The Australian sharemarket is set to fall sharply after renewed pressure in the US bond market sent Wall Street lower and oil prices surged amid uncertainty over the war with Iran.
ASX futures were pointing to a decline of 97 points, or 1.1 per cent, at the open on Thursday, after the index closed flat on Wednesday. In New York, the S&P 500 fell 0.7 per cent, while the Dow Jones was down 299 points, or 0.6 per cent, in mid-afternoon trading.
The technology-heavy Nasdaq composite dropped 1.1 per cent from its latest record high, as rising borrowing costs weighed on shares and other investments.
Bond yields and inflation pressure Wall Street
The yield on the benchmark 10-year US Treasury rose to 5.12 per cent from 4.96 per cent late on Tuesday. The increase took the yield back to levels last seen in 2007, before the global financial crisis caused borrowing costs to fall sharply.
Yields have been climbing since reaching lows during the Covid-19 pandemic, with the latest rise driven by concern over persistent inflation, the size of US government debt and other economic pressures.
Those concerns intensified after a preliminary report indicated that growth in US business activity had accelerated to its strongest level in more than five years. While the result pointed to a resilient economy, it also raised the prospect of further inflation.
Chris Williamson, chief business economist at S&P Global Market Intelligence, said the report showed that business costs were rising at their fastest rate in four years, partly because of higher oil prices. Companies could pass those increased costs on to customers in the months ahead.
Traders now see a better-than-even chance that the US Federal Reserve will raise its federal funds rate at each of its next two meetings, in October and December. Fed governor Michael Barr said in a speech that “further policy adjustments are likely to be needed to ensure inflation comes down to target in a timely fashion.”
Oil prices rise as Iran talks produce no breakthrough
Brent crude for November delivery rose 3.5 per cent to 102.78 US dollars a barrel, after reaching 103.12 US dollars earlier in the day. The rise ended a run of declines that had taken prices lower from almost 110 US dollars a barrel last week.
December Brent, which has become the most actively traded contract, increased 2.8 per cent to 98.10 US dollars a barrel. The price remains well above the roughly 72 US dollars recorded before the war with Iran began.
Talks between US and Iranian officials are continuing through mediators, but no concrete outcome has emerged. Concerns that the conflict could keep oil supplies constrained in the Middle East have helped push fuel prices higher.
The combination of expensive oil, elevated bond yields and expectations of further interest-rate rises added to pressure on US equities, although strong corporate profits have continued to provide some support.
Homebuilder KB Home reported quarterly profits above analysts’ expectations, but its shares moved between gains and losses after executive chairman Jeffrey Mezger said conditions had become more difficult for the sector. The stock was last down 1.8 per cent.
Mezger said prospective buyers were becoming more cautious because of higher mortgage rates linked to the rise in the 10-year Treasury yield, as well as “geopolitical uncertainty and broader economic headwinds”.
General Mills also exceeded profit forecasts for its latest quarter. However, the company behind Cheerios and Progresso said annual growth was expected to remain below its historical performance because of a continued challenging consumer environment. Its shares rose 0.5 per cent after fluctuating earlier.
Markets also weakened across Europe and Asia. Hong Kong’s index fell 1 per cent and Shanghai’s slipped 0.4 per cent ahead of Chinese president Xi Jinping’s state visit to Washington and his meeting with US president Donald Trump.
The leaders are expected to try to stabilise relations between the world’s two largest economies, despite ongoing competition over artificial intelligence and trade, as well as disputes involving Iran and Taiwan.
