Australian shares have dropped to their lowest level in three months, as surging borrowing costs intensified fears of a global recession — spooking investors into the arms of the safe-haven US dollar and punishing currencies across the region.
The ASX 200 closed 0.5 per cent lower at 6,462 points. Essentially, the benchmark index has fallen back to where it was on June 21.
Meanwhile, the Australian dollar has fallen sharply, to its weakest level in over two years.
By 5:00pm AEST, the local currency was trading at 63.65 US cents, after a 1 per cent slide.
Markets are wagering the US Federal Reserve might have to lift interest rates past 4.5 per cent (a level which is likely to push the US economy into recession), as it desperately tries to bring inflation down from its 40-year high.
Borrowing costs have spiked in the US, with the yields on 10-year Treasury bonds jumping above 4 per cent for the first time since 2010.
"It is now clear that central banks in advanced economies will make the current tightening cycle the most aggressive in three decades," said Jennifer McKeown, head of global economics at Capital Economics.
"While this may be necessary to tame inflation, it will come at a significant economic cost.
"In short, we think the next year will look like a global recession, feel like a global recession, and maybe even quack like one, so that's what we're now calling it."
Telix Pharmaceuticals was the worst-performing stock on the ASX 200. The drugmaker's shares plunged 15.4 per cent after it withdrew its application to market its prostate cancer imaging product, Illuccix, in Europe.
Investors also dumped shares of Core Lithium (-7.6 per cent), Imugene (-5.3 per cent), BrainChip (-5.1 per cent), Novonix (-4.3 per cent) and Virgin Money UK (-4 per cent), while financials and consumer discretionary were the sectors which suffered the heaviest losses.
But coal and gold miners rebounded, including Coronado Global Resources (+5.9 per cent), Ramelius Resources (+5.7 per cent), Whitehaven Coal (+3.9 per cent), Silver Lake Resources (+3.4 per cent) and New Hope Corporation (+3 per cent).
Markets in the Asia-Pacific were also feeling the pessimism, with significant falls across New Zealand's NZX 50 (-0.8 per cent), South Korea's KOSPI (-2.5 per cent), Japan's Nikkei (-1.5 per cent), Hong Kong's Hang Seng (-2.5 per cent) and the Shanghai Composite (-1 per cent).
Retail sales hit new record high
In economic news, there is very little sign that the Reserve Bank's recent interest rate hikes have affected Australian shoppers.
Consumers spent a record $34.9 billion at the shops last month, according to the latest data from the Australian Bureau of Statistics (ABS).
Retail spending rose 0.6 per cent in August (compared to the previous month). It has also jumped 19.2 per cent over the same period last year, though Australia was grappling with the COVID-19 Delta outbreak at the time.
It was also the eight month in a row that retail trade had increased.
Ben Dorber, head of retail statistics at the ABS, said the rise was driven by the combined increase in food-related industries.
"Cafes, restaurants and takeaway food services [are] up 1.3 per cent and food retailing up 1.1 per cent," he said.
Sales at department stores rose by 2.8 per cent (to a new record level), while household goods retailing had its largest rise since March (up 2.6 per cent).
These stronger-than-expected results could lead to the RBA lifting interest rates more aggressively in the coming months.
"The longer household spending stays solid, the bigger the upside risk for inflation and the peak cash rate," ANZ economists Adelaide Timbrell and Catherine Birch wrote in a note.
" We forecast a peak cash rate of 3.35 per cent late this year, while market pricing is above 4 per cent next year."
The RBA's cash rate target is currently 2.35 per cent.
'More volatility and a need for caution'
US stocks gave up early gains to fall deeper into a bear market on Tuesday, while sterling showed scant movement a day after hitting a record low, as investors remain nervous about a potential global recession.
The pound was little changed, at $US1.07, after sterling collapsed to $US1.03 on Monday on concern over the funding of recently announced UK tax cuts, which follow huge energy subsidies.
Late on Monday (local time), the Bank of England (BoE) said it would not hesitate to change interest rates and was monitoring markets "very closely".
BoE chief economist Huw Pill added that, on Tuesday, the central bank was likely to deliver a "significant policy response" to last week's announcement but that it should wait until its next meeting in November before making its move.
The yield on five-year gilts (UK government bonds) rose about 0.1 per cent, to about 4.6 per cent, holding its spike on Monday from just over 4 per cent.
US stocks mostly faltered after a morning bounce, with the S&P 500 hitting a two-year intraday low.
The Dow Jones Industrial Average fell 0.4 per cent, the S&P 500 lost 0.2 per cent, and the Nasdaq Composite added just 0.3 per cent.
Meanwhile, The S&P benchmark index fell more than 20 per cent from its early January high, to a low on June 16, confirming a bear market. The index then rallied into mid-August before petering out.
"We don't see a quick retrenchment or a return to 2 per cent inflation, keeping the Fed in hiking mode. This implies more volatility and a need for caution and balance in equity allocations," BlackRock's chief investment officer for US Fundamental Equities Tony DeSpirito wrote in a note released on Tuesday.
Markets see a 65 per cent probability of a further 75-basis-points move at the next US Federal Reserve meeting in November.
The Fed needs to raise interest rates by at least another percentage point this year, Chicago Fed President Charles Evans said on Tuesday, a more aggressive stance than he has previously embraced that underscores the central bank's resolve to quash excessive inflation.
"Central bankers have been walking a tightrope, trying to curb inflation while attempting to limit recessionary risks," Bank of America strategists wrote in a note released on Tuesday.
"However, their recent tone — and 'jumbo' rate hikes — have reinforced that the foremost priority is controlling inflation, even at the potential cost of a recession."
Oil prices dropped to a fresh nine-month low, with Brent crude sinking 1.4 per cent, to $US85 a barrel.
Spot gold slipped 0.4 per cent, to $US1,621.89 an ounce.
ABC/Reuters
