Interest rate rise hits Aussie market
The first interest rate hike in Australia in 11-and-a-half years took centre stage on the Australian markets yesterday.
The Reserve Bank of Australia (RBA) lifted the cash rate by 25 basis points, or 0.25 percentage points, taking it to 0.35 per cent, and signalled that more rate rises were ahead, as the central bank seeks to dampen inflation.
The RBA sees inflation at 6 per cent by the end of the year, and it doesn’t see it slowing down until 2024.
In response, the yield on the three-year Australian bond rose above 3 per cent for the first time since 2014.
Market reaction was muted, with the rate rise largely expected.
The S&P/ASX 200 slid 30.8 points, or 0.4 per cent, to 7316.2, while the broader S&P/All Ordinaries Index retreated 36 points, or 0.5 per cent, to 7587.6.
Higher rates are generally viewed as a positive for the banks, as it directly flows into increased profits.
However, the big four did not exactly jump for joy, with Westpac up 2 per cents to $23.90, and the others closing lower, but up from their lows.
Winners and losers
Winners were hard to find on the day, but embattled funds manager Magellan Financial added 82 cents, or 5 per cent, to $17.11, but is still down 10 per cent year-to-date.
While low rates are not considered favourable for growth stocks, BNPL (buy now, pay later) players Zip Co and Block, Inc. both had a good day, with ZIP up 5.5 cents, or 5 per cent, to $1.16, and SQ2 (Block) $6.47, or 4.6 per cent higher.
Going somewhat against the accepted wisdom that rate rises are bad for growth stocks, tech heavyweight Appen gained 29 cents, or 4.6 per cent, to $6.65, while diagnostic imaging company Pro Medicus added $1.44, or 3.3 per cent, to $45.21, regaining some of Monday’s 8.2 per cent loss.
AGL was down 27 cents, or 3.1 per cent, to $8.35 after acknowledging that its largest shareholder, billionaire Atlassian co-founder Mike Cannon-Brookes, intends to vote his 11.3 per cent holding in the company against its planned demerger.
AGL’s board said it remained committed to splitting up the company, which Cannon-Brookes argues is bad for both shareholders and the environment.
One of the eye-catching losses on the day was online bookseller Booktopia, which sank 18 cents, or 28 per cent, to an all-time low of 45 cents (it peaked at $2.99 last August) after announcing that profit for the nine months to March 31 was down 63 per cent to $5.5 million, as COVID lockdowns ended, and that co-founder and chief executive Tony Nash would be leaving.
Booktopia said it would implement several cost-cutting initiatives in the fourth quarter to cope with lower revenue growth rates.
On the flipside, GrainCorp closed 9 cents higher at a record of $10.50, up 0.9 per cent, taking its gain for 2022 to 27 per cent on the year, after lifting its guidance in April.
The company is benefiting from the Ukraine war, which is driving strong and ongoing global demand for Australian grain and oilseeds as the northern hemisphere faces supply shortages.
CSL gained $2.42, or 0.9 per cent, to $272.87 after reporting that blood plasma collections were now back around pre-COVID-19 levels and that it expects gross margins to return to pre-COVID-19 levels over time.
Now, over to the Fed
Interest rates were also in focus in the US, ahead of a widely anticipated Federal Reserve decision on Wednesday.
Wall Street is largely expecting the central bank to lift rates by 50 basis points (0.5 per cent) this week, the first of several interest rate hikes it’s expected to implement this year to control soaring inflation.
Many investors believe expectations of aggressive monetary tightening from the central bank are already priced into markets.
The S&P 500 Index rose 20.1 points, or 0.48 per cent, to 4,175.48. The Dow Jones Industrial Average gained 67.29 points, or 0.20 per cent, to close at 33,128.79. The tech-heavy Nasdaq Composite added 27.7 points, or 0.22 per cent, to finish at 12,563.76.
Stocks are recovering from a hammering in recent weeks. April was the worst month since March 2020 for the Dow and S&P 500, and the worst month for the Nasdaq since 2008.