Around $60 billion has been wiped off the value of Australian shares after US inflation rose faster than expected in August, prompting fears of more aggressive interest rate rises by the US central bank.
In the first hour of trade, the All Ordinaries index and the ASX 200 fell 2.9 per cent, the biggest one day percentage fall since June.
The market came off its lows during the day, but resumed its sell-off in late trade.
By the close, the All Ordinaries index fell 2.5 per cent to 7,072, while the ASX 200 index lost 2.6 per cent to 6,827, with most stocks losing ground.
The market was a sea of red, with real estate and industrial stocks the hardest hit.
Head of investments and capital markets at fund manager VanEck, Russel Chesler, said with interest rates rising globally, equity markets remain vulnerable to further sell-offs.
"We are still very much in a bear market, and there are still numerous downside risks," he said.
"We believe that Australia's share market is likely to continue outperforming the US share market; we may not see Australian official rates rise as much as US rates as our inflation isn't quite as high."
However, investment house Nomura said it expects bigger interest rate rises in Australia and New Zealand if the US Federal Reserve ramps up its interest rate increases.
It is expecting the RBA to raise rates again by another 0.5 percentage point next month, and is predicting the official cash rate will reach 3.5 per cent by February next year from 2.35 per cent at the moment.
Energy stocks fell on lower oil prices, with Woodside Energy down 2.4 per cent, and technology stocks followed the Wall Street tech giants lower.
Just one company had risen on the ASX 200 in the first hour of trade, but five stocks ended higher, with Computershare (+1.2 per cent) doing the best.
Retailer Myer rose 5.8 per cent, a day before it releases its annual profit results.
The worst performers on the ASX 200 were lithium explorer Lake Resources (-16.5 per cent), data centre operator Megaport (-10 per cent), and Pinnacle Investment Management (-7.5 per cent).
Lake Resources slumped because of a dispute with its technical partner Lilac Solutions over lithium processing at its Kachi Pilot Plant in Argentina.
The big banks all lost ground, with the Commonwealth Bank (-3.6 per cent) the worst hit, followed by National Australia Bank (-3.1 per cent), ANZ (-2.3 per cent) and Westpac (-1.9 per cent).
Big miners BHP (-1.8 per cent) and Rio Tinto (-2 per cent) recovered some ground, as did Fortescue Metals, which slumped more than 5 per cent in early trade.
Rio Tinto announced it would partner with its biggest customer China Baowu Steel Group to invest $US2 billion ($3 billion) in developing an iron ore mine in Western Australia.
Today's fall followed four days of gains after a recent market sell-off on inflation fears.
While inflation rose in the US in August, consumer prices in the United Kingdom eased back over the month to 9.9 per cent, from a 40 year high of 10.1 per cent in July, because of a fall in petrol prices.
US inflation stood at 8.3 per cent over the year, still lower than in the UK.
The Australian dollar plunged nearly 2 cents overnight as the US dollar surged to a near two-decade high against a basket of currencies on expectations of more large rate hikes by the Fed.
The local currency fell further in afternoon trade to around 67.11 US cents.
Bitcoin fell 10 per cent overnight to $US19,883 per digital coin.
Asian stocks sold off
Asian stocks followed global markets lower on the US inflation rise.
The Nikkei 225 lost 2.8 per cent to 27,819, the Hang Seng in Hong Kong fell 2.2 per cent to 18,895, and the Shanghai Composite dropped 0.75 per cent to 3,239.
US inflation rises
Consumer prices in North America increased by 0.1 per cent in August, with US Labor Department figures showing falling gasoline prices were offset by more expensive food and rent.
Economists expected a 0.1 per cent fall in the US Consumer Price Index after it was unchanged in July because of a decline in oil prices.
Food prices gained 0.8 per cent over the month to increase by 11.4 per cent on an annual basis.
The pace of inflation eased over the year as the price of goods dropped because of an easing of supply chain pressures, and a shift in spending to services.
The CPI increased by 8.3 per cent over the year to August compared to 8.5 per cent over the year to July.
Core inflation, which removes volatile food and energy prices, increased more than expected, rising to 6.3 per cent over the year to August from 5.9 per cent in July.
Over the month, core inflation rose by 0.6 per cent, up from 0.3 per cent in July.
Annual inflation peaked at 9.1 per cent in June, the biggest increase since November 1981, and the highest in 41 years.
US gasoline prices have plunged from an average record high above $US5 a gallon in June to around $US3.707 per gallon now.
The Federal Reserve meets next week for its regular policy meeting and is expected to raise interest rates again by 0.75 per cent.
However, ANZ economists said the chance of a 1 percentage point rise had increased.
"There is no way the Federal Reserve can moderate its policy tightening or ease its overtly hawkish forward guidance."
"The latest inflation data from the US shows inflationary pressures are still accelerating in the US and are very broad based."
"The market generally anticipates the Fed will dish out another 75 basis point lift, but there is now an increased probability that the FOMC may raise the policy rate by 100 basis points next week."
Former US Treasury Secretary and now Harvard University professor Larry Summers said a 1 percentage point move by the Fed would "reinforce credibility."
Last week, Fed chairman Jerome Powell reiterated that the central bank was "strongly committed" to fighting inflation.
The US central bank wants to see US inflation fall to its target of 2 per cent and has pledged aggressive rate hikes to achieve that.
It has raised benchmark interest rates from near zero in March to the current rate of 2.25 per cent to 2.5 per cent.
The Fed has twice raised its policy rate by three quarters of a percentage point, in June and July, to curb surging inflation made worse by the war in Ukraine.
Official US interest rates could reach 4 per cent by the end of the year or early next year, but Mr Summers said it was unlikely that would be enough to lower inflation to 2 per cent.
"It is highly implausible that inflation will fall to 2 per cent without unemployment exceeding 4.5 per cent," he said on Twitter.
"I fear it is unlikely that a peak Fed funds rate around 4 per cent will be enough to restore 2 per cent inflation."
US president Joe Biden said it would "take more time and resolve to bring inflation down" and cited the recently passed Inflation Reduction Act, which is aimed at lowering the cost of healthcare, prescription drugs, and energy costs.
US stocks slump
The rise in monthly inflation saw Wall Street tumble to its biggest loss in two years.
Investors were hoping that the Federal Reserve could scale back its interest rate rises in coming months if price rises continued to ease.
But all three major US indices plunged, ending four days of gains.
The indices saw their biggest one-day percentage falls since June 2020, during the COVID-19 pandemic.
Interest rate-sensitive sectors like technology were hit the hardest, with Apple, Microsoft and Amazon weighing on the market.
The Dow Jones index fell 3.9 per cent, or 1,276 points, to 31,105, the S&P 500 index lost 4.3 per cent to 3,933, while the Nasdaq Composite dropped nearly 5.2 per cent to 11,634.
European markets also ended in the red.
The FTSE 100 in London dropped 1.2 per cent to 7,386, the DAX in Germany lost 1.6 per cent to 13,189, and the CAC 40 in Paris fell 1.5 per cent to 4,728.
Oil prices fell, with Brent crude oil down 0.5 per cent to $US93.49 a barrel, while spot gold lost 1.3 per cent on the rising greenback to $US1701.68 an ounce.
ABC/Reuters
