local authorities to "decisively" curb real estate speculation and take steps to rein in the property market after data showed prices surged the most in two years last month. The Shanghai composite was down 2.7 per cent at the close of the ASX.
In Tokyo the Nikkei index dropped 1.3 per cent.
Overnight sentiment was already on the back foot after US new housing starts fell more than forecast and Caterpillar, the world's biggest machine equipment manufacturer reported sharp drops in sales of 12 per cent in Asia, 11 per cent in the US and 4 per cent across the world.
Foxconn, China's biggest employer also announced hiring freeze because of slowing production of Apple's iPhone 5.
More to come